What happened
Petco Health and Wellness (WOOF 0.30%) shareholders lost ground to the market this week. Their stock dropped 17% through Thursday trading, according to data provided by S&P Global Market Intelligence. That's compared to a 1% decline in the S&P 500. The pet supply retailer's shares are now down 15% so far in 2023 compared to an 8% increase in the wider market.
Petco's weekly slump was powered by an earnings report that left investors wanting more.
So what
Petco on Wednesday announced that comparable-store sales rose for the 18th consecutive quarter, increasing 5% in the first quarter. That result met management's short-term forecast and amounted to a 10% increase over the past two years. But the boost also reflected slowing demand trends in the pet supply industry. And pet owners are tilting their spending away from discretionary items to focus on essentials like food.
This shift is pressuring Petco's gross and net profit margins, resulting in the company reporting a modest net loss in the period. Executives said the overall performance was positive, given those demand and cost pressures. "We continue to execute on our strategy amid the current environment," CEO Ron Coughlin said in a press release.
Now what
Petco affirmed its conservative fiscal 2023 outlook, meaning investors can still expect modest sales and earnings growth this year. The company is under increasing financial pressure from rising interest rates, though, and management is aiming to pay down debt at an accelerated rate over the short term.
Overall, the update doesn't threaten the investing thesis for this growth stock. But Petco appears to be entering a tougher selling period ahead, which might worsen if a recession develops in 2023. This prospect convinced investors to step away from many retailing stocks this week, including the pet supplies specialist.
