I didn’t know there was such a thing as a pet care ecosystem but apparently it does exist. That is illustrated by Petco Health & Wellness (NASDAQ:WOOF) stock. The company operates not only in the physical retail space but also e-commerce, veterinary clinics, training, grooming and pet insurance.
When I talked to a Wal-Mart (NYSE:WMT) store manager in the depths of the pandemic in 2020, he said pet supplies was the third biggest panic-buy category.
The first and second were toilet paper and cleaning supplies. Pet supplies came in ahead of even basic food needs.
So maybe there is something to this pet care ecosystem concept.
A Look at WOOF Stock
Petco has a history dating back to the 1970’s and was first went public in 1994. After being taken private in 2015 in a $4.7 billion deal, the company reappeared in the public markets in January 2021. The offering valued the company at $4 billion.
Moving on, proceeds from the initial public offering were able to reduce its massive leveraged buyout debt. As of the end of the first quarter in 2021, leverage has been reduced to approximately 2.9x.
This improvement marked a steep drop from LBO levels greater than 7.0x.
The total addressable market for pet care is estimated at $119 billion and is expected to grow to $157 billion by 2025. This includes about $72 billon in consumables and supplies as well as about $35 billion in veterinary care.
The addressable market also includes things such as grooming, training, and insurance.
Total revenues for WOOF for 2021 are estimated at $5.5 billion, so market share gains in all areas may provide strong double-digit growth for the company.
The 27% revenue growth experienced in Q1 2021 likely won’t be repeated, but tailwinds exist for WOOF stock nonetheless.
Options and Varied Services for Customers
The focus for Petco (as well as most retailers on Earth) is the omni-channel market. This means the company’s customers can buy products and supplies through multiple options at their choice or convenience.
In the first quarter, the company reported 21% growth in digital markets. It also posted 3.6 million app downloads.
In addition, the company now has 137 veterinary hospitals, a presence which increases the cross-marketing opportunities by many multiples.
Although WOOF stock has had a recent history of net losses and low free cash flow, the company is expected to turn profitable this year. This financial improvement is largely due to the absence of large interest expense related to the leveraged buyout.
Positive free cash flow in Q1 totaled $68 million and gross margins increased to 42.2%. Total earnings per share (EPS) for this fiscal year are estimated at 76 cents and 82 cents for next year.
Conclusion
If the company’s growth rates continue according to management expectations, which are based on continued market growth in all their respective categories, then 27x this year’s EPS may not be exorbitant.
However, throughout the history of the world economy and the track record of the capital markets, things never go according to plan. Never.
So what happens to WOOF stock going forward is a toss-up. Because one day, pets may not be at the forefront of American conscious like they are today.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other investment related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.