Petco Health and Wellness Company (WOOF) is likely to meet the Street’s expectations when it reports its first quarter earnings and this could set the pet and pet owner health and wellness company up for an improved full-year 2023, according to analysts at UBS.
In a note to clients, the analysts wrote that they think the market will walk away from Petco’s 1Q earnings with more confidence in its near-term outlook.
But they cautioned that it would continue to be challenging to draw conclusions about the second half of 2023, even post-earnings.
“In the near-term, there is evidence to support WOOF's top-line given the defensive nature of its consumables portfolio,” they wrote. “Still, we think the uncertainty around the performance of its high-margin, hard goods category will cap profitability for the next couple of quarters.
“This will likely give investors pause on the name until there is better visibility into the recovery of its discretionary segment. Thus, we think the stock will remain range bound in the near term.”
The analysts believe that the momentum experienced by Petco in 2022 has likely carried over into the first quarter of 2023.
“Our estimates imply a moderate negative 100 basis point sequential deceleration on a four-year compound annual growth rate,” they wrote.
“That said, we think WOOF is well-positioned to generate positive same-store sales moving forward despite the challenging consumer backdrop.”
The analysts added that they expect an unfavorable mix to continue to pressure margins in 1Q.
“We model negative 200 basis points of gross margin contraction to 39.2% in 1Q (compared to the consensus 39.5%),” they wrote.
They said together these factors drove their earnings per share (EPS) forecast of $0.02, below the consensus expectation of $0.05.
Further, they wrote that, given Petco is likely to meet expectations in 1Q, this would provide credence for the company to reiterate its full-year 2023 guidance of revenue in the range of $6.15 billion to $6.275 billion and adjusted EPS of $0.40 to $0.48.
The analysts awarded the stock a ‘Neutral’ rating with a US$9.50 price target, representing about 20x their FY24E EPS estimate.
The stock was trading up 1.5% at US$10.11 on Tuesday afternoon.
Contact the author at emily.jarvie@proactiveinvestors.com
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