Petco Health and Wellness Company likely saw muted sales in the third quarter, analysts at UBS wrote in a note to clients ahead of the pet care retailer’s earnings report being handed down before the stock market opens on Wednesday, November 29.
The analysts wrote that Petco’s results would likely feature stable consumable sales but there remained several unknowns.
“There are several risk factors that will dominate the investment debate. First, has the retailer been able to stabilize its market share?” they wrote.
“The company had planned to be more aggressive with promotions and pricing as a way to draw in customers. So, it's best to expect that this will have weighed on its margins.”
The analysts also believe the sale of discretionary goods remained pressured during 3Q, a category that typically has a 50% gross margin compared to the 20% gross margin for consumable items.
Additionally, they highlighted that the benefit of inflation has faded and the prospect of deflation in select types of pet supplies has increased.
“Still these risks are not unknown to the market. The stock has declined by about 60% in the year to date,” they wrote. “The key is how much of the uncertainty is already priced in and when can it generate a catalyst to spark better fundamentals.”
Wall Street analysts expect Petco to report 3Q earnings per share (EPS) of $0.02 on revenue of $1.51 billion, representing a decline in EPS from $0.16 in the year-ago quarter but slightly higher revenue.
Looking ahead, the UBS analysts wrote that they do not anticipate Petco will revise its full-year guidance of revenue in the range of $6.15 billion to $6.275 billion, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) between $460 million to $480 million, and adjusted EPS in the range of $0.24 to $0.30.
This is in line with the consensus analyst estimate of EPS of $0.28 on revenue of $6.21 billion.
The UBS analysts awarded Petco a ‘Neutral’ rating and a price target of US$5. Petco shares traded down 3.1% at US$3.87 on Tuesday afternoon.
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