Better Buy: Petco vs. Chewy

In today's article I will analyze and compare Petco Health and Wellness (WOOF) and Chewy (CHWY) to determine which pet stock is currently a better investment.

The COVID-19 pandemic led to an increase in pet ownership among households throughout the world. For instance, the number of pet dogs and cats in the US grew 7% year-over-year to 149 million in 2020, leading to higher spending on pet food and medication. Moreover, pet ownership is anticipated to keep booming in the post-pandemic environment. 

With that, the Global Market Insights report reveals that the global pet care market is estimated to hit $350.3 billion by 2027, growing at a CAGR of 6.1%. So, companies in this space should benefit from the strong demand for pet products. 

In today’s article, I am going to analyze and compare two prominent pet stocks, Petco Health and Wellness Company, Inc. (WOOF) and Chewy, Inc. (CHWY), to find out which one looks best for long-term investors.  

Founded in 1965, Petco owns & operates pet stores and offers a wide range of pet products and services, including pet consumables, veterinary care, grooming, pet health insurance, and others. Based in Dania Beach, Florida, CHWY is an e-commerce company that offers over 70,000 products for pets from 2,500 partner brands, including pet food and treats, pet medications, and other pet-related services. 

Year-To-Date (YTD), shares of Petco have fallen 18%, while CHWY stock has lost 53% over the same period.  

Recent Developments 

On May 5th, Petco announced that it had collaborated with a digital health innovator, Butterfly Network, Inc., to lift veterinary industry point-of-care standards by bringing high-quality ultrasound to all full-service veterinary hospitals in Petco Pet care centers. The company's Chief Veterinarian, Dr. Whitney Miller, said, "... Butterfly iQ+ Vet system … will help speed diagnoses and improve health outcomes, ultimately delivering the best possible care to every pet and the families who love them."

On June 3rd, Brian Fitzgerald, an analyst from Wells Fargo, decreased its price target on Chewy stock from $65 to $55. Despite this‌, the analyst was impressed by the company’s higher-than-expected first-quarter earnings and solid Adjusted EBITDA figure. Hence, Fitzgerald views the investment opportunity as compelling and keeps an "Overweight" rating on Chewy shares. 

Financial Overview & Analysts' Estimates

On May 24th, Petco Health and Wellness reported earnings for the first quarter of fiscal 2023. In Q1, the company’s revenue grew 4.3% year-over-year to $1.48 billion, beating Wall Street revenue estimates by $30 million. Also, Petco disclosed a Non-GAAP EPS of $0.17, topping analysts' consensus by $0.02. Management said that the strong Q1 results were driven by an incredible team's 'no excuses' execution approach, growth in the pet category, and its over 200 fully-owned veterinary hospitals.

Furthermore, its net income improved by 227% from the same period last year to $24.7 million. WOOF reported an Adjusted EBITDA of $132.6 million, representing a 5.4% year-over-year increase.

For the current quarter, analysts anticipate WOOF's EPS to remain flat YoY at $0.25, while its top line is expected to demonstrate 4.75% year-over-year growth to $1.50 billion.

Chewy's total revenue increased by 13.6% on a year-over-year basis to $2.43 billion in the first fiscal quarter of 2023, beating estimates by $20 million. The revenue growth was due to increased spending per customer and an active customer base. Notably, the number of active customers grew 4.2% year-over-year to 20,601, while net sales per active customer advanced 14.9% year-over-year to $446. CHWY's Non-GAAP EPS came in at $0.05, beating the consensus by $0.18.

However, the company’s first-quarter net income declined 52.3% YoY to $18.5 million. Following the same trend, its Adjusted EBITDA has been reported at $60.52 million, down 21.8% year-over-year. The company also experienced a deterioration in gross, net, and adjusted EBITDA margins. 

Currently, Wall Street expects Chewy's earnings to decrease in the second fiscal quarter of 2023 to ($0.13) a share compared to its year-ago figure of ($0.04). However, analysts forecast that its FQ2 revenue should increase 13.51% YoY to $2.45 billion.

Comparing Options Market Sentiment

Let's take a look at the September 16th, 2022, option chain for WOOF and CHWY to define options market sentiment by comparing the open interest levels. In Petco's case, the open calls/open puts ratio at the $17.50 strike price comes in at 4.1x, implying a bullish options market sentiment. When it comes to CHWY, the open calls/open puts ratio at the $30.00 strike price stands at 0.23x, indicating a bearish market sentiment.  

The Bottom Line

I believe Petco Health and Wellness is a better long-term “buy” candidate in the current market conditions. The company looks more attractive from a fundamental standpoint, taking into account its first-quarter report with solid net income and Adjusted EBITDA growth trends. Moreover, Petco Health and Wellness’ top line is expected to continue increasing in the second quarter as well. Finally, the quantitative side also makes investment in Petco Health and Wellness more attractive, considering the medium-term bullish options market sentiment.

WOOF shares fell $0.39 (-2.40%) in premarket trading Tuesday. Year-to-date, WOOF has declined -20.06%, versus a -13.87% rise in the benchmark S&P 500 index during the same period.

About the Author: Oleksandr Pylypenko

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.


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