Why Are Pet Stocks Going to the Dogs Again?

Pets can be loyal and therapeutic companions, providing a steady presence in your life, but you can’t say the same about owning some of the country’s most popular stocks specializing in pet care these days. Shares of Petco Health and Wellness (WOOF +38.33%) hit a new all-time low on Wednesday, plummeting 18% after the company offered a disappointing near-term outlook.

On Thursday morning, it was Chewy’s (CHWY 2.65%) turn to go to the doghouse. Shares of the online retailer opened lower despite posting better-than-expected results, and – unlike Petco – issuing 2023 revenue guidance that exceeded analyst expectations. The stock was still downgraded by Deutsche Bank following the fresh financials.

Keeping the theme going because it’s raining cats and – well, you know – Erin Wright at Morgan Stanley lowered her price target on **PetMed Express **(PETS 2.01%) on Thursday. The pet wellness specialist didn’t post quarterly financials this week the way that Petco and Chewy did. The move was done partly in sympathy with the financial updates provided by the other two companies earlier this week, but a veterinary industry tracker also notes that vet visits have declined slightly so far this year.

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NASDAQ: WOOF

Petco Health And Wellness

Today’s Change

(38.33%) $0.92

Current Price

$3.32

Key Data Points

Market Cap

$675M

Day’s Range

$2.92 - $3.33

52wk Range

$2.24 - $4.50

Volume

471K

Avg Vol

1.9M

Gross Margin

35.26%

Unleashing the pet stocks

Companies that provide products that make furry friends happier and healthier seemed like no-brainer investments when the pandemic stunned the globe a little more than three years ago. With folks working and learning at home, it seemed like the perfect time to take in a puppy or kitten, knowing that we would be around to take care of them. They also offered companionship at a time of social distancing. Pet adoptions surged in the wake of the global health crisis.

Another bullish trend working in the industry’s favor at the time was the humanization of pets. More people started treating their dogs and cats like members of the family, jumping on fresh pet food and even monthly treats like the ones provide by Bark’s (BARK +0.07%) BarkBox subscription boxes. We may have been worried about our long-term finances during the early months of the COVID-19 crisis, but we had no problem spending more on our pets.

Image source: Getty Images.

Where did things go wrong? It’s not as if we’re no longer taking care of the dogs and cats that we took in with open arms three years ago. However, the constant through all of the recent downturns is that growth is slowing. Petco’s mixed report offered a problematic peek at 2023. The retail giant sees sales rising a mere 2% to 4% over last year’s results, and that is with an extra week in the 2023 fiscal year. The news gets worse on the bottom line, as margin pressures find Petco bracing investors for a likely decline in adjusted earnings per share.

Chewy’s revenue outlook was more upbeat than Petco’s performance. Its forecast is actually ahead of where Wall Street pros were perched. However, it did echo the bottom-line pressures that Petco pointed to earlier in the week. Chewy sees its adjusted EBITDA margin clocking in flat to possibly down 50 basis points this year. The Deutsche Bank downgrade also noted that Chewy experienced a sequential dip of 120,000 users during the fourth quarter.

With companies in growing numbers starting to require in-office work and schools already back to brick-and-mortar teaching for more than a year, it’s easy to see why the interest in new pets is waning. We will still continue to take good care of the pets we did bring in, but slowing business – and operational factors weighing on margins – can be problematic to the publicly traded players.

This week has been hard, but investors probably could’ve seen it coming. Rover (ROVR +0.00%) – the company behind the leading app for matching dog and cat owners with local pet sitters, boarding solutions, and dog walkers – had a similar report last month. It posted blowout financials on both ends of the income statement for the holiday quarter, but it warned that business would decelerate sharply this year. It was an unwelcome surprise, especially since Rover’s services make it a beneficiary of the return to office work for pet owners.

It’s a challenging time for pet food stocks, but there are far greater problems than slowing growth and having to do a better job of controlling costs in an inflationary environment. The pet stocks will be back, and potentially cheap after recent markdowns. Every dog stock has its day.