Will earnings bring gains for Petco, Chewy and Freshpet’s shares?

Petco, Chewy and Freshpet have seen mixed results in Q4 earnings, with Freshpet the strongest performer following an earnings beat, and Petco’s shares sliding on a miss. Chewy’s results beat expectations, but its share price fell in after-hours trading on falling customer numbers and flat EBITDA guidance.

- Petco and Chewy’s shares slump on Q4 earnings.

- FnF Research estimates the global animal healthcare market will be worth $84.98bn by 2030.

- ProShares Pet Care ETF gains 2.7% year-to-date.

Pet food and product retailers Petco [WOOF] and Chewy [CHWY] both reported fourth quarter (Q4) and full-year (FY) 2022 earnings Wednesday, with mixed results and share price movements.

Petco was the first to report before markets opened Wednesday. Its share price opened 6.8% down and continued to fall throughout the day in response to Q4 earnings, which missed analyst expectations. Petco shares closed down 17.5% for the day, taking their value down 11.5% year-to-date.

After markets closed, Chewy released its Q4 earnings, revealing it turned a surprise profit. After closing up 1.8% year-to-date, however, the stock fell 2.5% in after-hours trading.

Elsewhere, Freshpet’s [FRPT] share price closed up 17.6% year-to-date, having remained flat since 27 February, when it reported a narrowing of losses which beat analysts’ expectations.

All three companies have suffered on markets over the past 12 months, with declines of 18.2%, 36.8% and 56.9% respectively for Chewy, Freshpet and Petco.

Investors treated to surprise profits

Petco reported Q4 results before markets opened on 22 March. Revenue rose 4.2% year-over-year to $1.6bn, just missing Refinitiv analyst expectations by 0.6%. EPS for the quarter fell 17.9% year-over-year to $0.23, 4.2% below analyst expectations.

FY revenue rose 3.9% to $6bn, as expected by analysts. FY EPS fell 17.6% to $0.75, 1.3% below analyst expectations.

Chewy’s Q4 EPS of $0.01 was a pleasant surprise after analysts polled by Refinitiv had yielded a consensus estimate of $0.11 losses per share. Revenue increased 13.4% year-over-year to $2.7bn, beating analyst expectations by 2.7%.

Chewy’s FY revenue increased 13.6% year-over-year to $10.1bn, beating the $10.03bn analysts had expected, while FY EPS of $0.53 was another surprise upside on the $0.02 loss per share analysts had forecast.

However, Chewy’s shareholder letter predicted EBITDA margin will be flat to down 50 basis points for 2023. Combined with a 1.2% drop in active customer numbers, this pushed investors to shed Chewy stock on the results.

Freshpet’s Q4 results, announced on 27 February, showed a 43.1% year-over-year increase in net sales to $165.8m. This represented its “strongest topline growth since the company went public”, according to its press release. Net losses of $0.06 per share marked a 71.4% year-over-year improvement, and exceeded analyst expectations by 33.3%.

For the full year, Freshpet reported losses of $1.29 per share on revenue of $595.3m. Annual revenue grew 39.9% year-over-year and exceeded analyst estimates by 2.4%. Losses nearly doubled, but they were 0.8% narrower than analysts had expected.

A healthy market?

Inflation has hit the pet care industry as hard as any other. Data from NielsenIQ shows that pet food prices rose by an average of $0.30 in 2022, the largest price jump in the past five years. This has led to increased spend but a reduced basket size for pet product customers, limiting the number of items that retailers are able to shift. Notwithstanding this, pet ownership rose 10.7% during 2022 to 110 million households.

While Chewy expects flattening margins, the latest research forecasts growth for the sector. A report released Tuesday from FnF Research estimated the global animal healthcare market was worth $40.2bn in 2022, and it is expected to grow at a CAGR of 9.8% between 2023 and 2030, bringing the industry to a value of $84.98bn by the end of that period.

According to its recent shareholder letter, Chewy estimates the pet category’s total addressable market in the US alone is $130bn, and says it has grown consistently despite economic volatility.

Funds in focus: ProShares Pet Care ETF

Investors looking to tap into the potential of the pet care industry’s growth can select the ProShares Pet Care ETF [PAWZ]. As of Wednesday, Chewy is PAWZ’s fourth-largest holding with a 7.57% weighting, Freshpet its sixth with a 4.88% weighting, and Petco accounts for 2.82% of assets under management. Its top holding with a 10.36% weighting is Idexx Laboratories [IDXX], a US manufacturer and distributor of pet and livestock healthcare products and services.

PAWZ is up 2.7% year-to-date, but down 5.3% over the past month.

Analysts polled by Refinitiv yielded a median 12-month price forecast of $11.00 for Petco, implying 31.1% upside on the most recent closing price of $8.39. For Chewy, a consensus target of $50.00 implies 32.4% upside on $37.76, while a $75.00 consensus target for Freshpet implies 20.9% potential gains over $62.05.