Petco (NASDAQ:WOOF) recently rolled out some solid earnings, but the market seemed less than impressed. One analyst, however, recently declared Petco a good buy—or perhaps a good boy, depending on how you want to look at it—thanks to some fundamental changes in the pet supplies market and retailing in general.
Upgrade Comes In on Solid Basics
The new analyst perspective came in from Bank of America Securities, which took Petco up from “neutral” to “buy”, and for reasons that most investors will likely relish hearing about. One of the biggest reasons for the upgrade was a likely continuing pattern of growth in pet products demand, thanks in large part to issues around the pandemic and people being home more in the face of that.
Some here may point out that growing vaccine take-up rates are likely to turn this point around, but Bank of America Securities counters such a notion. It notes that recent surveys have revealed that substantial numbers of Americans are still working from home, and are likely to continue doing so even with high vaccine take-up rates. The bank actually looks for hybrid models of employment to settle in, which means quite a bit more time at home and a better ability to look after and enjoy a pet.
Increasingly Bullish Sentiment at Petco
Bank of America Securities' projections here are certainly welcome for investors. It's also leading the way in improving sentiment at Petco, based on our latest research; while the research doesn't go back far—the company only recently went public—the change is driving gains for analyst sentiment.
A month ago, Petco was fairly evenly split in sentiment, with five “hold” and five “buy” ratings. However, thanks to the recent switch at Bank of America Securities, that stands at four “hold” and six “buy.”
The price target, however, didn't change; a month ago it was at $29.11 per share, and so it remains today. While Bank of America Securities boosted its rating, it did not boost its price target. Given that Petco is trading at $22.85 as of this writing, it's clear that there's still quite a bit of upside potential connected to this stock.
Location, Location, Fundamentals
It's not just the changing labor conditions that are driving gains at Petco; the company's CEO, Ron Coughlin, actually pointed out a few others that are helping. For one, Coughlin notes that the move away from urban apartments into suburban houses or even rural homestead houses is driving further interest in pets. These recent transplants may have had interest in pets before, but were often forbidden by lease and rental agreements from having same. With the move away from the cities, pets become an option, and Petco becomes the place to pick up the necessary accouterments for pet care and ownership.
Thus, Coughlin noted, Petco is rapidly expanding into suburban areas, where there are lots of new pet owners. Ruralites often make their way to suburbs for shopping and the like, so they can get in on this action as well. Moreover, the increasingly suburban focus allows for more delivery options; Petco recently partnered with DoorDash (NYSE: DASH) to provide not only faster, but also cheaper, delivery.
The moves out of the city suggest there's a possibility that a second wave of pet buying could kick in, and that would give Petco still more life. While there's always a floor involved here—the currently-housed pets will require care no matter how many new pets are picked up—the ceiling may be farther up than we initially expected. With 3.3 million pets recently finding homes as a result of the Covid-19 lockdowns, that's a pretty sizable market for Petco to take advantage of.
Granted, there are competitors in this market, and good ones at that. Chewy (NYSE:CHWY) is bridging the gap nicely, taking advantage of the growth of e-commerce overall and the rise in pet ownership to move product and make profit. However, Petco's focus on the suburbs is helping it here; with delivery options and retail being allowed to reopen, it can take advantage of the immediacy factor, as well as the ability to let some of these pets choose their own toys and treats by having a physical location to go into.
The market overall is gaining; Chewy stock is better than double what it was this time last year, even after some recent reversals in the share price. Petco may be comparatively new to the market, but it's still set to make a good investment as the demand for pet supplies—and even pets—seems to increase steadily given the overall environment.
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