myosotis jade
That’s what I believed in August Petco Health and Wellness (Nasdaq:Woof) Proving to be a real dog struggling with declining sales in a post-pandemic world, hitting revenues at a time when debt was really high expensive.
Even though the stock price has dropped significantly, I have been unable to buy on the dip until now due to the leverage overhang and, frankly, fear of the quality of the business.
Now, investors have to swallow yet another disappointment, with the stock plummeting to new lows amid substantial concerns over quality. The fact that losses are reported and resulting debts is a serious problem here.
huge boom and bust cycles
Founded in the 1960s, Petco Health offers a wide range of products and services for animals, serving a huge market of more than 70 million households with pets. Owning a pet (or pets) creates a market opportunity worth more than $100 billion annually. Most of this market consists of food, but the business also extends to care, insurance, and other services.
The business recorded comparable negative revenue growth in 2016, 2017 and 2018, but has since seen growth, but it is precisely the pandemic that has prompted private equity owners to take the business public in 2021. This is because it provided a good opportunity to do so.
Pre-pandemic, the business was a $4.4 billion business with operating income of $129 million, comparable to a supermarket in terms of operating margins. In 2020, when the pandemic hit, sales jumped to $4.9 billion and EBITDA increased to $484 million.
Sales growth in 2021 was even more significant, with EBITDA increasing to $591 million, bringing sales up to $5.8 billion and adjusted earnings to $0.91 per share, but excluding stock-based compensation expense. Adjusted to $0.72 per share.
Sales growth slowed dramatically in 2022, with sales reported up 4% to $6.4 billion, but EBITDA down 1.5% to $582 million and adjusted earnings per share This decreases to $0.75 and decreases further after stock-based compensation expense. Net debt is flat at $1.45 billion, which translates into a leverage ratio of 2.5x, which looks reasonable, but that’s in the face of adjusted earnings, business investment requirements, and, of course, slowing business momentum. It is.
In 2023, sales are expected to be at the midpoint of $6.21 billion and earnings are expected to be around $0.58 per share, an admittedly bleak outlook considering this year will include an additional trading week.
Sales rose 3% to $1.53 billion in the second quarter, but operating profit was cut in half (after similar performance in the first quarter). As a result, the company lowered its EBITDA guidance to just the midpoint of $470 million, resulting in adjusted earnings of about $0.27 per share, or breakeven after stock-based compensation expense. Lower general margins and higher interest rates have hurt earnings since August, when the stock was trading around $5.
While it’s tempting to get involved in the stock because of its low price, there were concerns about the weight of the debt and the quality of the business, leaving little margin for error to avoid the current predicament.
all downhill
The stock price, which was $5 in August, gradually fell to $3, changed territory in the fall, and after the release of Q3 results, the stock plummeted another +20%, and now stands at $2.70 per share. It is traded at.
These results revealed that 0.5%. decline Sales were $1.49 billion, with like-for-like sales flat compared to the same period last year. That was about good news because the total profit (in dollar terms) was actually down 8% to he $550 million. After deducting a huge $1.22 billion impairment charge, the company actually reported an operating loss of $10 million (versus a profit of $48 million a year earlier).
This is just part of the bad news. That’s because we’re looking at $36 million in interest expense for the quarter. This interest expense is increasing rapidly amid rising interest rates, despite the company’s several caps.
This means that net debt was actually very flat at $1.42 billion, so a realistic loss was reported here, but 268 million shares meant that the business’s This means that the valuation has fallen to just half of the nominal net debt.
The company’s revenue is still around $6.21 billion, so its adjusted EBITDA outlook has been lowered to $400 million, and adjusted earnings are expected to be just 8 cents, which translates into a realistic loss here. This has pushed the leverage ratio to around 3.5x, but the current run rate suggests the leverage here could be more than 4x for him.
The company attributes this softening to the tightening of consumers navigating more difficult economic conditions. To offset some of these headwinds, the company is targeting cost savings of $150 million by its fiscal year 2025, of which $40 million is expected to be realized in the first year.
It’s too early to get well
The reality is that stock prices have fallen to new lows amid mounting distress, eroding profitability and raising real leverage concerns, with no immediate resolution in sight.
Frankly, the stock is effectively a long-term call option here, but given the lack of recognition of the quality of the business, the lack of profitability, and the (relatively) large amount of debt, frankly any With options on the table, I’m being very cautious. Proponents point to the ecosystem as a long-term potential and strength, and Petco is also strong in care centers (something that cannot be replicated with e-commerce).
At the same time, the rise of e-commerce and specialized players such as: Chewy (CHWY) This can put a lot of pressure on the core product part of your business and prevent your business from thriving in the future.
I’m not convinced given the ongoing headwinds, but it’s still too early to be optimistic about the stock and I don’t see any reason to get involved just yet.