Stock Wars: Petco Vs. Chewy

Benzinga’s latest Stock Wars matches up two leaders in a major industry sector, allowing readers to decide which company is the better investment.

This week, the duel is between major players in the pet supplies sector: Petco Health + Wellness Company, Inc. WOOF and Chewy Inc CHWY.

The Case for Petco: Petco started in 1965 as a mail-order veterinary supplies business. It was acquired in 2000 by Leonard Green & Partners and TPG Capital, and nearly merged with its privately-owned rival PetSmart in 2015, but the deal fell through. Instead, the company was acquired by CVC Capital Partners and the Canada Pension Plan Investment Board in November 2015 for $4.6 billion.

Today, Petco operates more than 1,500 retail locations in the U.S., Puerto Rico and Mexico. It also maintains a network of approximately 140 in-store veterinary hospitals under the Vetco banner, with this service recording 63% year-over-year in the first quarter. Its philanthropic Petco Foundation has provided financial support for animal welfare endeavors.

Among the company’s most recent developments is the introduction of the OncoK9 multi-cancer early detection test for dogs at its hospitals and plans to expand same-day delivery of fresh and frozen dog and cat food, with the goal of bringing the service to 560 of its locations by the end of the year.

The company will also debut its new playbook and toolkit to encourage post-pandemic employers to encourage a pet-friendly workplace to accommodate employees returning to the office with their furry companions.

According to its first-quarter earnings report published May 20, Petco generated $1.4 billion in revenue, a 27% year-over-year spike from the previous year’s $1.1 billion, the 10th consecutive quarter of growth, and a gross profit of $596.9 million, up 28% from $466.2 million a year earlier.

The San Diego-headquartered company also acquired approximately 1.2 million net new customers, marking the third consecutive quarter of growth totaling one million or more.

Petco ended the quarter with earnings per share (EPS) of 3 cents and adjusted EPS of 17 cents. The company also raised its full-year 2021 guidance from a range of $5.25 billion to $5.35 billion to a new range of $5.475 billion to $5.575 billion.

“We entered 2021 with momentum, and delivered record quarterly sales in Q1 driven by our strong execution and unique model across digital and in our Pet Care Centers,” said Ron Coughlin, chairman and CEO.

“We’re attracting new customers and gaining market share in a growing category through our unique end-to-end health and wellness ecosystem," he added. "There are more pets in homes than ever and the 1.2 million net new customers we gained in the quarter is a multi-year high, that provides an annuity for years to come. The category acceleration combined with a strengthening of our customer base give us confidence to raise our full-year guidance.”

Petco opened for trading on Wednesday at $22.79, sandwiched between its 52-week high of $31.08 and its 52-week low of $17.86.

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The Case For Chewy: Chewy was founded in 2011 as Mr. Chewy by Ryan Cohen and Michael Day, who met in a Java chat room. The duo initially planning to launch an online jewelry site before aiming at the pet food market.

The company was acquired by Petsmart in 2017 for $3.35 billion, a then-record sum for an e-commerce business acquisition, and two years later raised $1 billion in 2019.

The company’s website carries more than 2,500 brands. Chewy has also recently expanded into veterinary care with the telehealth service Connect with a Vet, now available in 47 states, and through its pharmacy business, which includes compounded medications customized for specific pet needs. The company has also put out a hiring call, seeking hundreds of new employees at various distribution centers around the country.

The Dania Beach, Florida-headquartered Chewy will announce its first-quarter earnings on June 10. Its most recent earnings report, the fourth quarter and full-year 2020 results were published on March 30. In that report, Chewy recorded fourth-quarter net sales of $2.04 billion, up 51% year-over-year from $1.35 billion, and a net income of $21 million, up from a loss of nearly $61 million in the previous year.

For full-year 2020, the company has net sales of $7.1 billion, up from $4.8 billion in the previous year, but it also recorded a net loss of $92.4 million, which is better than the previous year’s loss of $252 million.

CEO Sumit Singh defined 2020 as “an incredibly challenging and unpredictable year for all of us,” but he also insisted the company came out ahead.

“During this time, Chewy performed exceptionally well and made significant strategic and operational progress,” Singh said. “Specifically, we grew net sales by 47% year-over-year, increased our customer base by 43% year-over-year, delivered our first full year of positive adjusted EBITDA, and generated the company’s first quarter of positive net income in the fourth quarter of 2020.”

Chewy opened for trading Wednesday at $73.55, which is closer to its 52-week low of $44.31 than to its 52-week high of $120.

The Verdict: It's easy to assume Petco would have been in less vibrant financial shape than Chewy, considering how the brick-and-mortar retail sector fared during the COVID-19 pandemic.

However, Singh’s glass-half-full definition of Chewy’s full-year 2020 performance pales in comparison to Coughlin’s glass-completely-full look at the latest earnings.

And while both companies are not within scratching distance of their respective 52-week stock highs, Chewy is much further away from its peak, which it hit back in February. This precipitous drop is not at all encouraging.

Perhaps the retail investors who are cheering Chewy co-founder Ryan Cohen’s latest endeavor as chairman of the board at GameStop Corp. GME will get behind the stock and give it an ascension it might not otherwise experience on its own merits. However, at this point, it seems like Petco is the stronger of the two.

(Photo by Ilona Ilyés / Pixabay.)