Why Petco Shares Are Tumbling Today

Petco Health and Wellness Co Inc WOOF shares are trading lower by around 13% after the company reported Q2 FY23 results and cut the FY24 EPS outlook.

Q2 sales of $1.53 billion, up 3.4% Y/Y, came in line with the consensus. The increase was driven by strength in the consumables business, up 6.8%, and services & other business, up 30.6% Y/Y, partially offset by the company's supplies and companion animal business, down 9.4%.

Adjusted EBITDA was $112.6 million compared to $133.5 million in the prior year.

Adjusted net income decreased to $16.3 million from $43.5 million prior-year quarter.

Adjusted EPS of $0.06 was also in line with the street view. 

As of July 29, 2023, cash and cash equivalent stood at $173.1 million.

"With discretionary spending continuing to be pressured, we're taking numerous strategic actions to strengthen our business, including initiatives to unlock a targeted $150 million in cost savings and productivity enhancements by the end of fiscal 2025. These actions, combined with the enduring competitive advantages of our differentiated offering, will position us even better to deliver sustainable and profitable growth for the long term," said CEO Ron Coughlin.

Guidance: The company lowered the outlook for adjusted EBITDA to $460 million-$480 million (from $520 million-$540 million) and adjusted EPS to $0.24 - $0.30 (from $0.40-$0.48) compared to the consensus of $0.42.

The company expects the increase in interest expense to impact adjusted EPS by about $0.12-$0.15, with FY23 being a 53-week year. 

Cost saving plan: The company initiated a cost action plan, expecting annualized gross run-rate cost savings of $150 million by the end of FY25 from merchandise, supply chain, and G&A categories. 

In year one, Petco anticipates achieving savings of $40 million. In Q2 2023, the company recorded $6 million in headcount reduction-related charges.

Price Action: WOOF shares are down 12.2% at $5.74 premarket on the last check Thursday.