Pet stocks show signs of stability: RBC survey

RBC Capital Markets has released findings from their third annual pet industry survey, suggesting signs of stabilization despite ongoing pressures in the market.

The survey, which included responses from 1,540 participants, revealed an increase in pet ownership, with approximately 84% of respondents owning a pet, a slight rise from 81% the previous year and 75% in 2022.

The survey highlighted consumer shopping habits, noting that online purchases of pet supplies have increased, with 89% of participants buying online, up from 82% last year. Amazon (NASDAQ:AMZN) and Chewy (NYSE:CHWY) are the leading online retailers, with significant customer overlap.

Notably, Walmart (NYSE:WMT) has seen an 8-point increase in the number of online shoppers purchasing pet products from their platform. Additionally, 48% of survey participants reported increased spending on pet supplies in the past three months, compared to 30% in a July 2023 survey.

Chewy, in particular, has seen positive customer retention, with 74% of online pet shoppers claiming to be Chewy customers, an increase from 61% the previous year. The company also boasts a high likelihood of repeat purchases, with 94% of its customers indicating they are likely to buy more in the future. Price remains the primary reason for customer churn, with former Chewy customers typically turning to Amazon, Walmart, and Petco.

Petco has also experienced an uptick in customer base, with 67% of pet owners identifying as Petco customers, up from 52% in the previous year. The retailer has seen a decrease in customer loss, with location being the main factor for those who have stopped shopping there. Petco has benefited from an increase in the use of its services, with notable rises in grooming, training, and veterinary services utilization.

The survey results suggest a cautiously optimistic outlook for the pet industry, with RBC analysts viewing the sector as a unique investment opportunity linked to housing market dynamics.

In other recent news, Joel D. Anderson has officially assumed the role of Chief Executive Officer, succeeding R. Michael Mohan, who now chairs the newly established Value Creation Committee.

In addition to these leadership changes, Petco's shareholders have approved the election of four Class I director nominees and endorsed the pay structure for the company's executive officers.

Petco has also announced a reshuffling of its executive team, including the appointment of James Roth as Chief Stores Officer and Shari White as Interim Chief Merchant. These changes aim to enhance retail operations and expedite the company's operational reset.

Analysts from RBC Capital Markets and Evercore ISI have upgraded their price targets for Petco, reflecting a positive outlook on the company's improved financial health.

Petco's strategic decisions, such as focusing on high-margin services and discontinuing non-core activities, have played a significant role in its recent financial performance.

The company is on track to achieve a substantial cost savings target of $40 million in 2024 and $150 million by the end of 2025. However, analysts have expressed caution regarding Petco's significant debt load, despite the forecasted positive free cash flow.

InvestingPro Insights

The pet industry continues to show resilience, and recent data from InvestingPro underscores some critical financial metrics for companies like Chewy, which is mentioned in the article. With a significant market capitalization of $813.52 million, Chewy reflects substantial investor interest in the pet sector. However, the company's current P/E ratio stands at -0.61, indicating that it is not currently profitable. This aligns with an InvestingPro Tip highlighting that analysts do not anticipate the company will be profitable this year.

InvestingPro Tips also reveal that Chewy operates with a significant debt burden and that its short-term obligations exceed its liquid assets. This financial leverage is a crucial consideration for investors, as it could impact the company's flexibility and resilience in the face of market pressures. Moreover, with a 1.84% revenue growth in the last twelve months as of Q1 2023, the company is showing some positive momentum despite the challenges in the market.

For readers looking to dive deeper, InvestingPro offers additional tips on Chewy, providing a broader perspective on the company's financial health and stock performance. These insights, coupled with the survey's findings, paint a comprehensive picture of the opportunities and risks within the pet industry investment landscape.

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