Shares of Petco (NASDAQ: WOOF), a prominent retailer in the pet products market, slumped by 20% last month, as the company grapples with a slowdown in sales and increased competition from Walmart (NYSE:WMT)'s newly launched pet services. This decline comes despite the company's reputation for being recession-proof.
The downturn in Petco's shares has been attributed to rising interest rates and the recent entry of Walmart into the pet services market. The broad sell-off in pet stocks following the pandemic-induced boom in pet product sales has also played a significant role in Petco's share price drop.
Adding to Petco's concerns are its high-interest payments on a $1.7 billion variable-rate loan, which currently stands at 9%. This loan, taken out two years ago at a rate of 3.5%, is now consuming nearly a quarter of the company's free cash flow. The interest expenses have surged by 72% to $37.5 million, further straining Petco's profitability.
The company's revenue growth has also been sluggish, with only a 3.4% increase in the recent quarter. This modest uptick contrasts sharply with the post-pandemic boom period when pet product sales soared.
The launch of Walmart's first Pet Services center in Georgia poses another significant challenge for Petco. Offering services such as veterinary care, grooming, and self-serve dog wash, Walmart is poised to take a substantial slice of Petco's market share. The retail giant already operates over 65 vet clinics nationwide and plans to expand its pet services centers further.
In light of these developments, analysts are favoring other stocks over Petco. The company, which went public in 2021 with an integrated approach to e-commerce and brick-and-mortar services like grooming and veterinary care, now finds itself under increased pressure to maintain its market position.
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