In the world of investments, insider buying activity can often serve as a litmus test for a company’s health and future prospects. Recently, Petco Health and Wellness Company (WOOF) landed a massive vote of confidence when one of its directors, Cameron Breitner, made a staggering $2.35 million investment through a massive insider buy. This remarkable move came hot on the heels of WOOF’s stellar earnings report, which was met with a positive reception from investors and analysts alike.
Breitner’s decision to invest such a substantial sum speaks volumes about his confidence in WOOF's trajectory and potential for growth. Notably, this transaction stands out as the largest insider buy recorded for WOOF to date.
In this article, we will delve deeper into WOOF’s financials, evaluate its current valuation and growth prospects, and assess the sentiment in the options market to determine if following Cameron Breitner’s lead in adding the stock to your portfolio is advisable.
About Petco Stock
California-based Petco Health and Wellness Company (WOOF), valued at $1.22 billion by market cap, provides pet health services such as veterinary care, grooming, and training, in addition to offering pet nutrition products and supplies. Petco Health and Wellness serves customers in the United States, Mexico, and Puerto Rico.
Shares of Petco have rallied 30.7% on a year-to-date basis, outpacing the Russell 2000 Index’s (IWM) returns of about 2% over the same time frame.
Petco Soars After Upbeat Q1 Results
Petco Health and Wellness Company shares soared more than +40% over three trading days two weeks ago after the pet products retailer posted better-than-expected Q1 results. The company’s revenue decreased by 1.7% year-over-year to $1.53 billion in the first quarter of 2024, primarily due to a 1.2% decline in same-store sales. However, its Q1 revenue figure topped analysts’ expectations by $20 million. By segment, the consumables business showed a minimal growth of 0.1% year-over-year, the supplies and companion animal business declined by 6.8% compared to the previous year, and the services and other business increased by 4.2% year-over-year.
Petco’s gross profit for Q1 was $579 million, a decrease of $26 million compared to the previous year. Additionally, its Q1 gross margin came in at 37.8%, a decrease of 101 basis points. WOOF’s adjusted EBITDA for the first quarter arrived at $75.6 million, a decrease of 32% year-over-year, with an adjusted EBITDA margin of 4.9%, down 219 basis points from the previous year. The company’s adjusted EPS was negative $0.04, down from $0.06 per share the previous year, but exceeded the consensus by $0.02.
“In Q1, we made meaningful progress against our strategy to reposition the business for sustainable and profitable growth … The underlying value proposition of this iconic and trusted brand remains strong, and I’m confident that a renewed focus on retail fundamentals and effective delivery of cost transformation will restore profitability and amplify the competitive advantages of our differentiated approach within the pet category,” said Mike Mohan, Petco's Interim Chief Executive Officer.
Management also stated that Petco’s liquidity remains strong at $617 million, comprising $90 million in cash and cash equivalents and $528 million of availability on the revolving credit facility, which was upsized and extended in March 2024 for another five years. In terms of free cash flow, WOOF reported -$41.1 million FCF, a significant decline from -$24.4 million in the prior year, primarily due to substantially lower operating cash flow despite a notable decrease in capex.
It’s also important to note that WOOF’s Q1 leverage ratio, based on net debt to adjusted EBITDA for the last twelve months, rose to 4.1x from 3.7x in the fourth quarter of 2023 and 2.9x a year ago. This change resulted from the decline in the company’s EBITDA, not an increase in net debt. From a valuation standpoint, should earnings persist in their weakness, WOOF’s leverage ratio might continue to climb, consequently driving up the cost of equity.
For the second quarter, management expects revenue to be approximately $1.525 billion. Adjusted EBITDA is projected to hover around $80 million, with adjusted EPS forecasted to be approximately -$0.02.
Analysts tracking Petco anticipate the company will report a loss of $0.07 per share in fiscal 2025. At the same time, analysts forecast that the company will return to profitability in fiscal 2026, with earnings projected to reach $0.06 per share.
Petco Director Makes Record Bet on the Stock
In a regulatory filing, Petco Health and Wellness Company disclosed that Director Cameron Breitner purchased 750K shares of Class A common stock on May 29 at a weighted average price of $3.1391, bringing the total transaction size to about $2.35 million, and marking the largest insider buy for WOOF on record.
Breitner made his purchase following the company’s robust Q1 performance. Notably, Breitner’s stake of 750K shares represents 0.3236% of the total outstanding shares.
Recent News for WOOF Stock
On May 28, Petco Health and Wellness Company announced management changes, with Justin Tichy departing and the COO role being eliminated. As part of the changes, James Roth has been appointed Chief Stores Officer and will report directly to Interim Chief Executive Officer Mike Mohan. Also, Shari White has been appointed Interim Chief Merchant, reporting directly to Mike Mohan. “Today’s changes to our leadership team will accelerate Petco’s initiatives to drive retail excellence as we execute on our operational reset,” said Interim CEO Mike Mohan.
On May 23, Wedbush added Petco to its Best Ideas List, increasing the stock’s price target to $4 from $3 and maintaining an “Outperform” rating, all in response to the company’s better-than-anticipated Q1 results. Wedbush highlighted the company’s impressive gross margin performance in the first quarter as a pivotal factor contributing to the stock’s robust performance.
On May 14, Petco Health and Wellness Company announced the appointment of Glenn Murphy as Executive Chairman of the Board of Directors. As Executive Chairman, Murphy will assist the Petco leadership team in enhancing profitability and executing strategic initiatives for long-term growth.
WOOF Stock Valuation
Assessing Petco’s valuation, the stock is trading at 0.18 times forward sales, well below the sector median of 0.87x. It also looks undervalued compared to its peer Wag! Group (PET), which has a multiple of 0.58x.
Options Market Sentiment on Petco Stock
Looking at the July 19, 2024, option chain, we see a bid/ask for the $4.00 CALL option of $0.55/$0.60, and a bid/ask for the $4.00 PUT option of $0.35/$0.45. Keep in mind that this is the options strike closest to the current stock price.
We can calculate the expected price move by adding the mid prices of these options together to determine the total cost to purchase a long straddle at current levels, and then dividing that premium by the current stock price:
0.40 (4.00 put) + 0.58 (4.00 call) = 0.98/4.13 = 23.7%
As seen above, based on Wednesday's closing prices, the options market implies that traders think WOOF stock could rise or fall by about 24% through July options expiration. That would place the stock in a trading range of roughly $3.14 to $5.12 by the expiration date.
Moreover, the calls at the $4.00 strike price outweigh the put options about 75 to 1 with 3,167 open calls to 42 open puts, indicating a robustly bullish sentiment in the options market and a higher expectation for the stock price to increase.
What Do Analysts Expect For WOOF Stock?
Petco stock has a consensus “Hold” rating. Out of the 14 analysts covering WOOF stock, two analysts recommend a “Strong Buy,” two suggest a “Moderate Buy,” nine advise “Hold,” and the remaining one analyst gives a “Strong Sell” rating.
The stock trades at a premium to its mean price target of $3.62, but the Street-high target price of $10.00 suggests an upside potential of about 142%.
On the date of publication, Oleksandr Pylypenko did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
