Dive Brief:
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Petco is facing investment and credit downgrades as some analysts see ongoing market share loss, with sales and profits remaining under pressure for the rest of the year or longer.
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S&P Global Ratings last week downgraded the pet retailer’s issuer credit rating to B from B+ and term loan B issue-level rating from B+ to B; their recovery rating on its term loan is unchanged. The move reflects the analysts’ “expectation that Petco's profitability will remain pressured over the next 12 months” and that continued comp declines will weaken profits and cash flow over the next few quarters.
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Also last week, Bank of America Securities Research Analyst Kendall Toscano lowered Petco’s share price target to $1.50 from $5, saying that “Its market share has eroded meaningfully” in the last nine years and that its sales and margin declines will likely continue into 2025.
Dive Insight:
Over the holidays this year, a lot of pets in the U.S. enjoyed treats and gifts, befitting their elevated place as members of the family. Pet retailers had been enjoying a boost as many people stuck at home during the height of the pandemic brought home new pets who needed supplies.
But in the last year, new-pet ownership has returned to normal, and sales of such one-off consumables as crates, leashes and toys have fallen off, according to S&P Global Ratings analysts Ilwaad Aman and Diogenes Mejia. In the meantime, competition in the space has heated up.
Many Petco customers have drifted to online purveyors like Amazon and Chewy and mass merchants like Walmart, which are more convenient or offer better value, according to the Bank of America report. This led to a performance last year that was weaker than expected.
“We think Petco has lost much of its competitive bite,” Toscano said.
Acting CEO Mike Mohan last month acknowledged these market shifts, and said the retailer is pivoting quickly in response. However, while a move to offer more value could boost sales, it could also hurt margins, the S&P analysts warned. Moreover, Petco’s move to slow its plans for new vet hospitals in order to protect free cash flow could also have negative consequences, analysts from both S&P Global Ratings and Bank of America Securities said last week.
Bank of America’s Toscano called the move “another worrisome sign,” saying the vet hospital initiative “helps lift sales and differentiate the company” from the online and mass-market players that have nipped at its share.
