Petco Tumbles Most Since IPO on Rising Costs, Shift to Food
(Bloomberg) -- Petco Health & Wellness Co. fell the most since its initial public offering in January amid a squeeze from rising costs and a shift to less-profitable food products.
Gross margin, a broad measure of profitability, slipped to about 41% in the third quarter, Petco said Thursday in an earnings statement. That represented a decline of almost 2 percentage points from a year earlier, and the pressure is likely to linger this quarter.
The results show the hurdles facing Petco as it seeks to profit from a boom in pet ownership spurred by the coronavirus pandemic. While consumers typically splash out for supplies after adopting dogs, cats or other animals, spending shifts over time to food, which can have lower profit margins. In a further complication, Petco also cited pressure from freight and labor costs.
“Culprits behind the margin compression were an unfavorable product mix (indexing toward consumables, which tend to have lower profitability), greater customer-acquisition costs and supply-chain inflation,” Diana Rosero-Pena, an analyst at Bloomberg Intelligence, said in a note. “We think the latter may be more transitory than the first two.”
Petco sank 12% to $21.87 at 12:04 p.m. in New York after plunging as much as 13% for the biggest intraday decline since the IPO. Through Wednesday, the shares had advanced 37% from the IPO price.
The San Diego-based company said it had raised some prices to offset cost increases and will consider doing so again. In addition, the shift to food will help it bolster customer loyalty as it seeks to sell more premium goods and build the business for the long term, Chief Executive Officer Ron Coughlin said.
“It’s strategically a good thing for us,” Coughlin said on a conference call with analysts. “Does it provide margin pressure here and now? Yes.”
Third-quarter sales rose 15% to $1.44 billion, the company said in a statement. Analysts had predicted $1.38 billion.
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