Why Petco Health and Wellness Shares Are Up 43% Last Month

Actions of Petco Health and Wellness (WEFT 1.90%) up 42.6% in September 2024, according to data from S&P Global Market Intelligence. The pet products retailer reported solid fiscal second-quarter earnings on Sept. 10, and management’s guidance for the next reporting period was in line with current analyst expectations.

This may sound bland to you, but Petco investors were pleasantly surprised. The stock rose 48% over the next two days and stayed up for the rest of the month.

This is a comeback, not a landslide victory

This move makes more sense when placed in a larger context. It’s a comeback story with uncertain results.

Petco has struggled in recent quarters, showing flattened sales growth and negative cash flows. The financial trends were so painful that Petco CEO and President Ron Coughlin left the company in March. After working under interim management for four months, the company installed a long time Five below CEO Joel Anderson will lead a turnaround effort supported by new chairman Glenn Murphy.

Anderson moved into Petco’s corner office just two weeks before the end of the second quarter, which ended Aug. 3. This is not enough time to make a significant difference in the financial results of that period. Instead, Petco investors bought into the new CEO’s focus on the “fundamentals of retail” and the potential for sustained long-term profits. The revamped management team expects to deliver positive free cash flow in fiscal 2024, suggesting significant earnings growth in the second half.

Mind you, Petco entered that report with deep expectations. On the eve of the earnings release, the stock has fallen 80% in two years. It doesn’t take much growth to bounce back from that sharp drop in prices, and it was only a partial recovery anyway. Even now, Petco’s stock price is down 49% in two years.

Turnarounds are never easy

CEO hires at deeply troubled companies are typically industry superstars with a long track record of market-beating financial performance. Not sure that applies to Joel Anderson.

It’s true that Five Below has seen robust revenue growth in recent years, but its free cash flows and net margins are down in 2024. Anderson may have jumped from one sinking ship to another.

He can always prove me wrong, of course. Judging by the second quarter earnings call, Anderson seems passionate enough about pets and committed to making the business work from a holistic standpoint. It’s not all about the numbers and I think that’s the right attitude. Petco’s main advantage over online pet stores and large retailers is its staff and hands-on services like grooming and veterinary care. Anderson understands and wants to make the most of these qualities.

Doing so while seeking stronger returns will be a difficult balancing act, and Petco’s turnaround is by no means guaranteed. I wish him the best of luck (along with my dog ​​and four lizards), but I’m not a Petco stock buyer right now. Anderson has a tough job to do.