Petco customers are flocking toward cheaper pet food — and the more expensive stuff — amid inflation 'bifurcation'

By Bill Peters

Executives continue to see 'a bifurcation among pet parents,' but one analyst says shares will 'likely remain in the dog house'

As shares of Petco Health & Wellness reeled on Thursday due to weaker demand and a downbeat financial forecast, executives at the pet-store chain said that customers continued to migrate toward more expensive pet food as well as the cheaper offerings, after months of abnormally high inflation that have reshaped shoppers' buying patterns.

"Our supplies and companion animal businesses remain more pressured than anticipated, impacting our profitability for the year relative to our expectations," Chief Executive Ronald Coughlin said on Petco's (WOOF) earnings call on Thursday. Petco's companion animal business sells small pets like hamsters and fish.

"With food, we also continue to see a bifurcation among pet parents, with ongoing migration to more premium foods on the one hand and an uptick in value-seeking behaviors amongst a second cohort," he said.

Shares of Petco tumbled 20.5% on Thursday, after the company swung to a loss and cut its full-year outlook. Executives said "discretionary spending was continuing to be pressured" and announced plans to further save money, following earlier upper-level staff cuts.

Pet adoption boomed during the pandemic, but that trend ran up against decades-high inflation last year that prompted pet shops, vet clinics and many other businesses to raise prices to cover costs and forced customers to make more difficult spending decisions.

But despite higher prices, more than 40% of pet owners were spending between $100 and $299 on their pets, according to an Ally Consumer Research survey cited by USA Today in April. While pet-ownership has become more common over the years, and services more sophisticated, the industry has become more consolidated, also driving up prices for services.

Petco, which is indirectly controlled by private-equity firm CVC Capital Partners and Canada Pension Plan Investment Board, said Thursday that over the last year, including in the second quarter, it had cut corporate and field-leadership staff by around 25%. The company is also taking steps -- including adding new technology and streamlining shipping operations -- to save some $150 million by the end of fiscal 2025.

As Petco tries to meet consumers looking for a break from higher prices, the company recently re-introduced more affordable pet-food brands like Fancy Feast and Diamond Naturals to its shelves. But executives also reported "strong growth" in more premium brands like Fresh Frozen and Orijen.

Management said that investments in store staff have helped with employee retention. And it said that its grooming and vet segments were "capturing more market share," and that the company still stood to benefit from the "long-term megatrends of humanization and premiumization."

Still, Wells Fargo analyst Zachary Fadem, in a research note on Thursday, cut his price target on Petco to $7 from $11, and said with "patience wearing increasingly thin, deeper cost/optimization actions may be necessary." Shares of the company, he said, would "likely remain in the dog house."

Shares of Petco have fallen 44.9% so far this year. By comparison, the S&P 500 Index SPX is up 14.4% over that period.

-Bill Peters

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08-25-23 0838ET

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