Shares of Petco Health and Wellness(NASDAQ: WOOF) rose 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.
That may sound bland to you, but Petco investors were pleasantly surprised. The stock surged 48% higher over the next two days and stayed aloft for the rest of the month.
This is a rebound, not a skyrocketing win
This move makes more sense when placed in a larger context. It's a turnaround story with uncertain outcomes.
Petco has been struggling in recent quarters, showing flattened sales growth and negative cash flows. The financial trends were so painful that Petco CEO and chairman Ron Coughlin left the company in March. After working under interim leadership for four months, the company installed longtime Five Below CEO Joel Anderson to 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. That's not enough time to make a significant difference to that period's financial results. Instead, Petco investors embraced the new CEO's focus on "retail fundamentals" and the potential for sustained long-term profits. The revamped management team expects to deliver positive free cash flows in fiscal year 2024, which suggests a sharp bottom-line boost in the second half.
Mind you, Petco entered that report with rock-bottom expectations. On the eve of the earnings presentation, the stock had fallen 80% in two years. It doesn't take much of an upswing to bounce back from that sharp price drop, and it was just a partial recovery anyhow. Even now, Petco's share price has dropped 49% in two years.
Turnarounds are never easy
CEO hires at deeply troubled companies are usually superstars of the industry with a long track record of market-beating financial performance. I'm not sure that applies to Joel Anderson.
It's true that Five Below has delivered robust revenue growth in recent years, but its free cash flows and net margins swooned 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 point of view. It's not all about the numbers, and I think that's the right attitude. Petco's chief advantage over online pet stores and big-box retailers lies in its staff and hands-on services such as grooming and veterinary care. Anderson gets it and wants to make the most of these qualities.
Doing that while seeking stronger bottom-line profits 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 buyer of Petco stock at this point. Anderson has a difficult job to do.
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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool recommends Five Below. The Motley Fool has a disclosure policy.
