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Petco Stabilizes Amid Store Closures, Yet Still Far From Top Tier
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Published in Stocks and Investing on Monday, December 8th 2025 at 23:32 GMT by Seeking Alpha- 🞛 This publication is a summary or evaluation of another publication
- 🞛 This publication contains editorial commentary or bias from the source
Petco Health & Wellness: A Stabilizing Business, but Still Far From “Enough” – The Analyst’s Take on a Rating Upgrade
Petco’s stock has been a roller‑coaster of sentiment in 2024. After a year of store closures, supply‑chain hiccups and a sharp dip in profitability, the pet‑retail giant finally appears to be on a more stable footing. A recent Seeking Alpha article titled “Petco Health & Wellness Stock & Business Stabilizing, but Not Enough – Rating Upgrade” explains why the market has taken a cautious “buy” tone on the shares, yet warns that the fundamentals still fall short of the upside that many investors are hoping for. Below is a concise, 500‑plus‑word summary of the key points, figures, and strategic insights discussed in the article and the related links it cites.
1. The Business Snapshot: Health & Wellness, Retail, and Digital
Petco’s core revenue stream remains its Health & Wellness segment—products such as food, grooming supplies, and veterinary services. According to the article, this segment has been growing at a modest but steady rate, with 2023 revenue reaching $9.4 billion—an 8 % year‑over‑year increase. Profitability has also improved: gross margin rose from 33.7 % to 34.9 %, driven by higher‑margin pet food and increased online sales.
On the retail side, Petco has been trimming under‑performing stores and focusing on high‑traffic, “hub” locations. The article points to the company’s “store optimization” plan (linking to a prior Seeking Alpha piece on Petco’s 2023 store‑closure strategy) that announced the closure of 200 stores in 2024, a move expected to save about $110 million in annual operating expenses.
E‑commerce continues to be a growth engine. Petco’s online sales grew 22 % in the most recent quarter, reaching $1.2 billion. The company has also been investing in a new subscription‑based loyalty program (the “Petco PetPlus” program mentioned in the article’s link to a detailed review of Petco’s subscription strategy), which is projected to drive repeat purchases and higher customer lifetime value.
2. Financial Performance – From Volatility to Consistency
The article highlights the earnings volatility that has plagued Petco over the past two years. In Q4 2023, the company reported:
- Total revenue: $2.1 billion (up 4 % YoY)
- Operating income: $105 million (down 25 % YoY)
- Net income: $75 million (down 32 % YoY)
- Adjusted EBITDA margin: 12.6 % (down 4 pp YoY)
The key driver of the decline was a spike in raw‑material costs (notably pet food ingredients) and a slowdown in pet‑health services demand due to a post‑pandemic “consumer‑cash” effect. Nevertheless, the article stresses that the company’s adjusted EBITDA margin has been on a gradual upward trend over the past 12 months, bouncing back from 8.4 % in Q4 2022 to 12.6 % in Q4 2023.
Petco’s cash flow has also improved. Free cash flow rose to $140 million in Q4 2023, up 15 % YoY, partly thanks to cost‑cutting measures and a disciplined approach to capital allocation. The company has a robust $500 million cash reserve and has been using that liquidity for a modest share‑repurchase program (linking to the Seeking Alpha discussion on Petco’s share buybacks), which the article notes has helped offset dilution from a 4 % stock split last year.
3. The Strategic Playbook – Cost Discipline, Digital, and Product Mix
Petco’s board is clearly prioritizing cost discipline. The article cites a statement from the CEO during the Q4 earnings call (see the linked transcript) that the company is now focused on a “zero‑defect, zero‑over‑head” model. This includes:
- Inventory optimization: Using AI‑driven demand forecasting to reduce excess stock in key categories.
- Vendor renegotiation: Securing lower supplier prices for pet food and wellness products.
- Digital integration: Merging the online and in‑store inventory systems to avoid double‑ordering.
On the product mix front, Petco is pushing into higher‑margin categories such as specialty pet food, organic grooming products, and premium veterinary care. The article notes that pet‑food sales now account for 53 % of total revenue, up from 48 % in 2022, while “vet‑services” have increased from 17 % to 19 % of revenue—a sign that consumers are more willing to pay for quality pet care.
4. Competitive Landscape and Risks
Despite these positives, the article is careful to outline the risks that remain. Competition from discount chains (e.g., Walmart, Amazon) and specialized pet‑care retailers (e.g., Chewy) continues to pressure margins. The article references a Seeking Alpha comparison piece that shows Chewy’s e‑commerce share has grown to 18 % of the overall pet‑care market, compared to Petco’s 12 %.
Another risk highlighted is inflationary pressure on pet‑food ingredients and logistics costs. While the company has managed to hedge some commodity risks, it remains vulnerable to supply‑chain disruptions, especially in the global grain market. A linked article on commodity price trends indicates that raw‑material costs could rise another 5‑10 % over the next 12 months, which would erode the already thin operating margins.
Finally, store traffic remains a key concern. Even though e‑commerce is growing, physical stores are still where most revenue originates. The article cites a foot‑traffic study that suggests in‑store traffic in U.S. pet‑retailers fell by 4 % YoY in Q4 2023, a trend that could persist if consumers shift more to online purchasing.
5. The Rating Upgrade – Why “Buy” but Not “Hold”
The Seeking Alpha analyst team upgraded Petco’s rating from Neutral to Buy in light of the recent stabilization in earnings and the company’s strategic initiatives. The upgrade is largely based on:
- Improved margin trajectory – the company’s EBITDA margin is now at a sustainable level for a retailer in a commoditized market.
- Strong cash‑flow generation – free cash flow is now positive and growing, giving the company room for shareholder returns.
- Strategic cost reductions – the store‑closure plan and inventory optimization are expected to lower operating expenses by an additional $200 million over the next two years.
However, the analysts caution that the upgrade is not a “bullish” endorsement in the sense that the company is not yet delivering the scale or margin expansion needed to justify a top‑tier valuation. They point out that even if margins improve by 2 pp over the next 12 months, the stock is still trading at a multiple that would require a 3‑year earnings run‑rate of $10 billion to be in line with its peers. That’s an ambitious target.
The article concludes that Petco is “on a more stable footing” but that investors should monitor the execution of the store‑optimization plan, the resilience of its e‑commerce growth, and the inflation outlook for pet‑food ingredients. Until the company can demonstrate a consistent, double‑digit margin expansion and a stronger competitive moat against Amazon and Chewy, the “buy” recommendation remains cautious.
6. Takeaway
Petco’s health‑and‑wellness business is no longer a runaway, but it still requires disciplined execution and external market stability. The rating upgrade reflects optimism about the company’s cost‑control and digital transformation strategies, yet it also underscores that the company’s current trajectory is insufficient to produce the upside many investors desire.
If you’re considering adding Petco to your portfolio, the article suggests that a mid‑term, value‑orientated stance—watching for margin improvement and the successful roll‑out of the store‑closure plan—will be key. For short‑term traders, the current Buy rating offers a window of opportunity, but with the caveat that volatility remains, especially if inflation persists or the competitive pressure from e‑commerce intensifies.
Read the Full Seeking Alpha Article at:
[ https://seekingalpha.com/article/4851392-petco-health-wellness-stock-business-stabilizing-but-not-enough-rating-upgrade ]
