The 5% drop in the share price that followed yesterday’s Pet Valu Holdings’ (CA:PET, US:PTVLF) earnings could be a sign that PET stock investors are in for a bumpier ride. By the end of Wednesday’s session, everyone had calmed down and the shares closed even.

The pre-market release of first-quarter 2023 results showed revenue was up, profit was down, in a sign that the core business, which surged as people acquired more pets during Covid, could be returning to historical norms.

Yet, what’s worrying is that pet ownership remains high in North America, hence, concerns about what’s ahead over the remainder of 2023 and into 2024.

Not-Awful Numbers

Pet Valu finished the first quarter with 751 stores, having added seven since January. The company’s system-wide sales were $339.6 million, 18.8% higher than a year ago, with same-store sales growth of 9.4%. (All figures in Canadian dollars unless otherwise specified.)

There’s nothing wrong with those numbers.

On the bottom line, it earned $23.0 million on an adjusted basis, 7.3% lower than a year earlier, or 32 U.S. cents a share. That was three cents lower than the analyst estimate. However, its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $48.8 million, 4.3% higher than in Q1 2022.

For all of 2023, it expects same-store sales growth of 8.5% at the midpoint of its guidance, revenue of $1.06 billion, adjusted EBITDA of $233.5 million, and adjusted net income per share of $1.63.

“We are excited for our growth potential in 2023, and are reaffirming our full year outlook,” said Pet Valu CEO Richard Maltsbarger. “Our teams remain steadfast in their focus on our strategic priorities, which are anchored in delivering long-term, profitable growth.”

The company’s gross margins fell by 130 basis points to 34.8%. A weaker Canadian dollar made non-Canadian-sourced products more expensive in the quarter. Another factor was higher wholesale revenue, with lower margins, offset by lower freight costs and the acquisition of Chico, a Quebec-based franchisor operating 66 stores.

As part of its full-year outlook, Pet Valu said it would open 40 to 50 stores in 2023, which translates to 33 to 43 over the year’s final three quarters. It also plans to renovate or relocate another 20 to 30.

Rewards for Patience

Investors need to remember that Pet Valu has only been a public company for less than two years. It went public in June 2021 at $20 a share. So, even after its post-earnings decline, its shares are up 32%, considerably higher than the 1.3% return for the S&P/TSX Composite Index over the same period. The ProShares Pet Care ETF (US:PAWZ) is down 35.5% by comparison.

A big reason Pet Valu’s same-store sales growth rate slowed to 9.4% from 22.8% in Q1 2022 is store closings in 2021 affected sales. So, even though pet ownership increased during Covid, sales fell due to fewer days open.

A big reason Pet Valu’s same-store sales growth rate slowed to 9.4% from 22.8% in Q1 2022 is store closings in 2021 affected sales. So, even though pet ownership increased during Covid, sales fell due to fewer days open. The long-term prognosis for the pet care industry remains healthy.

“‘While people aren’t acquiring pets to the same degree that they were, they still have these pets and they’re still spending on them,’ said Lisa Hutcheson, managing partner at consulting firm J.C. Williams Group,” BNN Bloomberg reported.

“Even in an economic downturn or recession, people are still going to want to spend on their pet.”

Little Momentum

Unfortunately, there’s little momentum behind the shares. On Fintel’s proprietary scoring model that ranks companies on their six-month momentum. PET stock shows up with at 27.44; Pet supplies juggernaut Chewy (US:CHWY) weighs in with a 40.78 score.

Still, Stifel GMP analyst Martin Landry was cautiously optimistic about the industry despite the lower earnings and slower same-store sales growth.

“The pet industry remains resilient despite an economic slowdown,” Landry wrote in a note to clients.

“However, investors will need to be patient before revenue growth flows through the bottom line in a meaningful way as the company copes with inflationary pressures and currency headwinds.’

Of the seven analysts covering Pet Valu stock, six rate it ‘overweight’ or an outright ‘buy’, with a target price of US$44.14, 63% higher than where it’s currently trading.

This article originally appeared on Fintel

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.