Plenty to Growl About at Petco
Petco Animal Supplies is still in the doghouse with investors after again disclosing that its near-term outlook will come up short of expectations.
Petco, which strives to be the Wal-Mart Stores of pet food and supplies, is suffering digestion problems from its rush to gobble up smaller chains and to convert and expand many of its own outlets to “superstores.”
Throw in El Nino-related construction delays on the West Coast this year, and San Diego-based Petco said earlier this week that its performance in the next six months won’t meet Wall Street’s forecasts.
Investors were none too happy, especially because it’s the second consecutive quarter that Petco disclosed it would miss analysts’ expectations. So Petco’s stock, already down sharply in recent months, tumbled another $3.50 a share to $14 Tuesday in heavy trading on the Nasdaq market.
Since touching $33 a share last Oct. 14, the stock has plummeted more than 50%, wiping out nearly $400 million of its total market value. And the stock is now just slightly above the price of Petco’s initial public offering four years ago, which was $10.33 (adjusted for splits).
Petco isn’t the only big pet-food chain having problems. Petsmart, a Phoenix-based operator of 468 outlets in North America and Britain, has been struggling with operating and management problems, and its stock price has been sliding since mid-1996.
At Petco, the problem is not a lack of shoppers, company officials say. “It’s not [consumer] demand at all,” Petco’s chief executive, Brian K. Devine, said in a telephone interview. “The core business is still great.”
Even so, Petco’s current problems are prompting the company to put its acquisition strategy on, well, a leash.
“At this point we’re going to digest everything we have . . . and are going to be very cautious in making any [additional] acquisitions,” he said. “We want to make sure we don’t have [more] surprises for our shareholders.”
Petco now runs 457 stores (including more than 130 in California) in 33 states and the District of Columbia after a spree of acquisitions, including its purchase last November of PetCare Plus, which had 82 stores in 10 Midwestern and Southern states. It’s also building a new distribution center in Mira Loma, near Riverside.
The takeovers reflect Petco’s desire to quickly expand its market share in the highly fragmented pet-food industry, where the vast majority of outlets are still run by small operators. With its superstore format, Petco also tries to stand out on price and selection.
The company had planned to open 40 more stores in fiscal 1998, or about 10 per quarter. But in its revised outlook, Petco said the bad weather and the need to devote management and other resources to its recently acquired stores mean only four stores will open in the first half of fiscal 1998, with the remaining 36 opening in the second half.
Moreover, Devine said his company’s ability to garner profits from the newly acquired stores “will be delayed,” and will be “at a lower rate than originally anticipated.”
Why? It’s taking longer than planned for Petco to clear out the acquired stores’ old merchandise, and that’s forcing Petco to offer deep discounts on the goods, which eat into profits. The delay also means “we’re not getting our lower-cost, higher-margin products in those stores faster,” Devine said.
Even with the downward revision, Petco is a company that’s growing briskly. When it reports its fiscal 1997 results on March 20, Petco said it would post an annual sales gain of nearly 25%, to $750 million.
Much of that gain reflects sales from newly acquired stores. But in the fourth quarter, Petco’s “same-store” sales--a benchmark retail gauge that measures sales at stores open at least a year--showed a solid 10% increase.
Petco likely will show a net loss for fiscal 1997; for the first nine months of the year it lost $18.5 million on sales of $538 million. That’s because of $32 million in merger-related costs and other charges.
Exclude those costs, and analysts expect Petco to earn roughly $18 million, or 87 to 88 cents per diluted share, for fiscal 1997. Devine predicted that Petco’s fiscal 1998 per-share profit would jump another 30%, to about $1.15 a share, but that’s well off from the $1.40 or so that analysts had previously forecast.
