On Friday, Citi updated its outlook on shares of Petco Health & Wellness Co. Inc. (NASDAQ:WOOF), increasing the price target to $5.00 from the previous $4.50, while retaining a Neutral stance on the stock.
The adjustment comes after Petco's third-quarter performance surpassed expectations, with same-store sales (SSS) growing by 1.8%, beating the anticipated 0.7%. This growth was primarily fueled by the consumables and veterinary services segments, while supplies and companion animal products saw a lesser decline.
The third-quarter earnings before interest, taxes, depreciation, and amortization (EBITDA) also exceeded forecasts, attributed to an uptick in sales and gross margins. InvestingPro analysis reveals the company trades at an EV/EBITDA multiple of 23.27x, with a significant debt burden and current ratio of 0.84, indicating potential liquidity challenges.
Despite this, Petco's guidance for fourth-quarter sales and EBITDA was set slightly below analyst predictions. Management cited the comparison with last year's initial launch of value products in the fourth quarter as a modest headwind to same-store sales and noted that one-off consulting expenses would impact EBITDA.
Citi's analysis suggests that Petco's recent results could indicate that the company's "self-help" year is progressing. However, the firm anticipates that more significant strategic changes might be challenging to implement in the future. In light of these considerations, Citi has revised its estimates and raised the price target for Petco, basing the new target on a 6.5x FY26 enterprise value/EBITDA multiple.
The update follows Petco's third-quarter earnings, which provided a glimpse into the company's operational performance and management's strategic outlook. Petco's focus on growth areas such as consumables and veterinary services appears to be paying off, while it navigates through a competitive retail landscape and various macroeconomic factors.
For a comprehensive understanding of Petco's financial health and growth prospects, investors can access detailed analysis and over 10 additional ProTips through InvestingPro's exclusive Research Reports. The company's forward guidance reflects a cautious but realistic approach as it continues to adapt to market conditions and internal challenges.
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