What happened

Shares of Petco (NASDAQ:WOOF) were sliding today despite a strong third-quarter earnings report from the pet-centric retailer.

As of 1:12 p.m. ET, the stock was down 11.4%.

Image source: Getty Images.

So what

Petco, the brick-and-mortar retailer that has been revamping its business to be a one-stop shop for pet products and services, said that revenue in its third quarter increased 15% to $1.44 billion, ahead of estimates at $1.37 billion.  That represented the company’s sixth straight quarter of double-digit growth, and lapped 17% revenue growth in the quarter a year ago, or 35% growth over a two-year span.

Gross margin fell from 42.9% in the quarter a year ago to 41.2%, which may be one reason for today’s sell-off. The company did not address that in the earnings release, but supply chain issues and labor shortages were a likely factor.

Elsewhere, profitability was solid as selling, general, and administrative expenses only grew by 8%, and adjusted EBITDA increased 17% to $138.5 million. On the bottom line, adjusted net income increased from $40.4 million to $54 million, or $0.20 per share, which was better than estimates at $0.18. 

The company continued to open veterinary hospitals in its stores, increasing the number of full-service vet care centers to 172 out of 1,449 stores in the U.S.

CEO Ron Coughlin said, “Our focus on long-term, sustainable growth is powered by continued execution against our transformation, with one of the fastest veterinary expansions in history, further enhancement of our digital competitive advantages, expansion of our merchandise differentiation through powerful owned and exclusive brands, and our incredible Petco Partners who are improving more and more pet lives every single day in a challenging environment.”

Now what

Petco also raised guidance for the full year. It’s now calling for revenue of $5.725 billion-$5.775 billion, up from a prior forecast of $5.6 billion-$5.7 billion, and it sees adjusted earnings per share of $0.86-$0.88, compared to the previous range of $0.81-$0.85. 

Considering the better-than-expected quarterly results and the elevated guidance, the sell-off today is puzzling. The market may be concerned about gross margin compression or fearing a slowdown in the pet sector next year as pandemic tailwinds fade, but today’s decline shouldn’t obscure the fact that this was a strong quarter for Petco.

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