More people are adopting larger dogs, one of many growth opportunities Petco Health & Wellness Co. highlighted during its most recent earnings announcement.

“Larger dogs mean larger bowls filled with more food,” said Ron Coughlin, chief executive of Petco
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during the first-quarter earnings call, according to FactSet.

Petco reported first-quarter earnings and sales that beat expectations and raised its full-year guidance last week, as the company added 1.2 million new customers during the quarter, after adding at least 1 million each of the two previous quarters. During the call, Coughlin listed a number of areas where Petco will benefit in future quarters.

Analysts estimate a 4% jump in pet adoptions during the COVID-19 pandemic. Moreover, there’s an ongoing “pet humanization” trend that is driving sales. For instance, Coughlin estimates that fresh food for pets will quadruple over the next few years.

The move to fresh food is part of the increased focus on pet health and wellness that Petco has identified.

Another, veterinary services grew 63% year-over-year.

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“With more vet locations, more vet clinics and aggressive marketing, we almost doubled our new veterinary customers in the quarter, versus prior year,” Coughlin said. “These new customers are driving higher baskets and transactions than average.”

Spend-per-pet was up 5% and the company gained market share, Coughlin said, with new programs, like Vital Care, which offers perks like  check-ups and vaccinations for $19 per month, and Repeat Delivery, driving recurring business.

Vital Care has added 70,000 members since launching in October and Coughlin said these customers spend  2.5 times more than the average customer.

UBS analysts think that for Petco to stay on the growth path, the company will need to continue to drive shoppers across platforms, including online and at its pet center locations, and increase the amount spent per pet.

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Growth could be challenged once stimulus spending ends, supply chain expenses rise, and digital grows faster than the retail business.

“Looking ahead, we think Petco is well positioned to benefit from its new customers and the underlying growth in the pet category, but the degree to which it can manage margins remains to be seen,” analysts said.

UBS rates Petco stock neutral with a $27 price target.

“While we expect comp trends to materially decelerate through 2021 as comparisons toughen and new pet growth slows, the sales outlook for Petco and other pet retailers such as Chewy remains solid,” wrote Wedbush in a note.

Wedbush rates Petco stock neutral with a $22 price target.

And while there have been reports that many pets adopted during the pandemic are being returned, Wells Fargo says pet returns declined 24% year-over-year in January and February.

Wells Fargo rates Petco stock overweight with a $30 price target.

Petco is confident that business will continue to increase for years to come.

“From a mid- to long-term standpoint, a recent survey indicated 65% of 18-to-34-year olds plan to acquire a pet in the next five years. And once a cute puppy or kitten joins the family, they’re going to need to be fed, groomed and vaccinated for over a decade or more,” said Coughlin.

“This is what we call the furry annuity.”

Petco shares began trading in January. The stock has gained 14.3% over the last three months while the S&P 500 index
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is up 11.5% for the period.



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