Petco Is Still Being Priced Like the Old Petco
At a surface level, Petco Health and Wellness (NASDAQ: WOOF) looks like a company that would be a solid defensive stock for times like these.
Data from the American Pet Products Association forecasts that Americans will spend $165 billion on their pets in 2026, an increase of 4.4% from 2025.
That low single-digit growth didn't show up in WOOF's latest revenue numbers, which were flat year over year (YOY). But does that justify a 4% drop in the company's stock price?
The report had some positives, and even more importantly, the market has been pricing the stock for failure for so long that it may be setting up an opportunity for risk-tolerant investors.
The Good and the Bad From Petco's Earnings
In the second quarter of Petco's 2027 fiscal year, the company booked net sales of $1.49 billion, essentially flat against the year-ago period, with comparable sales up 0.6%. That marked the second straight quarter of positive comps.
Management pinned some of the topline softness on a rockier-than-expected rollout of a relaunched membership program. Specifically, point redemptions came in heavier than anticipated right out of the gate, pulling sales forward and creating a short-term drag.
That could be a sign of a stressed consumer. However, Petco said sales were tracking ahead of its internal targets before the relaunch hit.
On the bottom line, the story looks better. Gross profit rose to $591.1 million, a 39.7% margin, up 37 basis points from a year ago. But that came with a caveat. About $6.8 million of that improvement came from a net benefit tied to IEEPA tariff refunds. If that gets stripped out, the normalized gross margin was roughly flat YOY.
Operating income still climbed 11.1% to $47.8 million, and net income more than doubled to $38.7 million from $14 million in the same period last year. Adjusted EBITDA came in at $122.2 million versus $113.9 million a year ago, or $115.4 million on a normalized basis excluding the tariff item.
Petco also made real progress on its balance sheet. First-half free cash flow improved to $60.8 million, up from just $9.9 million over the same stretch in 2025, and total debt fell to $1.48 billion from $1.59 billion a year earlier.
After the quarter closed, the company voluntarily prepaid another $75 million of debt, bringing total prepayments to $170 million over the past nine months as it works toward a leverage target of 2x net debt to Adjusted EBITDA.
Petco's Turnaround Strategy Is Gaining Traction
CEO Joel Anderson framed the results as evidence that the company's "Reach for the Sky" turnaround strategy is gaining traction, particularly in consumables, while CFO Sabrina Simmons pointed to the prepayment as a sign of the company balancing growth investment against deleveraging.
Petco left its full-year guidance unchanged, calling for net sales flat to up 1.5% and adjusted EBITDA of $415 million to $430 million, while guiding Q3 sales growth of 0.4% to 1.0% and adjusted EBITDA of $100 million to $103 million. Management also flagged initiatives for the back half of the year—including a rollout of Hill's Pet Nutrition fresh dog food and continued growth in cat products—as levers to reaccelerate the top line.
WOOF May Be Forming a Bottom
It's always tough to call a bottom for a stock. That said, the WOOF chart suggests the worst may already be priced in. Since May 2026, the stock has found support near $2.50, which is close to its closing price on Sept. 4.
But there are concerns. WOOF has been finding support near the descending 200-day moving average, which has marked resistance.
Complicating things further is the lack of institutional ownership. Only about 6% of the WOOF float is sold short, but with a lack of institutional buyers, traders can have an outsized influence on price action. That was the case on the day after the earnings report, when the stock was down over 4% with nearly five times the normal trading volume.
How to Approach Petco After Earnings
Analyst coverage of WOOF is light, and ratings from the group tracked by MarketBeat are mixed. Out of nine analysts, two have a Sell rating, and the consensus rating is Reduce.
However, the consensus price target of $3.42 offers 32% upside. For that upside to materialize, the company will need to show strong improvement, not only with margins but with its growth investments.
The bottom line is, as much as WOOF seems like the right stock for the right time, there are better options for investors with a speculative itch to scratch.
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