Shares of Petco Health and Wellness (NASDAQ: WOOF) rebounded 10.6% on Thursday, defying several analyst downgrades on the heels of a much larger post-earnings drop yesterday. Petco's gains today only recouped around a third of its 30%+ plunge on Wednesday, which came after the pet-products retailer announced significantly weaker-than-expected quarterly results.
Wall Street scolds Petco's latest "operational reset"
Petco's third-quarter net revenue declined 0.5% year over year to $1.49 billion, hurt by what CEO Ron Coughlin described as a "challenging consumer environment." On the bottom line, that translated to an adjusted (non-GAAP) net loss of $0.05 per share, swinging from a profit of $0.11 per share in the same year-ago period.
During the subsequent conference call, Petco management also outlined "an operational reset of the business" designed to focus on increasing profitability and competitive positioning. That's easier said than done, of course, for a consumer-discretionary stock with a business that largely operates at the mercy of broader consumer-spending trends.
Perhaps unsurprisingly, several analyst firms subsequently downgraded their respective per-share price targets on Petco in response, including Wedbush (to $3.50 from $4.50), Bank of America (to $5 from $10), Baird (to $3 from $8), and Wells Fargo (to $3 from $7).
What's next for Petco shareholders?
I typically take Wall Street downgrades and specific price targets with a grain of salt. But it's noteworthy that Petco stock rebounded a meaningful chunk of yesterday's losses even when faced with a slew of negative analyst notes. Perhaps yesterday's drop was an overreaction, and the market is taking a more optimistic stance for Petco's operational reset amid the latest data showing inflation continues to soften.
Even so, I much prefer to invest in businesses that are operating from positions of relative strength. So until Petco shows more tangible signs of a return to sustained, profitable growth, I'm content watching this story play out from the sidelines.
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