What Happened:

Shares of pet-focused retailer Petco (NASDAQ:WOOF) fell 10.6% in the after-market session after the company received a double rating downgrade as Bank of America analysts downgraded the stock's rating from Buy to Underperform (Sell) and lowered the price target from $5 to $1.5. The analysts cited some of the reasons for the shift in sentiment, adding, "We expect weak P&L for Petco to deteriorate further into the first half of this year, adding to eleven straight quarters of declining profitability... Another worrisome sign: Petco has slowed opening new vet hospitals, an initiative that helps lift sales and differentiate the company vs. peers."

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What is the market telling us:

Petco's shares are somewhat volatile and over the last year have had 40 moves greater than 5%. But moves this big are very rare even for Petco and that is indicating to us that this news had a significant impact on the market's perception of the business. 

The biggest move we wrote about over the last year was 4 months ago, when the stock dropped 11.6% on the news that the company reported third quarter results, which missed analysts' expectations on nearly every key metric we track: revenue growth, same-store sales growth, gross margin, adjusted EBITDA, EPS, and free cash flow. Management acknowledged the challenges posed by the current consumer environment and expressed a commitment to swiftly address these issues by enhancing customer appeal, implementing cost controls, and managing capital more tightly. It's worth noting a significant decline in GAAP operating income and EPS, thanks to a one-time $1.22 billion goodwill impairment charge. Even when adjusting for the non-recurring expense, this was still a bad quarter for Petco.

Petco is down 37.2% since the beginning of the year, and at $1.99 per share it is trading 81.4% below its 52-week high of $10.73 from May 2023. Investors who bought $1,000 worth of Petco's shares at the IPO in January 2021 would now be looking at an investment worth $67.52.

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