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Pet Valu CEO Richard Maltsbarger.Handout

The stock market is littered with companies that failed to hold much interest after splashy initial public offerings during the pandemic, which is why Pet Valu Holdings Ltd. PET-T stands out.

The question now: Have we reached peak dog?

The retailer of pet food, treats and toys, based in Markham, Ont., is not new to the Canadian business landscape: It has been around for more than 40 years and has over 700 franchised and corporate-owned locations across Canada.

But the stock is new. The company completed an IPO in June, 2021, when the shares (PET-T) began trading on the Toronto Stock Exchange at $20.

Today, they trade at $31.60 for a gain of 58 per cent since their debut.

This performance stands out among promising companies that have floundered as interest rates rise and investor enthusiasm wanes.

Shopify Inc., the e-commerce platform and lockdown superstar whose share price surged to record highs last year, has slumped 76 per cent this year. All of the stock’s gains since 2020, when the move toward online shopping accelerated at a terrific pace, have now vanished.

Newer stocks are also having a tough time. Farmers Edge Inc., an agricultural technology company, completed an IPO in March, 2021, at $17 a share. The shares now trade at just $2.70.

That’s an extreme case, but part of a trend. The Renaissance IPO ETF, a U.S. exchange-traded fund that tracks new stocks, has fallen 59 per cent from a recent high in November.

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Pet Valu is a roaring success by comparison, and for a number of reasons.

First, the stock arrived at a time when investors had little concern with risk, inflation or rising interest rates. That drove interest in technology companies and meme stocks in 2021, even if their profitability was a far-off dream.

The humble pet store, though, arrived with little fanfare or headspinning valuation. Pet Valu reported net income of $98.8-million in 2021, or $1.33 a share, implying that the stock began trading with a forward price-to-earnings ratio of just 15.

Today, with high-valuation stocks under pressure and investors rattled by concerns of declining economic growth – or perhaps an oncoming recession – stocks with lower valuations and defensive business models that can withstand economic volatility look particularly attractive.

On Tuesday, Pet Valu reported first-quarter financial results that underscore its ability to perform well even as clouds move in. Revenue rose 25.4 per cent over the same period last year. EBITDA (or earnings before interest, taxes, depreciation and amortization) rose 30 per cent after adjusting for costs such as last year’s IPO.

As pandemic plays go, this one has room to run.

According to the American Society for the Prevention of Cruelty to Animals, one in five U.S. households added a pet during the pandemic, underpinning demand for food and toys for years. Pet Valu estimates that Canadians adopted three million pets during the pandemic.

More pets means more demand for supplies. The American Pet Products Association said that pet industry expenditures in 2021 rose to US$123.6-billion, up 27 per cent since 2019, before the start of the pandemic.

Canadian growth isn’t far off: According to Statistics Canada, pets and pet food expenditures increased by 23 per cent over this two-year period.

Pet Valu is in the right place, then – even as pet adoption rates normalize as workers return to offices and job sites, and year-over-year comparisons become less remarkable.

“Industry backdrop is robust and in the very early innings of a long tail of organic growth,” Irene Nattel, an analyst at RBC Dominion Securities, said in a note that supported the company’s aspiration to increase its footprint to 1,200 stores over the long term.

But Pet Valu can also drive growth from loyalty memberships and capture a greater share of the market through cross-selling opportunities.

“Pet Valu has seen early wins, but there is still substantial opportunity,” Mark Petrie, an analyst at CIBC World Markets, said in a note.

The euphoria over getting a dog to keep you company during lockdowns might be subsiding. But those kibble bowls won’t fill themselves.

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