Why Petco Health & Wellness jumps 8% this week

What happened

Shares of Petco Health and Wellness (NASDAQ: WOOF) rose 7.7% this week, according to data compiled by S&P Global Market Intelligence, mainly following a broad market rally earlier this week, but also after signing a partnership with insurer Nationwide, which markets itself as the first and largest provider of pet insurance.

The market rallied sharply on Monday and Tuesday, helping to push Petco shares up more than 12% for the two-day period, but has since given up 3.5% since then.

Image source: Getty Images.

So what

Pet ownership and care has long been a massive upward trend, with spending on pets growing at a compound annual rate of 11% since 2018, reaching $123.6 billion last year . More than 90 million households, or about 70% of all US households, own a pet, primarily dogs and cats.

While pet food and treats are the largest expense, accounting for 40% of all expenses, or $50 billion, insurance (as part of a broad “other services” category) accounts for an increasing percentage of total expenditure. In 2021, these services accounted for 28% of the total, or nearly $35 billion, at a CAGR of nearly 15% from four years ago, and it’s worth noting that insurance was even mentioned on the list. ‘era.

Yet, just like Soft and other pet-focused businesses, Petco is feeling the impact of current economic conditions as consumers cut back on discretionary purchases to save money. Petco said second-quarter sales rose just 3.5% in August, compared with 4.3% in the first quarter.

Now what

Fortunately, pet ownership has remained robust, and while the “humanizing” trend continues to treat pets as part of the family, consumers are still willing to spend on veterinary services. Petco’s services segment, which includes veterinary hospitals — Petco paid $35 million in May to buy out the remaining half of its Thrive vet joint venture — saw revenue jump 13% in the quarter.

Pet insurance is a similar growth market and has doubled in size in four years to $2.8 billion. Petco’s partnership with Nationwide helps it tap into this opportunity and is expected to make it a bigger part of its overall business.

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Rich Duprey has no position in the stocks mentioned. The Motley Fool holds positions and recommends Chewy, Inc. The Motley Fool has a Disclosure Policy.

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