Paul Cerro's avatar
$27.4m follower assets
The market is giving credit to the wrong company
For Petco and Chewy investors, this is why we have a problem when the market favors the latter over the former

Looking at a business foundation, Petco offers more than Chewy currently does or even can offer

Financially, Petco is doing much better and IS profitable!

Looking at how the companies have performed based on their recent low, the market is more bullish on $CHWY > $WOOF despite Petco having a superior moat, clear path to margin expansion, and customer retention all stemming from their closed ecosystem bet through pet health and wellness.

We feel that the market consistently underestimates the clear differences in businesses and which is in a better position to drive TSR.

The research below that includes a link to the original deep dive in the first paragraph.

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When and why will the market realize Petco is a better business? (This is obviously unknowable, but interested in any thoughts you may have)
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Paul Cerro's avatar
$27.4m follower assets
Petco Vital Care Economics Fueling Growth
Petco $WOOF Vital Care was one factor in our long thesis for the company since its members have 1.5x higher traffic, 1.7x higher spend and generate 3x higher LTV

See our post on the program economics and how it drives recurring sales and retention $CHWY

Living in my city, I see sooo many dogs, and the amount that people spend on them is quite evident. Most of them have better wardrobes than me! Haha.

I know WOOF is not apparel, but it does seem that spending on pets is a tailwind industry, generally.
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Paul Cerro's avatar
$27.4m follower assets
$WOOF: Banking on the Pet Industry
TL;DR
  • Petco’s omnichannel push will help it solidify itself as top pet health and wellness company with a strong defensible moat and loyal customer base

  • Continued push into value-added services creates a closed-ended one-stop-shop ecosystem for all pet owners

  • Its strategic initiatives will drive top-line growth and significantly improve the company’s profitability and cash flow

  • Given the company’s strategic growth initiatives, the market is mispricing the potential for Petco to deliver outsized returns over the next few years

Take a look at the rest of our thoughts below and be sure to like and subscribe to continue getting more research on the consumer space.

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Steve Matt's avatar
$10.6m follower assets
$BFLY and $WOOF Partner Up
Butterfly Networks and Petco announced the deployment of of the Butterfly IQ+ Vet handheld ultrasound device to Petco's nearly 200 veterinary hospitals located within Petco's pet care centers.

Butterfly reported earnings this morning as well. Revenue was up 25% while gross profit margins increased 200bps over Q1 2021. More importantly, subscription revenue increase 60% and now accounts for 29% of Butterfly's overall revenue, a single quarter record. Just waiting for the 10-Q to find out how many units were delivered to customers in Q1 but I'm leaning towards this being a very good quarter for them.

The partnership I never knew I wanted 😂

I can't say this idea ever dawned on me, but it makes perfect sense for both and is an intriguing concept.

I need to research a bit more on $BFLY -- they seem fascinating.
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Petco Health and Wellness Company (Ticker: $WOOF) - Brief Breakdown
For the full article check it out here.

Company Description and Qualitative Analysis
Petco Health and Wellness Company $WOOF, Petco for short, is a health and wellness company for pets of all kinds. Petco offers veterinary care, grooming, training, tele-health for pets, vital care, and pet health insurance services. Petco also offers various pet products such as food, toys, and other pet essentials. As of March of 2022, Petco operates 1,500 locations in the United States, Mexico, and Puerto Rico and has a network of 200 in-store veterinary hospitals. Unlike many subscription based pet companies, Petco offers products for pets of all kinds and is a one-stop shop for pet owners. Petco has one of the largest retail footprints of any pet store and is one of the most well known pet store chains. As long as people have pets, Petco will be a top player and their services will be needed. I also went into Petco during my interview with Paul Cerro, you can give it a listen here.

Quantitative Analysis
At the time of this writing (5/1/2022), $WOOF is trading at $19.26 with a 52 week range of $16.22 - $28.73 and a market cap of $5.84B. In Q4 of 2021 WOOF’s had an 18% net revenue growth with a 22% adjusted EBITDA growth. Sales growth was up 14% and 30% over the past two years showing continued growth post pandemic pet boom. Return of equity (ROE: Net Income / Total Equity *100) of WOOF is 7.5% and net margin (net income / revenue) is 2.83%. The price to earnings (price per share / earnings per share) ratio was 31.06 and the debt to equities ratio (total liabilities / total equity) is 1.87.

Bullish Thesis
Here are three points to support the bullish thesis updates:
  • One Stop Shop for Pet Owners: As much as everyone loves their pets, pets need supplies and care. Petco provides everything you need in one location. Although some services can be shipped or purchased online, there will always be room for grooming and in person veterinary services and Petco’s storefronts will allow pet owners to take them there with the trusted brand name of Petco behind them. By providing anything and everything for pet owners, Petco will always have a place in the pet industry.

  • Retail Footprint: Outside of PetSmart there is no other pet store that has anywhere near the retail footprint that Petco has. Although there are some aspects you can order online, such as food, toys, pet beds, crates, etc., there will ALWAYS be a spot for in person pet stores. Grooming, boarding, and other pet services will need an in-person facility with a trusted brand, and Petco provides that.

  • Continued Sales Growth: Even after the pandemic pet boom, Petco is seeing continued growth. Q4 of 2021 was the 7th consecutive quarter of double-digit comparable sales growth with a 13% jump in sales growth. In addition to continued growing sales, revenue is rapidly growing up 18% and 22% adjusted EBITDA. There is somewhat of a worry with potential decreased pet spending with seemingly a looming recession, but it seems with every passing quarter the demand for Petco products keeps increasing. If this trend continues I’d look for the market to react positively to Petco.

Bearish Thesis
Here are three points to support the bearish thesis:
  • Local Pet Stores: Currently, there is an increase in pet stores that provide unique and fun toys, beds, or other pet supplies that big chains like Petco may not provide. There are also local stores that specialize in certain pets like dogs which can take away from Petco’s sales. Although it has not been seen in any recent sales numbers, with the increase in stores being started the trend may change if people change their pet shopping habits. This trend has not been a threat as of yet, but it is something to monitor.

  • Perception of Large Brands: Whether you like it or not, there is always a negative perception of big brands. This perception ties into the previous point where the increase of large chains could make smaller brands more desirable. The lack of speciality for a specific pet could cut out the product sales for specific pets. Although the diverse products could be a benefit for Petco, certain speciality stores can cut into the sales of dog products for example. Although the diverse products and services will allow Petco to be around through the toughest of times for pet stores, it is possible for toys, beds, food, and similar item sales could be cut down while grooming, boarding, and in person services could be maintained.

  • Autoship Retailers: During the COVID-19 pandemic there was a boom in pets as well as subscription services. Companies like Chewy (which I wrote about last week) have items that Petco provides, but give a convenience factor that Petco (at least the perception) does not. You can order and subscribe to various services through Petco but that is not what Petco is known for. Chewy, BarkBox and other subscription services can cut Petco’s items sales and leave Petco to become more of an in person service provider. This trend has not yet happened or has not come to fruition just yet and now that stores and in-person shopping is back from the COVID-19 pandemic, I do not believe this is a major concern as of yet.

For the full article check it out here.
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Sector Overview - Pets
For the full article check it out here.

Macro Minute:
CPI data was released for the United States by the FED and the published number was 8.5% for the year-over-year inflation for the month of February. This data did NOT include things like meat, eggs, gas, electricity, housing, and even eating at home. This is another case of manipulated numbers in order to show inflation is not as high as it actually is. Inflation is now being blamed on the Ukraine war and is being known as the “Putin Price Hike” in the United States. It is difficult to project how long inflation will be extremely high, but Janet Yellen said she anticipates at least another year of high inflation which leads me to believe it may be longer than a year.

Sector Description: What is the Pet Industry?
Pets, furry creators, whatever you want to call your pets, the industry is absolutely booming. People love their pets and some treat their pets like children and are willing to spend quite a bit of money on their pets. In 2020, there was $103.6 billion spent on the pet industry. The pet industry spending can be divided into pet foods and treats, supplies, live animals, & OTC medicine, vet care & product services, and other services like boarding, grooming, training, pet sitting, and walking. This large industry has plenty of players and new companies coming in trying to innovate to make pet care easier.

Large Public Companies in the Sector
Chewy (Ticker: $CHWY) - Market Cap: $31.9B
Petco Health and Wellness (Ticker: $WOOF) - Market Cap: $6.8B
Freshpet (Ticker: $FRPT) - Market Cap: $5.7B

Opportunities for Broad Exposure
The ProShares Pet Care ETF (Ticker: PAWZ) allows investors to get broad exposure to this industry. In order to learn more about this ETF here.

Key Metrics and Considerations
Pet Boom: There was a very large boom in pet adoptions and pet purchases during the stay at home mandates due to COVID-19. Now that the pandemic is somewhat in the rear view mirror, the pets still remain. Pets of all kinds are now in houses for years and new pet owners are going to spend money on these pets. Many will find new companies, products, and services for their pets and the industry is ripe for growth.

Repeat Purchases: Pets are somewhat destructive, are always growing, and will need continual care throughout their lifetime. This will cause repeat purchases and there are even services which give buyers the subscription option. The subscription option gives consistent revenue and is a great way for a business to pull in consistent money.

Humanization of Pets: People have become extremely attached to their pets, even to the point of treating them almost like children. With the increased humanization of pets, more money will be spent on pets in order to spoil people’s animals. This includes spoiling with toys or various other swag for pets that cost money. Increased spending on pets means more revenue for pet companies.

Opinion of Sector
I am bullish on the sector but cautious on pets. I believe the COVID-19 pandemic helped a lot of companies but some will not survive. There are certain companies which offer niche products and services in the pet industry that may not survive, but others that offer a wide range of products and services for pets that diversify the business. Diversifying the business can limit growth as it is not singularly focused but can make a business bulletproof or harder to fail. There will be winners and losers in this industry, but unlike the semiconductor industry I believe the growth in the pet industry is slowing. The COVID pet boom is coming to an end and less pets will be purchased over time. Also if a potential recession comes, a logical place to cut spending is excess spending on pets.

For the full article check it out here.
Paul Cerro's avatar
$27.4m follower assets
CGC Q1'22 Quarterly Letter - Can you relate?
Cedar Grove Capital released its Q1'22 letter last week and wanted to share it with you all here.

While the quarter was a challenging one, we ended the quarter with 18% in cash and are strategically positioned to continue the rest of the year deploying dry powder in opportunistic areas.

Our holdings are included below - would love anyone's thoughts on them if they have any to share.

Current:

Closed:

Paul Cerro's avatar
$27.4m follower assets
Cedar Grove Capital Q1'22 Investor Letter
Hi all,

For anyone interested, Cedar Grove Capital will be releasing its first investor letter next week for Q1'22.

This letter will encompass our holdings, position sizing, returns, my thoughts for the portfolio going forward and select commentary for certain positions.

Click the link below to subscribe and get it when it comes out. cedargrovecapital.substack.com

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