Petco's Pain Could Be Your Gain: A Buying Opportunity in Pet Health Services?

The stock market has a funny way of overreacting to bad news, especially when it comes to companies undergoing transformation. Take Petco (WOOF), which saw its shares plummet 24% on June 5 after reporting a 2.3% year-over-year sales decline. But here's the kicker: the company's profitability actually improved, with gross margins expanding and adjusted EBITDA rising. This disconnect between Wall Street's panic and Petco's operational progress presents a compelling case for long-term investors to step in.

Let's start with the numbers. Petco's Q1 2025 results showed net sales of $1.5 billion, down slightly from last year, but adjusted EBITDA jumped to $89.4 million, a 16% year-over-year increase. Gross margins expanded by 30 basis points to 38.2%, and operating income more than doubled. Meanwhile, the company reaffirmed its full-year EBITDA target of $375 million–$390 million—a range it's on track to hit. So why the sell-off? Investors fixated on the top-line dip missed the bigger picture: Petco is intentionally shifting its focus from commoditized pet supplies to high-margin health services—and it's working.

The Strategic Shift: From Stores to Services

Petco isn't just a retailer anymore. It's now a pet healthcare powerhouse, with over 250 in-store Vetco Total Care hospitals and a 17% year-over-year surge in services revenue. This segment—think veterinary care, grooming, and training—is growing at 9%, far outpacing stagnant sales of consumables like food and toys. By emphasizing services, Petco is targeting Gen Z and millennial pet parents, who spend freely on their pets' well-being.

Consider the numbers: services now contribute over 20% of total revenue, and margins here are sky-high compared to packaged goods. The company's “wholistic care” model—pairing in-store hospitals with pet insurance partnerships (like its deal with Nationwide)—creates recurring revenue streams and customer loyalty. Meanwhile, rivals like Chewy and PetSmart are still playing catch-up in this space.

Why the Market Overreacted

Analysts pounced on Petco's sales decline, but they're missing two critical points:
1. The shift to services isn't free. Petco is closing underperforming stores (20–30 this year) and investing in tech upgrades to streamline operations. These moves hurt short-term sales but will pay off long-term.
2. Consumer demand is stabilizing. While pet ownership dipped post-pandemic, it's now growing again, especially among younger demographics. Petco's “Welcome to the Family” program—a one-stop shop for first-time pet owners—positions it to capture this wave.

The Risks, and Why They're Manageable

No investment is risk-free. Petco's debt-to-equity ratio of 1.40 is a red flag, but its improving EBITDA should help reduce leverage. Tariffs on Chinese imports are a concern, but management has factored these into guidance. The bigger risk? Execution. Petco must finalize its dog category reset and relaunch its Vital Care membership program by late 2025. If it stumbles, the stock could stay depressed.

Why Now Is the Time to Buy

At $2.81 per share—a 31.5% drop year-to-date—Petco trades at just 0.5x its GuruFocus estimated value of $4.93 within a year. Even conservative estimates suggest 75% upside. This is a value trap turned opportunity: the market's focus on near-term sales ignores Petco's structural shift to high-margin services and its dominance in pet healthcare.

The Bottom Line

If you're willing to look past the headlines, Petco's current price offers a rare chance to buy a $900 million company with a clear path to profitability and a secular growth trend in its rearview. The stock's volatility (72 moves greater than 5% in a year) means you'll need a strong stomach, but the reward? A rebound to $4–$5+ as the market catches up to Petco's transformation.

Action to take: Use dips below $3 to start a position. Set a trailing stop at $2.50 to protect gains. This is a “buy the dip, forget the noise” stock—if you can handle the swings.

Disclosure: This analysis is for informational purposes only and does not constitute financial advice. Always consult a professional before making investment decisions.