Petco Heath & Wellness Co. Inc. (WOOF) PT Raised to $3 at Evercore ISI

Evercore ISI analyst Oliver Wintermantel raised the price target on Petco Heath & Wellness Co. Inc. (NASDAQ: WOOF) to $3.00 (from $2.00) while maintaining a In Line rating.

The analyst comments "Petco still has some bark left in it. 1Q24 results easily came in ahead of compressed expectations – with less comp degradation than anticipated and improved gross margins. But the real treat was the expectation of positive FCF in 2024e. We like WOOF’s strategy to focus on profitability and FCF generation in 2024 and not chase unprofitable sales. Expectations into 1Q were low and 2Q guidance essentially met consensus expectations. Still, the print materially assuaged the worst-case thesis on WOOF: 1) that comp degradation would exponentially accelerate (comps beat by 200- 300bps despite deflation in consumables). 2) that adjusting the offering to skew more value based would severely compress gross margins (gross margins fell 100bps, but sharply less than the 200+bps feared). 3) cash generation is materially restricted – while WOOF’s capital position is far from ideal, generating FCF in 2024 was a positive surprise. All-in-all, the quarter was better than feared and came ahead of compressed expectations, taking actions to alter the operational framework/internal direction is critical to show progress, and estimates should marginally shift higher. The next step is formally firming up the management team, which we expect to transpire in the coming months. Our base case is revised to $3 from $2 and represents a 5.5x EV/EBITDA multiple, warranted given the better-than-expected print."

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