NEW YORK (Reuters Breakingviews) - The pandemic pet boom has some bark left in it. Locked-down humans adopted four-legged friends at a rapid pace during the lockdowns. This pushed global pet product sales up to $125 billion, according to Packaged Facts. But Fido will require food, treats and medicine after the vaccine arrives, and spending on services like grooming could rise. Companies that have lapped up sales still have room to run.
Chewy was best in show. The pet online retailer run by Amazon.com alumnus Sumit Singh saw its share price leap 160% through mid-December, with a 46% surge in net sales in the first three quarters of its fiscal year. It added 150% more active users in the first three quarters than in all of 2019 – bringing the total to near 18 million. Subscription sales may make customers sticky, and increased focus on private-label products and healthcare services should fatten margins.
It wasn’t the only winner. Zoetis, the animal medicine developer led by Kristin Peck, had a more modest 20% share price bump in 2020. In November it raised its full-year revenue guidance to $6.6 billion. Pet pain medicine sales could juice growth in 2021, offsetting weakness in the former Pfizer division’s livestock segment.
But bricks-and-mortar pet supply chains are a bigger question mark. PetSmart, which leveraged itself to buy Chewy for over $3 billion in 2017, said in October that the two would split. But investors balked at the refinancing, prompting S&P Global to downgrade PetSmart’s credit rating. Meanwhile, Petco is looking to go public and reduce debt. While higher same-store sales may provide a tailwind, both firms will struggle to compete with more nimble competitors that can afford to keep losing money and may need to shift further into high-margin services.
All in, the post-pandemic pet industry will be bigger, but also become more concentrated, especially as many mom-and-pop outlets may not weather the lockdowns. So Chewy trading at just under 6 times sales in mid-December, roughly double its pre-virus multiple, is justifiable. True, a shift in investor sentiment away from pandemic darlings would knock high-flying stocks like Chewy temporarily, even if their underlying businesses remain strong. But, long-term, the leaders of the pack are likely to pull away.
This is a Breakingviews prediction for 2021. To see more of our predictions, click here.
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