Petco Is Still Being Priced Like the Old Petco

Petco stock fell 4% after its earnings report, though net income more than doubled and free cash flow improved significantly.

The company made progress paying down debt, prepaying $170 million over nine months while pursuing a turnaround strategy CEO Joel Anderson says is gaining traction.

Analyst ratings remain mixed with a consensus Reduce rating, though the average price target of $3.42 implies 32% upside from recent levels.

At a surface level, Petco Health and Wellness NASDAQ: WOOF looks like a company that would be a solid defensive stock for times like these.

Data from the American Pet Products Association forecasts that Americans will spend $165 billion on their pets in 2026 , an increase of 4.4% from 2025.

That low single-digit growth didn't show up in WOOF's latest revenue numbers, which were flat year over year (YOY).

But does that justify a 4% drop in the company's stock price?

The report had some positives, and even more importantly, the market has been pricing the stock for failure for so long that it may be setting up an opportunity for risk-tolerant investors.

In the second quarter of Petco's 2027 fiscal year , the company booked net sales of $1.49 billion, essentially flat against the year-ago period, with comparable sales up 0.6%.

That marked the second straight quarter of positive comps .

Management pinned some of the topline softness on a rockier-than-expected rollout of a relaunched membership program.

Specifically, point redemptions came in heavier than anticipated right out of the gate, pulling sales forward and creating a short-term drag.

That could be a sign of a stressed consumer.

However, Petco said sales were tracking ahead of its internal targets before the relaunch hit.

On the bottom line, the story looks better.

Gross profit rose to $591.1 million, a 39.7% margin, up 37 basis points from a year ago.

But that came with a caveat.

About $6.8 million of that improvement came from a net benefit tied to IEEPA tariff refunds.

If that gets stripped out, the normalized gross margin was roughly flat YOY.

Operating income still climbed 11.1% to $47.8 million, and net income more than doubled to $38.7 million from $14 million in the same period last year.

Adjusted EBITDA came in at $122.2 million versus $113.9 million a year ago, or $115.4 million on a normalized basis excluding the tariff item.

Petco also made real progress on its balance sheet .

First-half free cash flow improved to $60.8 million, up from just $9.9 million over the same stretch in 2025, and total debt fell to $1.48 billion from $1.59 billion a year earlier.

After the quarter closed, the company voluntarily prepaid another $75 million of debt, bringing total prepayments to $170 million over the past nine months as it works toward a leverage target of 2x net debt to Adjusted EBITDA.

Petco's Turnaround Strategy Is Gaining Traction CEO Joel Anderson framed the results as evidence that the company's "Reach for the Sky" turnaround strategy is gaining traction, particularly in consumables, while CFO Sabrina Simmons pointed to the prepayment as a sign of the company balancing growth investment against deleveraging.

Petco left its full-year guidance unchanged, calling for net sales flat to up 1.5% and adjusted EBITDA of $415 million to $430 million, while guiding Q3 sales growth of 0.4% to 1.0% and adjusted EBITDA of $100 million to $103 million.

Management also flagged initiatives for the back half of the year—including a...