These 3 Pet Care Stocks Were Resilient in 2022
The number of pet parents soared during the pandemic and this momentum has shown little sign of slowing. Several key drivers define the pet care theme from the ageing of the population to human health and millennials and the work-from-home lifestyle. As pet populations have expanded, we have seen the rise of pet humanisation, pet product premiumisation and the rise of a generation of young people who are far more likely to own a pet compared to previous generations.
This explains why the pet care market is expected to grow at a CAGR of 8% between now and 2030 and the average household spend, per pet, is forecast to rise to $USD 1,320 by 2025, and $USD 1,897 by 2030. Notably, these forecasts by Morgan Stanley are higher than previous estimates of $USD 1,292 and $USD 1,909 respectively. Simeon Gutman, an equity analyst at the bank, recently stated: “An outcome in line with this expectation would increase total spending in the industry by 134% over the next decade, from $USD 118 billion in 2019 to $USD 277 billion by 2030.”
Whilst the growth outlook for pet care is positive, it has been a challenging year for equities. Many pet care companies have faced some degree of margin compression. Global supply chain issues and inflation have increased costs for names in the sector and indeed the broader economy. This, in turn, has translated through to higher prices for consumers. But how has this impacted these companies’ bottom line? Here we look at three companies and examine how they have fared against the cost of living crisis and rising inflation environment.
Number 1: Zoetis (Pet Care – Health)
Zoetis is one of the world’s leading animal healthcare companies. It recently issued its Q3 2022 results with CEO Kristin Pec stating the company lowered its full year guidance “to reflect lower than expected sales in the second half of the year related to continued supply constraints, veterinary workforce challenges and recent changes to foreign exchange rates. “ Despite this, Zoetis still reported revenue of $USD 2 billion for Q3 2022 which was 1% higher year over year. It also delivered 5% operational revenue growth in Q3 compared to the previous year. Earnings for the quarter were $USD 529 million which was 4% lower year over year, however the company stated “this was due primarily to a more favorable tax rate in the year-ago quarter.” The company raised its revenue guidance targeting $USD 7.7 – 7.75 billion dollars for the year.
Zoetis has faced supply chain challenges this year and these intensified in Q3. For example, its parasiticide portfolio was impacted with incremental supply arriving later than anticipated. Such products include chewable tablets that act as an antiparasitic medication for dogs with, or at risk from, external and internal parasitic infestations.
However, the company in our view has illustrated an ability to mitigate the impact of these constraints with the reduction in earnings due largely to changes in the tax environment. Furthermore, many supply constraints encountered by the company could be viewed as a 2022 issue. With signs the economy in China is reopening, the easing of supply chains and capacity constraints could help drive margin expansion in 2023. This would be positive for future earnings, particularly as many firms have already embarked on a cost-cutting drive and sought to make operational improvements in order to buttress margins in the current context.
Number 2: Freshpet (Pet Care – Food and Consumer Products)
Another company that makes us optimistic about growth in the pet care sector is Freshpet which sells refrigerated food for cats and dogs. The company saw Q3 2022 revenue of $USD 151.3 million, an increase of 40.7% year over year. That’s impressive revenue growth, however CEO Billy Cyr stated the firm was also executing an operational improvement plan “to address the cost challenges and improve margins” by “taking the necessary remedial actions, and putting in place the systems needed to further improve performance.”
This operational improvement plan was launched in August 2022 to help address a narrowing of margins due to higher input costs. The initiative focuses on improvements across logistics, commodities and quality by harnessing efficiencies and reducing disposal levels. In November, Freshpet advanced this plan by appointing a new CFO, Todd Cunfer who previously served as CFO of the Simply Good Foods Company, an investment company specializing in snacks and food businesses. We believe the company is well placed to exceed its guidance of 35% growth in revenue and its planned price increaes in February 2023 will be a test of the company’s pricing power for its unique refrigerated products.
Number 3: Chewy (Pet Retail)
Our final company is Chewy, an online retailer offering pet products, supplies and prescriptions. At the time of writing, the company has not yet published its Q3 2023 results which are due on December 8th, 2022. However, Q2 2022 revenue came in at $USD 2.43 billion, up 12.8% year over year.
Furthermore, the number of active consumers using the platform, increased 2.1% in Q2 but more importantly, revenue per active customer climbed 14.4% to $USD 462 over the quarter as well.
In other words, the company is extracting more value per customer. Whilst results overall were lower than analyst forecasts, we would highlight that the company still delivered double-digit revenue growth and margin expansion in a challenging backdrop. We believe customer brand loyalty and the company’s ability to pass through costs puts the company in good stead over the coming years and it is likely recent weakness in headline figures may be transitory, particularly given the likely easing of supply chain issues in the months ahead.
PETZ: Rize Pet Care UCITS ETF
 Morgan Stanley, “Pet Care Industry Outlook 2030,” November 2022. Available at: https://www.morganstanley.com/ideas/pet-care-industry-outlook-2030
 Zoetis, “Zoetis Quarterly Corporate Performance – Third Quarter 2022”, November 2022. Available at: https://investor.zoetis.com/events-and-presentations/event-details/2022/Zoetis-Quarterly-Corporate-Performance—Third-Quarter-2022/default.aspx
 Freshpet, “Freshpet, Inc. Reports Third Quarter 2022 Financial Results“, November 2022. Available at: https://investors.freshpet.com/investors/investor-news/press-release-details/2022/Freshpet-Inc.-Reports-Third-Quarter-2022-Financial-Results/
 Seeking Alpha, “Freshpet Advances Operational Improvement Plan to Drive Margin Expansion; Appoints Todd Cunfer as Chief Financial Officer and Dirk Martin as VP of Customer Service and Logistics”, November 2022. Available at: https://seekingalpha.com/pr/19000757-freshpet-advances-operational-improvement-plan-to-drive-margin-expansion-appoints-todd-cunfer
 Chewy, “Chewy Announces Second Quarter 2022 Financial Results”, August 2022. Available at: https://investor.chewy.com/news-and-events/news/news-details/2022/Chewy-Announces-Second-Quarter-2022-Financial-Results/default.aspx