Operational improvements and new growth initiatives could boost Petco , according to Jefferies. The bank upgraded the pet supplies and food retailer to buy from hold. Analyst Kaumil Gajrawala also lifted his price target to $5 from $4.05, implying upside of around 108%. Gajrawala said that Petco is trading at a discount versus peers. Better execution and self-help measures support an improving return profile, he argued. WOOF 1Y mountain WOOF 1Y chart "Petco enters F26 headed towards growth with liquidity and profitability concerns now in the rear view mirror. The breadth of initiatives planned do not rely on an improving macro and play to the retailer's strengths, giving us confidence they can work," he wrote. "Shares underappreciate the progress made thus far and self-help improvements to come." Petco trades at a forward price-to-earnings multiple of 13, below the S & P Small Cap 600's ratio of 15.5. The analyst said the heavy lifting is behind Petco, with the company going from an urgent liquidity story to a cost management story to now, a growth and return on invested capital story. Gajrawala also applauded the moves Petco has made to improve its balance sheet. "$1.5bn debt was swapped in Feb to a floating/fixed rate mix, pushing out maturities to 2031. The move gives management flexibility to reinvest appropriately. Ample liquidity ($257m cash, revolver untapped) confirms the turnaround strategy is ready to enter the next phase," he wrote. Gajrawala also said that Petco's new management, hired within the last two years, all have turnaround experience at other retailers. With the return to retail fundamentals complete, he believes that the team "shifts to offense." The analyst pointed to near-term growth drivers such as expanding fresh and frozen products, frequent updating product sets and carrying more national brands as tailwinds for more traffic and cross-sell. These near-term self-help efforts, Gajrawala wrote, are not reliant on a change in pet household formation or macro inflection. He also applauded several long-term growth drivers. "Cross-selling with vet/grooming, driving own-brand food/supplies, expanding vet clinics/Rx, and unveiling an updated loyalty program are drivers long-term, we think," Gajrawala said. "They will take time (testing) and capital but should reposition the business positively. A more holistic pet health offering should benefit from higher healthcare spend as the pandemic cohort begins to age." Shares of Petco have slipped 15% this year and are down 2% over the past 12 months. The stock has a market cap of $675 million, according to FactSet, and closed at $2.40 on Wednesday. Its low price could make it susceptible to bigger swings.
