Unusual Options Volume for Petco Health (WOOF) Presents an Intriguing Narrative

In theory, Petco Health and Wellness (WOOF) should represent one of the top-performing stocks of this year. After all, Americans love their pets, with our furry friends providing unconditional love and companionship. In addition, available data suggests that the pet industry may be recession resistant.

Further, Zacks notes that the new normal sparked positive trends in the pet segment. “According to PetSmart CEO J.K. Symancyk, the industry is seeing some of its strongest growth in years, quoted on Yahoo Finance. The pandemic and the lockdowns also led many households to adopt a pet. Notably, the coronavirus lockdown in 2020 witnessed the percentage of U.S. households with pets increase to an all-time high of 70%.”

As well, demographics plays a significant role in the underlying fundamentals of WOOF stock and its ilk. Per Zacks, “millennials (32%), Gen Xers (24%), and Baby Boomers (27%) are the demographics with the highest percentage of pet ownership. These age groups are in their key earning years and making sufficient money to shell out on their pets.”

If that wasn’t enough, “[t]he global pet care market size was $207.90 billion in 2020. The market is expected to grow at a CAGR of 5.6%, per Fortune Business Insights. Per ProShares, the industry has grown in America every year since 2001, even during the Great Recession. The latest study reveals that despite high inflation, Americans are still splurging like never before for their pets.”

All these factors should bolster WOOF stock. Unfortunately, Petco shares dropped nearly 45% on a year-to-date basis. Using data from Google Finance, since its first public close, WOOF plunged more than 60%. It raises the question: should contrarians buy into Petco’s positive earnings report and the subsequent 16% rally?

WOOF Stock Lights Up the Unusual Options Volume Screener

For the third quarter, Petco delivered earnings per share (adjusted for non-recurring items) of 16 cents, which came in line with Zacks’ consensus estimate. However, for completeness’ sake, data from Yahoo Finance indicated that the consensus EPS target was 13 cents. In either case, the current earnings metric slipped from 20 cents per share in the year-ago quarter.

Over the last four quarters, WOOF stock surpassed Zacks’ consensus EPS estimate only half the time.

However, the revenue front brought a significant amount of encouragement to the table. Petco rang up $1.5 billion on the top line, surpassing Wall Street’s target by 1.56%. Moreover, this latest tally compared favorably to sales of $1.44 billion posted one year ago. As well, Zacks noted that the company exceeded consensus revenue estimates three times over the last four quarters.

Adding to the generally positive print, Petco announced a partnership with Stella & Chewy's that “will bring the brand's raw and natural food products to Petco pet care centers, petco.com and the Petco app in January 2023.” Following these disclosures, WOOF stock closed out the Nov. 30 session gaining 16.33%.

What’s more, Petco ranked among the highlights for unusual stock options volume. For the midweek session, volume hit 11,357 contracts against an open interest reading of 39,952. This represented a delta against the one-month average volume of 619.71%.

Notably, call volume hit 6,796 contracts while put volume reached 4,561. Overall, the put/call volume ratio came out to 0.67.

America Loves Pets…to a Point

While WOOF stock undeniably carries a higher-risk profile, the underlying fundamentals have always been strong. According to the American Pet Products Association, total U.S. pet industry expenditures reached $123.6 billion in 2021, representing a 19.3% lift from last year’s tally.

Even more remarkably, 2020’s sales haul came out to $103.6 billion, exceeding the prior year’s result by 6.7%. No, this performance magnitude doesn’t come close to the healthy double digits scored in 2021. However, two years ago, the U.S. and the rest of the world struggled mightily against the mysterious SARS-CoV-2 virus.

Moreover, so many other segments suffered severe demand losses due primarily to restrictions against non-essential activities. However, the pet industry kept chugging along, demonstrating that it can absorb recessionary pressures.

So, is WOOF stock an easy buy? Not so fast.

As NPR pointed out, one of the saddest developments of the Great Recession centered on abandoned pets. The matter got so out of control that pet advocacy groups admonished human owners to hold onto their animals to the bitter end.

Historical precedent suggests that the pet industry is recession resistant so long as financial mitigation measures (such as stimulus checks) are distributed. However, faced with a complete cash flow or income loss, the data indicates that Americans’ love for their pets do have a limit.

That’s not to say that WOOF stock can’t continue its upside momentum. If the Federal Reserve manages a soft landing for the economy, Petco may present great value at this juncture. However, a hard landing – let alone an outright crash – will likely bode poorly for the broader pet industry.

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