The “puppy epidemic” you see running around the neighborhood has been a huge loss to the pet industry. But unlike other booms, the inevitable rebound in demand can be eased by two factors unique to this situation. The first is that pets will need food and care, driving future expenses. Second, as pets become members of the family, owners are more inclined to purchase premium-priced food, treats and services. Together, this means spending on pets is expected to normalize to higher levels. “Before the pandemic, dog and cat population growth was not so volatile,” said Ann Scott Livingston, research analyst at Euromonitor. But the desire for companionship in the early days of the Covid health crisis led to an increase in pet adoptions in 2020 and 2021, he said. Media reports at the time said some animal shelters had been completely emptied of dogs and cats. While that initial burst has eased — and shelters are inevitably filling up again — people are still adding new pets to their homes at a higher rate than in 2019, Livingston said. “Obviously, some level of consumer mobility has returned, but a lot of companies have established work-from-home or hybrid models, so a lot of consumers … realize, ‘Oh, I’m going to spend a lot more time at home than I did in 2019,’ which is this year and Last year helped boost adoption,” Livingston said. Euromonitor expects the pace to normalize next year, but the ripple effect is already evident. Morgan Stanley estimates that there are about 5 million more pets in the U.S. today than in 2019. But according to the bank’s research, a nearly 4% increase in pet ownership led to an 11% increase in spending per pet. In a recent research note, analysts led by Simeon Gutman said that a large portion of new pet parents are young adults, who spend more on their companions. Millennial “pet moms and dads” have smaller families or have delayed having children, analysts say. Many have just moved into their first home, and are ready to shower their pets with love – and treats and toys. According to Gutman, this is creating a tailwind that will help accelerate the pet industry’s sales growth in the coming years. He expects average annual pet-related spending to grow at an accelerated pace of about 8% from 2019 to 2030. That would boost industry sales to $277 billion by 2030, according to the firm’s baseline forecast. Notably, this momentum outpaced the compound annual growth rate of almost all other retail sub-sectors, the firm said. But, Morgan Stanley’s top pet industry stock picks might not be the first name that springs to mind. Instead of picking on retail names like Petco Health and Wellness and Chewy, Gutman hopes to play the pet market for investors by focusing on service providers. A bet on the power of vets Morgan Stanley called Zoetis, a specialty pharmaceutical company that makes heartworm prevention and other drugs and vaccines for animals, is its top pick in the space. It also likes Idex Laboratories, a leading manufacturer of diagnostic tests used by veterinarians. The bank has an overweight rating on both stocks. As for Zoetis, it has a $264 price target, implying a roughly 60% upside from the stock’s close on Thursday. Shares have lost about a third of their value since January. For Idexx shares, Morgan Stanley has set a price target of $603, implying a gain of about 63% from Thursday’s close. While food and treats make up the largest portion of a pet owner’s budget, veterinary services are second and, according to Morgan Stanley estimates, the fastest growing segment. Also, while spending on cat toys, a fancy dog bed or an elaborate fish tank may be under consideration, once consumers fall in love with their pets, regular veterinary care is seen as a must. A Morgan Stanley consumer survey found that most pet owners visit veterinarians for routine care and place a high value on their medical expertise. Right now, many of these visits don’t include blood work for preventive diagnostic tests, but Gutman expects that to change over time. “While we think wellness testing should expand over time, we expect near-medium-term penetration to expand at a more measured pace, taking time in terms of preventive care protocols, veterinary training and education of pet owners about the importance of these measures,” she said. wrote. Gutman expects greater use of Zoetis’ Simparica Trio, a next-generation flea, tick and heartworm insecticide, over time. The product, which launched in 2020, generated $168 million in global sales in its first year. Morgan Stanley says more vets are recommending the product than other options, so sales should grow from that base. Even pet product retailers have realized the importance of veterinary care in their business models. Petco has repositioned itself as a health and wellness company. Chewy recently added CarePlus, a line of pet wellness and insurance plans to its existing health offerings, which already include an online pharmacy, telehealth services and an online marketplace geared specifically toward vets. Both retailers see pet health as a way to be competitive against Walmart and Amazon, which have expanded their reach into the pet care aisle. Both Walmart, which leads in-store sales of pet supplies, and Amazon can compete aggressively on price, so Petco and Chewy are trying to claim their turf as experts in the field. Having the voices of highly trained vets by their side can reinforce this image. Euromonitor’s Livingston, who focuses on food and nutrition, said online channels are particularly important for pet products. About a third of the industry’s sales are generated online, he said. A shift to ‘human-grade’ food Pet owners prefer the convenience of ordering items such as pet food through an online subscription, which has contributed to this trend, according to Livingston. Most major pet product retailers offer some form of this service. In an earnings call Wednesday, Petco management talked about the importance of premium pet food brands — some exclusively — in driving repeat visits from shoppers. It states that shoppers who buy pet food and other consumable products generate about 30% more lifetime value than customers who don’t shop these categories with Petco. Also Wednesday, the retailer announced Wholehearted Fresh Recipes, a line of frozen, human-grade foods for dogs. According to Livingston, new brands are trending higher. Owners continue to “humanize” their pets. They want food packed with the same healthy nutrients they’re looking for in their own food, even if it comes with a higher price tag. “People are really looking at their pets as valuable members of the family and many of them will cut back on other areas of life before cutting back on their pet food,” he said. Sales of nutritional supplements for pets are also on the rise, according to Euromonitor. Petco sees premium pet food and its Vital Care program, which had 282,000 members as of its fiscal second quarter, as ways to build loyalty and grow sales. The recently revamped program allows customers to get discounts on products and services like teeth brushing and nail trimming, as well as vet exams, for $19.99 a month. On the company’s earnings call, CEO Ron Coughlin said the program drives customers to shop more frequently at its stores and that it boosts their spending by “double digits.” “We’ve captured a much higher share of wallet, about 30% of VitalCare customers are new to food with us and 40% new to services, as opposed to VitalCare 1.0, [the original version of the loyalty program]” he said. The program’s growth — up 180% from a year ago and up 28% from the first quarter — was aided by the addition of members from Thrive Pet Healthcare, a veterinary network it acquired earlier this year. In a research note, Goldman Sachs analyst Kate McShane said the current VitalCare can be very attractive to consumers looking to save in an inflationary environment. Meanwhile, Petco benefits from recurring revenue from membership fees and higher spending levels of its members. Petco says it assumes that VitalCare customers have a lifetime value similar to that of its typical customer. 3.5 times higher than. Still, Petco shares fell 8.8% on Wednesday as investors reacted to a lower forecast for fiscal 2022. The company is suffering from higher costs and weaker demand for more discretionary items. McShane has a buy rating on Petco, but that accounts for lower earnings estimates. He lowered his 12-month price target to $20 from $1. He said he would watch it continues to rate the stock favorably and expects its strategies to drive revenue and margin expansion over the long term. Petco shares closed Thursday at $15.23, down 23% since January. This coming Tuesday, Chewy will report his results. Analysts will pay close attention to customer churn rates. The fear is that the company will have to spend more on marketing to attract new clients. Wedbush analyst Seth Basham downgraded Chewie to neutral in late July. One of his concerns was that search rates for pet-related products have dropped, and that Apple’s privacy changes have made it harder to target potential customers online. The upcoming quarterly results will show whether these trends have affected Chewy As of Thursday’s close, the stock was down 31% year-to-date. That said, Chewy’s strength comes from its dominant position among consumers buying staples like pet food online. Since these purchases are essential, Chewy has a strong position History offers some reassurance here, Livingston said. During the Great Recession, from 2008 to 2009, spending on pets actually increased, he said.
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