The pandemic's biggest winners were probably Fido and Fluffy... Not only were their humans around all the time â with packed pantries and longer, more frequent walks on offer â but also adoptions soared. Much ink was spilled on just how hard it was to secure a shelter pet in 2020. Last month, in the [â¦] Not rendering correctly? View this e-mail as a web page [here](.
[Empire Financial Daily] The Pet Industry May Prove the Consumer Sector's Most Enduring Pandemic Winner By Berna Barshay The pandemic's biggest winners were probably Fido and Fluffy... Not only were their humans around all the time – with packed pantries and longer, more frequent walks on offer – but also adoptions soared. Much ink was spilled on just how hard it was to secure a shelter pet in 2020. Last month, in the cheekily titled article "No, you beg," New York Magazine recounted the travails of would-be adopters as they sought their pandemic pooch. The article will ring true to any well-intentioned adopter who was ever denied that puppy in the (shelter) window... The rescue dog is now, indisputably, a luxury good, without a market pricing system at work to manage demand. A better analogy might be an Ivy League admissions office. But even Harvard isn't forced to be as picky as, say, Korean K9 Rescue, whose average monthly applications tripled in 2020. And yet someone has to pick the winners – often an unpaid millennial Miss Hannigan doling out a precious number of wet-nosed Orphan Annies to wannabe Daddy Warbuckses and thus empowered to judge the intentions and poop-scooping abilities of otherwise accomplished urban professionals, some of whom actually did go to Harvard. While there is no doubt that shelters suddenly found themselves in a seller's market, it's always been a little tough for first-time adopters. I remember when I went to adopt my first dog as a grown-up, I was turned down by multiple rescue organizations, who wanted a referral from my vet – what a Catch-22! Who has a relationship with a vet when they don't already have a pet? The other reason I got rejected was that they preferred to adopt animals out to people who weren't away from home for long stretches. Even though I pledged to get a walker or send my prospective pooch to doggy day care, I was repeatedly passed over in favor of students, retirees, stay-at-home moms, or folks able to work from home (something that was much less common in 2004). Of course, the answer to the question "are you away from home for long stretches" changed markedly for many people last year – creating a large cohort of new pet owners. Adoptions weren't the only thing that soared last year... The stocks of companies involved in the pet business went up just as much as the adoption rate. One obvious beneficiary was online pet product retailer Chewy (CHWY), which more than tripled... Pet insurance company Trupanion (TRUP) also more than tripled last year, while IDEXX Laboratories (IDXX) – which provides diagnostics into the veterinary medicine market – nearly doubled, and hobbyist farmer retailer Tractor Supply (TSCO) was a stealth winner from the 2020 pet boom, up 50%. It was a great year to own stocks of companies catering to our animal friends. Some of these stocks that got a great tailwind from the increase in pet ownership are now facing a bit of a wall of worry about tough comps and decelerating growth. As a result, 2021 year-to-date returns have been more mixed in the group, with CHWY shares down 17% and TRUP shares down 34%... but IDXX and TSCO shares remaining strong, up 32% and 45%, respectively. While we may see headwinds in the short term, it's hard not to be long-term bullish on pet stocks... The pet care industry came in at about $99 billion last year, and about two-thirds of American households own at least one pet. The largest piece of it is food – at about 40% – with veterinary services just behind that at 25%. Toys and supplies make up another 22%, and services like grooming and boarding make up 8%. The balance is miscellaneous items, the largest of which is pet insurance. The pet category has been steadily growing at a faster rate than most other consumer packaged goods ("CPG") categories for years, with growth of around 5% annually. Packaged food grows at about 4%, but many big, public food companies have been growing at half that rate. Some categories – such as cereal – had even turned negative, until the pandemic hit, and people started eating more at home. We can also see the attractiveness of the pet sector through the high level of mergers and acquisitions in the space, as big CPG companies struggling for growth in their core markets look to this corner of the market for a shot in the arm. Among the industry's notable deals: cereal and snack giant General Mills (GIS) bought premium dog and cat food maker Blue Buffalo in 2018 and privately held Mars – maker of M&Ms, Skittles, and Snickers – went deep into veterinary health with its 2015 acquisition of the BluePearl chain of companion animal emergency care clinics followed by its 2017 acquisition of the publicly traded VCA Antech, which owns and operates more than 1,000 animal hospitals in the U.S. and Canada. The attractiveness of the pet sector has been driven by a number of larger societal trends. The bond between people and their pets has never been stronger... With an increasing number of people delaying parenthood – or even skipping it altogether – more "fur babies" are making it into their owner's beds, vacation plans, and wallets. As the emotional connection grows, so does the amount of money people are willing to spend on their pets. One beneficiary of that is veterinary services, as medical advances from the human world are ported over to the world of dogs and cats... along with high sticker prices. And it's not just food people are buying... According to the American Pet Products Association ("APPA"), 40% of dog owners and 25% of cat owners bought clothing for their pets last year, and 50% of owners buy Christmas gifts for their pet. (I'm guilty on both counts!) In a quest to help pets live longer, healthier lives, more pet parents are opting for premium pet foods, free of artificial ingredients, made with human-grade, even organic meats... and carrying a premium price. According to the magazine Pet Food Industry, 61% of U.S. pet owners are willing to pay more for foods that specifically target their pets' dietary needs. 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--------------------------------------------------------------- This trend should have legs, because the younger cohorts are even more inclined to spend on their fur babies than their predecessors... Back in 2017, a Harris Poll found that one-third of millennial homebuyers decided to buy a house because of their dog. Dogs were the No. 1 driver of home purchase... more than weddings (25%), or even the birth of a new child (19%)! As Lee Fowler, a real estate agent with Coldwell Banker in the Winston-Salem area of North Carolina told NBC News... All the time they mention their dogs... A lot of times they'll go into the house, through the kitchen, and then walk right into backyard and say "This will work perfectly for my dog." Or they'll look to see whether there's a fence, or if they can make one for their dog. This kind of decision-making may seem shocking, especially to readers outside of the millennial cohort. But it's a giant tailwind for the industry, and one that has been building over my entire career. I've looked at many pet stocks over the last twenty-odd years, and I have to admit... I only regret the ones I chose not to buy. The ones I bought all treated me well, because of these secular headwinds. Given the great secular set up, I'm always on the hunt for a good pet stock... However, I was a bit of a skeptic on Chewy. I have looked at several digitally native pet e-commerce companies over the years – ranging from Pets.com and its famous sock puppet over 20 years ago now to German e-tailer Zooplus (Z01.DE) – and they have all had a bit of a tough go making profits with a pure e-commerce model. One of the cardinal rules of e-commerce is that people hate paying for shipping... but mailing heavy bags of dog food and cat litter and cases of canned food is expensive. Pet products have always been one of the tougher categories to make money in online. Big shipping expenses plus many commoditized products with simple comparison price transparency is a tall order, especially with e-commerce giant Amazon (AMZN) ratcheting up its focus on the space, flexing all its inherent competitive advantages in logistics. But Chewy customers absolutely love the company, and autoship recurring orders make up a whopping 70% of sales there now, giving the e-tailer a level of predictability that would be the envy of any retailer. And unlike other "COVID-19 winners," the pet sector should be sticky. While many folks will assert that a high number of Peloton (PTON) bikes are about to become clothing racks and that they will never Zoom (ZM) again once back in the office, a new pet is a living thing... one that will require, food, water, enrichment, and medical care for the next 10 to 15 years, or more. Despite alarmist headlines about new furry companions being returned as COVID-19 restrictions lifted, the American Society for the Prevention of Cruelty to Animals ("ASPCA") thankfully reported around Memorial Day that it wasn't seeing this... and that polls the organization conducted indicated that rehoming intentions were low among new pet owners. Turning back to Chewy... shares have had a bit of a rough last couple of quarters, and are, as I mentioned above, down 17% so far this year, giving back some of 2020's outsized gains. Despite a surprise move into the black when it reported first-quarter earnings for the period ending in May, CHWY shares dropped 6% on the results, as the company called out some problems with Internet advertising productivity, presumably because of the mobile-tracking changes that tech giant Apple (AAPL) had recently implemented. When Chewy reported second-quarter earnings earlier this month, the company posted a very slight revenue miss, which was enough to send CHWY shares plunging down 9%. Revenue growth deceleration to "only 27%" versus the prior year's 47% growth manifested in a lot of jitters. I think Chewy will be fine in the long term, given how much its customers love the site, but it's hard for me to get excited about a $31 billion company that will do just $200 million in earnings before interest, taxes, depreciation, and amortization ("EBITDA") this year. It's a great company, but too rich for my blood... even after the recent pullback. I've found a different company in the pet space that I'm excited about, but I need to save that one for the paid subscribers... as it will be covered in the October issue my Empire Market Insider newsletter. If you aren't already a subscriber, you can learn more about signing up – including how to save 40% off the first year – [right here](. I'll remain on the hunt for some more ideas in the space that I will be free to share here at Empire Financial Daily. It was a tough weekend in our home as we unexpectedly went from three dogs to two... We lost our 16-year-old chihuahua, Prince, on Friday night. It was the first time I didn't have to make a call, and my fur baby went peacefully at home. I used to call him my grumpy old man, so it should be no surprise to me that he went on his own terms. I couldn't write about anything besides pets today because honestly, 99% of my mind is occupied by thoughts of my dearly departed boy. I'll share some pictures of Prince below, in tribute... From Prince's "Sweet 16" party last June. Prince was famous on the Internet for this tongue. Evidence that I am in the 50% who buys their dog holiday gifts. RIP, my sweet Prince. In the mailbag, more reactions to last week's piece about the scandals taking place at teen retailer Brandy Melville... If you have pets, do you see your spending on them creeping up? Where are you spending more – on food, vet care, or toys/clothes/accessories? If you have pet insurance, do you think it has been a good investment? Any Chewy customers care to share what they like about shopping there? I'm also open to any suggestions on how to get over the grief of pet loss... this is the seventh time for me, but it is still hitting hard. Share your thoughts in an e-mail to feedback@empirefinancialresearch.com. "Brilliant article, but so disgusting. Grateful to you for pulling the curtain down. As a former Wall St. executive I remember well the 'boom boom' rooms and the constant sexual harassment. I was hoping that things were changing. But they're not. And it's particularly sickening that they're abusing underage girls. I sincerely hope that every mother of an adolescent girl refuses to allow her daughter to either shop or work there. And that S in ESG needs to be taken seriously. Thank you, Berna." – Sheryl M. "I would never let my daughter work at Brandy Melville, and I will not buy their products. Regards." – John R. "I will never shop for my granddaughters at Brandy Melville again!!! Ever!!!" – Mary S. "Berna, Just amazing when people with money sell out their morals, ethics, and human decency to fulfill their personal desires. Of course I wouldn't let my granddaughter or daughter work there or buy their clothes." – Richard S. "Young women today have never had a louder voice. They don't need much encouragement to stand up for themselves. They just need to be informed. My daughters and granddaughters will definitely boycott this company if it comes to our area. Thanks for informing us." – Alicia R. Berna comment: I agree that young women will vote with their wallet here... As word gets out about this, the company will be crippled. "I read this article in horror. I am 51 years old. I was a teen clothing model in Atlanta GA in the 1980s for Macy's. I have a daughter who is 18 and just graduated and a new granddaughter. I have never heard of this Brandy Melville clothing line and tend to be fairly trendy. I think my daughter is just old enough that she missed it, thankfully. "I am in horror after reading about this company. I have decided at age 51 that I only have my voice and we cannot all be complacent on these issues, so I will post my horror on Facebook. I have friends who still have daughters this age and I assume they know this brand and most likely wear it, so I will start there. Word of mouth spreads fast when you are passionate... and RIGHT always wins out against WRONG!!! "That company is disgusting. I am a pediatric nurse; I have spent my life protecting children. I hope these people rot!!" – Shelbie R. Berna comment: Shelbie, I feel the same. Thank you for amplifying the story... and for your service as a pediatric nurse. Regards, Berna Barshay
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