Analysts expected PetCo Health and Wellness (NASDAQ: WOOF) to deliver first-quarter 2023 earnings per share of $0.025. However, many are waking to a satisfying surprise, as the American pet outlet reports a 140% upside beat for $0.06 earnings per share. Today, as the company releases all the significant information points and performance metrics for the quarter, the stock price is overhauled by a trader's market since most are focusing on some of the past negatives rather than the future positives.

As a result of the participant majority of Wednesday morning, WOOF stock is trading lower by as much as 7.6%.

PetCo has been outperforming other names in the sector, such as Chewy (NASDAQ: CHWY), by as much as 70.2% during the past twelve months, as the performance spread in both companies' charts suggested. However, there is a critical point to touch on for investors, as Chewy's price-to-earnings ratio stands at an obscene 274.9x, compared to PetCo's more realistic 29.9x.

What matters most is how this multiple will be affected and the subsequent stock price, based on management's 2023 full-year guidance provided in today's press release. 

Why PetCo Shares are Lower 

Earnings should be taken with a pinch of salt, as they are heavily focused on the short-term cycles and performance of a company, and even a terrible quarter could still represent a fantastic company to invest in in the big picture. Today, PetCo reported a net loss of $1.9 million, compared to net income of $24.7 million just a year prior. Subsequently, following this loss, earnings per share declined from $0.14 in 2022 to today's $0.06 to represent a more than 50% contraction in investor earnings power. 

Investors can take refuge in understanding that the net loss came primarily from increased interest expenses paid by the company, as 2022 saw the most aggressive rate hikes in the nation in more than a decade. PetCo paid $37.2 million in interest expenses, 89% higher than $19.6 million just a year prior.

Operationally, however, the company reports a comparable sales increase of 5.1% year-over-year, stacked at 10.2% on a two-year basis.

Moreover, management reports this quarter to be the 18th consecutive quarter posting comparable sales growth, this metric being a widely followed key performance indicator (KPI) for the retail industry; growth in this aspect alone should have been enough to cushion any other blow. 

Lastly, some may be leaning hard on free cash flow concerns, as it is the lifeblood of any business and investment. Reporting a negative free cash flow of $24.4 million is a reasonable concern for investors. However, it is an understandable position since the company is still within its "growth stage."

Companies going through these growth spurs have yet to be expected to spit out free cash flow. Instead, they are held up against their effectiveness at growing revenues and market share. Based on the critical metrics, and management guidance, some will find today's sell-off to be an exaggeration. 

What to Expect Moving Forward from PetCo

PetCo analyst rating points to a 23.5% upside from today's prices, reasonably bullish and similarly cautious regarding the seeming 'contraction' being experienced in the business. Within their earnings presentation, management points to further achievements accruing to the credibility of a growth company.

For example, digital sales within the industry grew at a double-digit clip year-over-year, with continued growth in repeat delivery and digital pharmacy products. In addition, the number of pets veterinarians saw increased by 20% annually as the business added 375 veterinarians to its ecosystem. These expansionary measures point to further monetization opportunities for the company at the expense of the expected negative cash flows as management focuses on growth investing.

Two factors are what can spark future revenue growth, market share, and monetization, which can result in richer price-to-sales multiples in the business. First, revenue growth, with more recurring than discretionary revenue, is the more desired outcome since it will bring less volatility to the bottom line.

Second, PetCo's loyalty and membership programs brought over 100,000 new customers to Vital Care Premier, finishing the quarter with 580,000. These active customers' monthly membership fees accrue over $1 billion annually. They are expected to keep growing at high single-digits and retain their recurring nature. 

As management expects to finish 2023 with net sales between $6.15 billion and $6.275 billion, markets will see a growth rate of 1.9% to 4.0%. As interest expenses drove profitability significantly lower during the past twelve months, the company expects to make a $100 million principal payment on its loan balances, effectively reducing the interest burden experienced during the period.

With positive EBITDA scheduled to fall between $520 million and $540 million, investors will see a swift recovery in the negative earnings per share balance. Considering these improvements, management has set expectations for payments to finish the year within $0.40 to $0.48 per share, representing a 17.6% to 41.2% increase from 2022 $0.34 earnings per share.

\Such an advance in earnings, an improving operational structure stemming from debt pay downs, and sustained revenue growth could all lead to analysts upping their price targets and investors assigning richer multiples for WOOF stock.