11:43 AM EST, 12/06/2024 (MT Newswires) -- Petco Health & Wellness' (WOOF) fiscal third-quarter results were "encouraging" amid improving fundamentals at the pet store chain, even though its fourth-quarter guidance fell short of Wall Street's estimates, Wedbush Securities said in a Friday note.

Petco's adjusted net loss came in at $0.02 per share in the quarter ended Nov. 2, compared with a $0.05 loss a year ago. The consensus among analysts on FactSet was for an adjusted loss of $0.04 per share. Revenue rose 1.2% year over year to $1.51 billion, beating the Street's $1.5 billion estimate.

Comparable sales in the quarter increased 1.8%, above the FactSet consensus of 0.7%.

Petco's "profit-first" strategy is showing signs of building margin improvement, Wedbush analyst Seth Basham wrote. The strategy could drive "more significant" earnings before interest, taxes, depreciation, and amortization improvement amid merchandising changes and market share gains in 2025 and beyond, he said.

Petco's annual gross margin improvement seen in the third quarter is expected to accelerate into the fourth quarter, according to the Wedbush note.

Gross margin rose 130 basis points year over year to 38.1%, driven by product cost management and improvements in services margins, Chief Financial Officer Brian LaRose said on an earnings call on Thursday, according to a FactSet transcript. The metric surpassed Wedbush's estimate of 37.9%.

For the fourth quarter, Petco expects adjusted earnings per share to come in between zero to $0.02, while revenue is projected at $1.55 billion. The guidance was below the Street's consensus estimates that Wedbush put at $0.04 and $1.57 billion, respectively.

"We believe the (fourth-quarter) outlook is appropriately conservative given the dynamic environment," Basham said. "We see upside as (Petco's) profit-first strategy is showing signs of building margin improvement through supply chain savings and operational efficiencies."

The brokerage maintained its outperform rating on the Petco stock while increasing its price target to $6 from $5.5. The pet retail category appears to be bottoming, the brokerage said.

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