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The pet supplies category has been resilient. But Petco and Chewy may see challenges ahead.

The trend: The pandemic-driven boom in pet adoption has made the pet supplies category fairly resilient even in the face of inflation. But that strength may be waning.

  • Chewy beat expectations as its FY Q4 net sales rose 13.4% year-over-year (YoY) to $2.71 billion, outpacing the expected $2.64 billion. Its adjusted earnings per share of 16 cents significantly exceeded the expected 1 cent.
  • Petco also performed better than expected. The retailer’s fiscal Q4 sales grew 4.2% YoY to $1.58 billion, slightly above the consensus estimate of $1.57 billion. Its adjusted earnings per share of 23 cents fell just short of the expected 24 cents.

Despite those better-than-expected results, there are signs of trouble ahead. Pet owners have been hit hard by rising costs, which Petco says have driven consumers to pull back on discretionary spending—a trend the retailer expects to continue for at least a few more quarters.

A tough environment: We expect pet supplies sales to grow 7.1% YoY this year, up from 6.1% YoY last year, per our Pet Products Retail Sales forecast. But that growth largely reflects rising prices rather than an uptick in volume as pet food prices rose 15.2% YoY in February, per the US Labor Department.

  • The challenging economic climate has driven “significant growth” in Petco’s Wholehearted private label brand, and also caused some shoppers to cut back on discretionary supplies, said CEO Ron Coughlin during the company’s earnings call.
  • The retailer expects fiscal year 2023 net sales of $6.15 billion to $6.28 billion, which would be a gain of 1.8% to 4.0%. That’s well short of the $6.36 billion guidance that Wall Street analysts had expected. It also expects FY23 adjusted earnings per share to decline between 21 cents and 13 cents.
  • Chewy’s guidance of fiscal year 2023 net sales of $11.1 billion to $11.3 billion (which would be an increase of 9.9% to 11.9%) is in line with analysts’ expected $11.11 billion. However, the retailer saw its active customer count decline to 20.41 million from 20.66 million a year ago, which is a warning sign.
  • Other retailers are eyeing an opportunity to attract cost-conscious consumers. For example, Dollar General earlier this month launched its rebranded dog and cat food private label line, Nature’s Menu.

Looking for growth: Pet supplies purchases are rapidly shifting online. We expect ecommerce sales to account for 45.7% of all US pet products sales by 2025. That would be a dramatic shift from ecommerce’s 31.0% share in 2020.

  • Chewy has long leaned into consumer desire for convenience by offering subscription programs, which also help boost repeat engagement among customers. The company saw autoship sales jump 17.5% in Q4 as subscription sales accounted for 73.3% of overall sales, up from 70.7% a year earlier.
  • Petco is also similarly looking to subscriptions to spur growth. The retailer on Wednesday announced an exclusive partnership with Freshpet to offer a fresh pet food subscription.
  • The partnership with Freshpet is one way that Petco is aiming to capture a piece of the fast-growing fresh-frozen pet food category, which it says will reach $6 billion within the next four years. The retailer, which also offers veterinary care and grooming services, is also looking for new revenue streams by “becoming a services business,” Coughlin told Yahoo Finance Live.

The big takeaway: At the end of the day, pet owners need to feed their pets. But retailers in the category are not immune to headwinds such as inflation.

  • That may force retailers such as Petco and Chewy to find more ways to offer consumers value and convenience to avoid losing share.

This article originally appeared in Insider Intelligence's Retail & Ecommerce Briefing—a daily recap of top stories reshaping the retail industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.