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September 2020
A Closer Look at the Pet Care Industry's Resilience During the Pandemic


Our previous ProShares Perspective asserted that while COVID-19 is a test for pet care businesses, the long-term trends support a variety of companies poised to potentially benefit from industry growth. Now, we’ll dig further into how companies that meet specific pet needs have fared and where potential growth opportunities may be found.



A QUICK REVIEW OF THE PET CARE INDUSTRY’S OUTPERFORMANCE

The current pandemic may be a catalyst for the long-term trends supporting the growth of the pet care industry. In fact, the pet care business, as tracked by the FactSet Pet Care Index, has outperformed the S&P 500 by nearly 24% on a year-to-date basis through August 31, 2020.1 What are the potential causes of this outperformance?



YEAR-TO-DATE PERFORMANCE OF THE PET CARE INDUSTRY VS. THE BROADER MARKET

Source: Bloomberg(12/31/19 - 8/31/2020. PAWZ standardized performance as of 06/30/20: NAV 11.16% YTD, 16.02% 1-year, 13.93% since inception (11/5/18). Market Price 11.46% YTD, 16.02% 1-year, 14.08% since inception (11/5/18). Expense ratio 0.50%. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained at ProShares.com. Index returns are for illustrative purposes only and do not represent fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged, and one cannot invest directly in an index.


The pet care industry’s impressive rally this year has been driven by a number of companies across three broad categories:





Many consumers are not only paying closer attention to their own food, but also to the food they feed to their four-legged friends. The pet food industry’s shift towards healthier and more environmentally friendly products may be advanced by the increased time and attention devoted to pets during the pandemic. Freshpets’ success is a prime example. The company offers “a fresh take on pet food” with premium food that requires refrigeration. Freshpet generated year-over-year earnings growth of 73% per their most recent earnings release in August.6



Nestlé Inc. is also seeing strong growth within the pet food industry. In its semi-annual report released at the end of July, the company indicated that its pet care product line, Purina, was the company’s largest growth contributor. While Nestlé may not be the first company that comes to mind when thinking about pets, the company made $7 billion in revenue from its pet care product line from January through June of 2020, making it the corporation’s second largest product suite.7 In fact, pet care was Nestle’s only product line that achieved year-over-year revenue growth, supporting the idea that pet care’s historical recession resilience has continued during the COVID-19 pandemic.

Similar to Nestlé, Colgate-Palmolive saw recent strong growth from its pet nutrition product line, Hill’s Pet Nutrition Inc., with sales accelerating at a much faster rate than the rest of its product segments during the second quarter. The company’s CEO, Noel Wallace, highlighted that investors are taking note and have “seen the continued success we’ve had on our Hill’s business.”

The health care industry in general has struggled during the pandemic, with many opting to cancel elective procedures in order to avoid potential exposure to COVID-19. Veterinarians, on the other hand, have begun to see an increase in demand with some even having to turn new clients away8. With the introduction of curbside appointments, owners are able to drop their pets off at the vet’s door and wait outside during their pet’s exam. VetSuccess, which tracks data from over 2,800 practices, reported that year-over-year daily average revenue per practice was up 14% nationwide during the first week of August. And increased veterinary revenues may not be solely from the puppy boom. Existing pet owners may be susceptible to what some are calling “staring at your pet” syndrome, which can lead to an increased focus on the care and attention owners place on their pets.

Veterinary pharmaceutical companies such as Zoetis Inc. are developing innovative solutions to take advantage of the heightened importance placed on pet health. Earlier this year, Zoetis launched its broad spectrum parasiticide solution, Simparica Trio: a monthly chewable tablet which helps kill fleas and ticks and protect against heartworm disease. Rob Kelly, President, International Operations, at Zoetis reported that “with Simparico Trio, we bring to market an advanced parasiticide solution, helping to deliver improved client satisfaction and patient protection.” This new product has helped to bolster revenue for the company with Zoetis reporting second-quarter revenue from companion animals up 11% from a year earlier.9



Retailers of pet products have been another bright spot in the industry. Chewy is one of the larger players in the space and supplies items like pet medications, food, treats and other pet-health products. As the company is an e-commerce business, it has benefited both from tailwinds supporting the demand for pet care products, as well as consumers’ shift towards online retail. Second-quarter results for the company revealed that Chewy saw revenues surge 47% year-over year.10



WHY WE THINK OF THE PET CARE INDUSTRY HAS LEGS TO STAND ON

Prior to the pandemic, the industry had shown signs of steady and stable growth. The drivers supporting pet care’s growth may be accelerated by the pandemic while reinforcing the ProShares investment thesis. Pets are a part of the family, and the amount of money spent per pet has increased as a result. In addition, the expansion of pet ownership supports an opportunity for stable growth while other industries may be struggling during the pandemic. New pet owners are likely to devote significant wallet share to their new companions while existing pets may continue to be pampered or receive renewed attention. For these reasons, the pandemic could reinforce many of the trends supporting the Pet Care industry.

1Source: Bloomberg. As of 8/31/20.

2Jefferies 2020 Global Consumer Virtual Conference- Bloomberg Transcript, June 23.

3APPA COVID-19 Pulse Study Volume 1

4Cost of Owning a Dog, Rover.com

5APPA COVID-19 Pulse Study Volume 1.

6Bloomberg, 2020.

7Bloomberg, 2020

8A Rare Economic Bright Spot in the U.S. Health System: The Vet’s Office, New York Time.

9Zoetis Quarterly Report SEC, 2020.

10Press Release: Chewy Q2 Financial Results, September 10, 2020




How Investors Can Invest in Pet Care

Investors looking for industries that have shown resilience during recessionary periods may want to consider ProShares Pet Care ETF (PAWZ), which tracks the FactSet Pet Care Index.

PAWZ

The first ETF focused on the pet care industry and gives investors the opportunity to gain broad exposure to public companies in the global pet care industry—companies that stand to potentially benefit from the proliferation of pet ownership and the emerging trends affecting how we care for our pets.

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Sources: Bloomberg, 2020; Jefferies 2020 Global Consumer Virtual Conference- Bloomberg Transcript, June 23; American Pet Products Association 2019-2020 survey; Cost of Owning a Dog, Rover.com; American Pet Products Association COVID-19 Pulse Study Volume 1; Bloomberg, 2020; Nestle Half Year Report, 2020; New York Times, 2020; Press Release: Chewy Q2 Financial Results, September 10, 2020

This is not intended to be investment advice.

Any forward-looking statements herein are based on expectations of ProShare Advisors LLC at this time. ProShare Advisors LLC undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Investing is currently subject to additional risks and uncertainties related to COVID-19, including general economic, market and business conditions; changes in laws or regulations or other actions made by governmental authorities or regulatory bodies; and world economic and political developments.

There is no guarantee any ProShares ETF will achieve its investment objective.

Investing involves risk, including the possible loss of principal. This ProShares ETF is non-diversified and entails certain risks, including imperfect benchmark correlation and market price variance, that may decrease performance. Please see their summary and full prospectuses for a more complete description of risks.

The fund is subject to the risks faced by companies in the pet care industry. Although the pet care industry has historically seen steady growth and has been resilient to economic downturns, these trends may not continue or may reverse. Consumer tastes and preferences are difficult to forecast. Changing consumer preferences could have a negative impact on the revenue streams of companies in the pet care industry. Many companies in the pet care industry are small, independent producers and retailers.

Investments in smaller companies typically exhibit higher volatility. Smaller company stocks also may trade at greater spreads or lower trading volumes, and may be less liquid than stocks of larger companies.

The fund concentrates its investments in certain sectors. Narrowly focused investments typically exhibit higher volatility.

The "FactSet Pet Care Index" and "FactSet" are trademarks of FactSet Research Systems Inc. and have been licensed for use by ProShares. ProShares have not been passed on by these entities or their affiliates as to their legality or suitability. ProShares based on the FactSet Pet Care Index are not sponsored, endorsed, sold, or promoted by FactSet Research Systems Inc., and it makes no representation regarding the advisability of investing in ProShares. THIS ENTITY AND ITS AFFILIATES MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO PROSHARES. FactSet Research Systems Inc. does not guarantee the accuracy and/or the completeness of the FactSet Pet Care Index or any data included therein, and FactSet Research Systems Inc. shall have no liability for any errors, omissions, or interruptions therein.

Carefully consider the investment objectives, risks, charges and expenses of ProShares before investing. This and other information can be found in their summary and full prospectuses. Read them carefully before investing.

ProShares are distributed by SEI Investments Distribution Co., which is not affiliated with the funds' advisor or sponsor.

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