Petco Animal Supplies may be going public again after confidentially filing with the Securities and Exchange Commission its plans for an initial public offering (IPO).
Although the private equity owners of the pet supplies leader previously pursued a buyout, the IPO may be a better route to achieve the $6 billion valuation they are reportedly seeking. The market has been friendly toward IPOs of late, and pet care in general has benefited from the panic buying of pet food and supplies brought on by the pandemic.
Yet competition remains intense, and rival retailer Pet Valu, which is also owned by private equity investors, just announced it was ending operations at all 358 stores and warehouses due to struggles encountered during the pandemic. As Petco has also struggled despite being deemed an essential business, let's see whether its IPO would result in it becoming a flea-bitten stock or an investor's best friend.
It's a secret
Petco wasn't very forthcoming in its IPO filing announcement, only saying the process would begin after an SEC review and that it had yet to decide how many shares it would issue or at what price. By filing its paperwork confidentially, it doesn't have to reveal its financial information publicly until about two weeks before the offering.
Confidential IPOs have become popular, with Airbnb, DoorDash, and online retailer Wish all choosing that route this year. Part of a legislative overhaul enacted to help small businesses in 2012, a confidential IPO lets a company prepare for its public debut on its own terms without media or investor scrutiny. It also lets it choose a time when the markets are most supportive.
Bloomberg reports Petco wants a $6 billion valuation, which would provide its private equity owners CVC Capital Partners and Canada Pension Plan Investment Board an ample return on their $4.6 billion purchase price in 2016. It's not uncommon for such investors to begin their exit strategy at this time, though whether you should buy their stake is another matter.
Like herding cats with a broom
Petco operates more than 1,500 stores in the U.S., Puerto Rico, and Mexico, offering pet care products, veterinary services, an e-commerce presence, and an online health advice service called PetCoach. The company reportedly had $4.4 billion in annual sales at the start of February, or almost 5% of the total $95.7 billion spent in the U.S. on pets.
While the retailer was pressured by the pandemic, it's done better than expected. Ratings agency Moody's, for example, had expected Petco's financial position to deteriorate during the crisis as consumers consolidated their trips and shopped online more, benefiting online-only shops like Chewy (NYSE:CHWY) and Amazon.com.
Although that did occur to a certain degree, people also spent more at Petco, which offset the reduced traffic. Moody's anticipates the pet care leader will continue improving modestly over the coming year.
An online threat
Yet Chewy remains a concern. The online retailer owned by rival PetSmart continues to enjoy significant growth. Analysts at PackagedFacts forecast online pet product sales will hit 24% of the total $78.5 billion this year, and grow to 26.5% by 2024. That suggests some $18.8 billion will be spent online in 2020, and Chewy issued guidance saying full-year revenue will range between $6.78 billion and $6.83 billion, or around 36% of total online sales at the midpoint.
Walmart and Target are also a threat, as they aggressively attack the market through discount pricing and see increased sales during the pandemic.
Petco is also a highly leveraged company, and Moody's pegs its lease-adjusted debt-to-equity at 5.5 times. On a funded debt-to-reported EBITDA basis, the leverage is even higher at about seven times. The ratings agency also notes that because the retailer is owned by private equity firms, there's a good chance it will remain a highly leveraged business. That could serve to drag on performance once it is turned loose.
Every dog must have his day
Fortunately, pet food, pet care, and pet products are largely recession-resistant since few pet owners forego spending on their animals even during the worst of times. At the same time, the growth of online players like Chewy and Amazon didn't cannibalize sales, but actually helped expand the overall retail market.
Because the industry remains highly fragmented, and despite the commanding presence Petco has in physical retail, and Chewy and others have in e-commerce, there is still plenty of room to grow. The humanization of pets and the consumable nature of most products sold present a potent force for future expansion that suggests investors will want to have a dog in the Petco IPO hunt.