Petco announced its IPO, following high sales due to the dog adoption trend we have seen this year.
What we know about the IPO
The company will go public under the ticker "Woof". This seems quite rude to cats, who represent half the logo after all. Not only that, but in the IPO filing papers, cats were mentioned only 4 times, vs. 9 times for dog. Lizard, on their side, had no mention whatsoever. They are obviously dog people.
Petco also wrote in their IPO filing papers that they were the only complete pet health and wellness company. Interesting that this was written in all caps and bolded. Maybe they fear Chewy, the company that went public a little more than a year ago and with shares going up 150% this year, for a total market value of $30.3 billion.
One last interesting detail is that the term “e-commerce” was mentioned 79 times in their filings, but the word "store" won with 115 mentions. Does this show an emphasis on their willingness to keep retail stores alive?
Jokes aside, let us jump straight into the subject
What is Petco?
Founded in 1965, Petco offers you a real experience with your pet. They really leverage their physical stores network and aim to be a kind of complete retail, wellness, health and education center for your lovely fluffy balls.
They offer a Petco spa so that you dog/cat/lizard can be all pretty and clean – overall, the company groomed over 2 million dogs –, a Petco training center, where your dog can learn to sit, crouch, stay, arrive: do what dogs do.
They also have Vetco branch with over 900 veterinary clinics, adding around 71 new locations per year.
These various services can quintuple customer value on average: Customers that have used the spa spent on average 3 times as much as the average customer, customers who have use the veterinarian service spent around 6 times what the average customer spent.
All in all, it is a one-step shop for all you will ever need to take care of your favorite animals. They are particularly careful to offer only quality products, removing all food with artificial ingredients from their stores last year and banning shock collars from their shelves this year.
What is the difference with Chewy, you may ask? Chewy is the Amazon of pets. They're not only fully online, but they anchor their customer with monthly orders, such as pet food or medication. Petco, on the other hand, aims to make its customers loyal through great, all in one place services.
Petco's conflictual relationship with IPOs
Like your friend that keeps getting back with their boyfriend/girlfriend, Petco has entered and exited the market twice since 1994. They almost went public again in 2015 before getting acquired by private equity company CVC Capital Partners and Canadian Pension Plan Investment Board, for $4.6 billion.
The surge in pet adoption seems like a good moment to try and go public, as Americans have never spent more taking care of their pets. Indeed, the number of households with pets is estimated to grow 4% this year, which would mean a market growing by $4 billion.
“As pet care demand continues to grow, we believe we are well-positioned to capture an outsized portion of the growing market as the only fully-integrated, comprehensive pet care provider in the industry,” said Petco in their filings
The growing pandemic demand is not the only argument for the IPO. Indeed, the private equity owners have spent 300 million on innovation and digital transformation, as well as their in-store pet clinics and spa (aka grooming facilities), making Petco a way more diversified and complete offer.
We do not know how many shares the company will offer except that they will raise 100 million, but Bloomberg reported in September that the IPO or sale of the company could be valued at $6 billion.
The potential threats
While the whole team is certain that IPO is a great idea for the company, new investors should be wary and hear all the facts before choosing to invest.
The first element is Petco's considerable debt load: they have 3.3 billion of debt, which as they announced, will not diminish much after the IPO. This makes them less flexible in case of an emergency, and a big portion of their cashflow will have to go towards filling this hole in their balance sheet, and not towards new investments and acquisitions. Plus, it is hardly motivating for investors to finance an IPO designed to reduce debt.
The second element are the competitors. Indeed, Amazon dominates the online market, PetSmart had more physical stores, and Chewy is really catching up with everything. Every dog will defend its part of the bone.
Finally, even though sales rose 10% this year – totaling $3.58 billion after 10 months – the company still reported a net loss of $20.3 million for the first 10 months of the year.
While all we seem to hear about these days is e-commerce for its convenience and affordability, we must remember that stores and service providers who are able to offer a superior customer experiences will always find a way to position themselves on the market.
As we say: “retail is not dead, bad retail is dead”.
“WOOF or MEOW?” — Petco’s IPO. Nestle’s 2050 food fantasy. November’s Jobs Report., in Snacks Daily Podcast
Petco plans IPO as pet adoption rates soar, in Fox Business
Petco, With $3.3 Billion of Debt, Plans an IPO, in Barron's