Petco Health and Wellness Company (WOOF) has filed to raise $100 million (but may be as high as $800 million) in an IPO of its Class A common stock, according to an S-1 registration statement.

San Diego, California-based Petco was founded in 1965 as a specialty retailer to offer products and services to pet owners to improve the quality of life for their pets.

The firm has since expanded into providing online access via its website and mobile application.

Management is headed by Chief Executive Officer Ron Coughlin, who has been with the firm since 2018 and was previously president of HP's Personal Systems business line

Below is a brief overview video of a Covid-19 update from CEO Coughlin:

Source: Petco

Petco was acquired in 2015 by private equity firm CVC Capital Partners and the Canada Pension Plan Investment Board in a $4.6 billion deal. The sellers were other private equity firms TPG and Leonard Green Partners.

Petco has received at least $1.36 billion from investors including CVC Capital Partners and Canada Pension Plan Investment Board.

The firm acquires customers and users both through its offline retail store network of approximately 1,470 locations located within three miles of 54% of its customers as well as through online social media, SEO and advertising.

Petco has invested $300 million in the last three years to build out its online-to-offline capabilities enabling customers to buy online and pick up in store [BOPUS] as well as curbside pickup.

Management believes this multi-channel approach results in increased customer retention and higher per-customer spend.

Below is a graphic showing how the firm sees its ecosystem:

petcocompany

SG&A expenses as a percentage of total revenue have been relatively stable as revenues have increased.

The SG&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of SG&A spend, rose to 0.2x in the most recent reporting period.

According to a 2018 market research report by Grand View Research, the global market for pet care products and services was an estimated $131.7 billion in 2016 and is expected to exceed $202 billion by 2025.

This represents a forecast CAGR of 4.9% from 2016 to 2025.

The main drivers for this expected growth are increased innovation in products and service offerings by market participants as well as increased use of technology to keep track of and care for pets.

Also, an increasing variety of technological solutions attract and retain pet owners in sticky service apps such as Wag and DogVacay.

Major competitive or other industry participants include:

  • PetSmart
  • Chewy (CHWY)
  • PetMed Express (PETS)
  • Other online/offline major and local retailers

Petco’s recent financial results can be summarized as follows:

  • Growing topline revenue
  • Increased gross profit and slightly lowered gross margin
  • Higher operating profit
  • Increased cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

petcopl

Source: Company registration statement

As of October 31, 2020, Petco had $195.8 million in cash and $5.7 million in total liabilities.

Free cash flow during the twelve months ended October 31, 2020, was $212.3 million.

Petco filed to raise $100 million in gross proceeds from an IPO of its Class A common stock, although it may be as high as $800 million.

The firm will have three classes of stock:

  • Class A common stockholders will have one vote per share.
  • Class B-1 stockholders will not have the right to vote on the election or removal of company directors.
  • Class B-2 stockholders will only possess the right to vote on the election or removal of directors.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Management says it will use the net proceeds from the IPO as follows:

We intend to use a portion of the net proceeds from this offering to pay the accrued but unpaid interest on the exchanged Floating Rate Senior Notes and to redeem in full the remaining $300 million aggregate principal amount, plus accrued but unpaid interest, of the Floating Rate Senior Notes that remain outstanding after the Recapitalization and the remainder of the proceeds, plus cash on hand, to repay a portion of the term loan facility.

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are Goldman Sachs, BofA Securities, Citigroup, Evercore ISI, Credit Suisse, UBS Investment Bank, Wells Fargo Securities, Baird and Guggenheim Securities.

Commentary

Petco is seeking public market investment primarily to pay down debt, which currently totals around $3.2 billion.

The firm’s financials show increased topline revenue growth in the most recent reporting period.

SG&A expenses as a percentage of total revenue have been flat as revenues have increased; its SG&A efficiency rate has improved markedly, although is still low by most IPO company standards.

The market opportunity for providing pet products and services is large and expected to grow substantially over the coming years, especially due to an increasing elderly population and younger demographics using technology more.

Goldman Sachs is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 82.0% since their IPO. This is a top-tier performance for all major underwriters during the period.

Petco has invested heavily in its ‘multi-channel’ online/offline approach as competitors such as Amazon have no doubt taken a chunk out of its online product sales.

It appears to be paying off, with significant revenue growth despite the Covid-19 pandemic and the negative effects on its retail operations.

A downside is that WOOF is private equity owned and has a significant debt load, albeit likely at very low interest rates for the foreseeable future.

Private equity owned IPOs have disappointed investors due to their slow growth and debt heavy balance sheets.

When we learn more details about the IPO’s pricing and valuation assumptions, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice. Past performance is no guarantee of future results.)

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