Watch out, Chewy. This 55-year-old pet store is coming for you
Posted January 14, 2021 4:34 p.m. EST
CNN — Petco is hoping the third time is the charm.
The 55-year-old pet retailer launched its third IPO in company history Thursday — and this time it's taking aim at fast-growing online rivals like Chewy.
The red-hot IPO market welcomed Petco back to the public markets with open arms. After raising $817 million, Petco's shares surged 56%, giving the company and its "WOOF" ticker a market valuation of about $6.2 billion.
Petco has had a makeover since it went private in early 2016 through a leveraged buyout. The company, now known as Petco Health and Wellness, invested heavily in e-commerce and building veterinary and other on-site services aimed at making it a one-stop shop for pet owners.
"We are the only retailer that offers all the pet parents' needs in one place," Petco CEO Ron Coughlin told CNN Business.
"Whether you want to get your pet vaccinated, a check-up, groomed, trained, or buy human-grade food — we're the only ones who can do it all under one roof," he said.
Like other brick-and-mortar retailers, Petco is leveraging its physical presence. The company is using its stores for not just grooming salons but as micro distribution centers with curbside pickup and ship-from-store.
"These things that people thought were albatrosses have become an advantage," Coughlin said, referring to Petco's stores.
Taking on Chewy
But Petco faces heavy competition from the likes of Chewy, which has emerged as one of the biggest winners of the pandemic.
Chewy shares have skyrocketed 273% over the past year, including 27% in 2021 alone
Coughlin, who joined Petco in June 2018 after stints at HP and Pepsi, noted that Petco added about 1 million new customers in the third quarter, not far from the 1.2 million that Chewy added.
"They are considered a customer acquisition juggernaut. We feel very good about competitiveness," he said.
Chewy is growing much faster, however. It surged 45% in the third quarter as Americans continued to buy pet food and supplies online. Petco, by comparison, reported slower but solid quarterly sales growth of 16.3%.
Pet adoption on the rise
Both companies are benefiting from an increase in pet adoption during the pandemic, which has left many people with more time on their hands.
"People are at home. They're a little down. They're looking for bundles of joy," said Coughlin.
Kathleen Smith, chairman and co-founder of Renaissance Capital, said there is a reason to believe these tailwinds in the pet business will persist even after the pandemic.
"The pet industry won't fall off a cliff. We'll keep our pets when we go back to work," said Smith, whose firm manages ETFs of recent IPOs.
Unlike Chewy, Petco is profitable right now. The company's operating income rose by 84% during the first three quarters of 2020 to $127 million. "We turned around the company faster than we expected," Coughlin said.
But Petco is also saddled with $3.2 billion of debt, a legacy of its 2000 and 2016 leveraged buyouts.
The company warned in its S-1 filing that its "substantial indebtedness could adversely affect our cash flows and prevent us from fulfilling our obligations under existing debt agreements."
Coughlin said Petco plans to use all of the proceeds from its IPO to repay debt. That would cut its debt and interest payments in half, he said.
Booming IPO market
The Petco deal is yet more evidence of the strong IPO market.
US-listed companies have raised a stunning $14.2 billion through 49 IPOs so far this year, according to Dealogic. That is by far the highest for this point of the year in stats going back to 1995. By comparison, no companies had gone public at this point in 2019 or 2020. And just four IPOs took place at this point in 2018, raising $1.3 billion.
"This IPO market is just on fire," said Smith of Renaissance Capital. The firm's ETF, with the ticker "IPO," more than doubled in 2020.
Besides Petco, this week also marked strong debuts for online lending startup Affirm and online clothing reseller Poshmark, which spiked more than 130%.
"With returns like that," Smith said, "companies are just piling in to go public right now."