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Strategy & Insights: Up Close

Third Time's the Charm for Petco? Petco Shares Soar in Recent IPO but the Future is Still Uncertain

Ron Coughlin is projecting a positive outlook as the company went public again on Thursday, raising $864 million in an initial public offering (IPO.) Trading on Nasdaq under the ticker symbol WOOF, shares soared to beat forecasts from $18/share to close at $29.40. The trend has even lifted other pet stocks like Chewy (CHWY) and Freshpet (FRPT). And more pet-focused IPOs are on the way in 2021, including BarkBox, which is expected to go public via a merger with Northern Star Acquisitions, listed under ticker BARK.

Recently renamed Petco Health and Wellness Co., this is Petco’s third time going public since its debut in 1965 as a mail-order veterinary supplies business. It first went public in 1994, was bought, and taken private in 2000. Then again it bounced around for public offering in 2002 and was bought and taken private in 2006 by previous owners TPG and Leonard Green. Petco was most recently acquired by Canada Pension Plan Investment Board and CVC Capital Partners in 2016 for about $4.7 billion, before last week debuting a third time.

In 2020, Petco reported net sales of $3.6 billion and a net loss of $20.3 million in the 39 weeks that ended Oct. 31. With a valuation of over $6 billion based on share price last week, this seems a little bit much given that the company is still carrying a little over $3 billion in debt load after years of private equity ownership. In other IPOs, investors have been reluctant to spend their money to reduce corporate debt, but it seemed the lure of Petco and the pet industry, and it’s charismatic and capable CEO (check out assorted videos on YouTube or LinkedIn which feature Mr. Coughlin) won them over.

And Petco is facing continued steep competition from pet-focused Chewy and PetSmart, and online powerhouse Amazon. Walmart and Target are also now increasing their pet offerings. How Petco is able to handle the competition in a changing retail landscape that favors more internet-based sales in which they still lag comparatively is yet to be seen. And some market trend watchers are focused on the timing of this return to the public markets as a way to help pay down some of their considerable debt by raising quick cash.

According to a profile in Fortune, this cash will help the company continue to pursue more differentiation in the market, including a focus on high-quality pet food offerings and services for pets. And lowering Petco’s interest expense with the public offering allows the company to continue fighting off competition. In short, despite a booming pet industry during the pandemic and a rising number of pet adoptions, Petco has more work to do but it bears watching.

Petco still faces an uphill challenge of standing out more and drawing consumers from other channels. They updated their website and moved to offer curbside pick-up during the pandemic. The refined online shopper experience is definitely notable, and they are now offering same-day delivery. They’ve also improved the brick-and-mortar experience with renovations to some of the almost 1500 stores.

But it may still be too little too late. When Petco tweaked their logo last fall, Twitter had a field day. Twitter users criticized the design sans the blue cat and red dog normally adjacent the Petco, in favor of a more simplified dark blue that is reminiscent of sleep company, Casper. This move was no doubt to create a more digital-friendly design, and a smart move I will add to a different color from that of the number one pet specialty retailer, PetSmart which boasted a very similar color choice.

Time will tell if they are going to continue innovating beyond the pretty digital facelift and slight tweaks in product lines and if sales will follow in the long term.

What are your future predictions for this brand?


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