In these January days in the financial media sphere, numerous results of the past 2020 are being summed up. Of course, the main topics are the COVID-19 pandemic, lockdown and self-isolation. In particular, there are quite unexpected changes in the behavioral model of consumers of goods and services. During tough quarantine restrictions, when people practically did not leave their homes, they began to have more pets. As a result, there is an increase in demand for products for them.
The world’s largest pet supplies retailer, Petco Health and Wellness, December 3, 2020 filed an S-1 application with the Securities and Exchange Commission (SEC) for an IPO on the NASDAQ exchange. The company chose WOOF as the ticker, which can be called a purely marketing ploy (“woof” means “woof” in English). The company was founded in 1965 as a small veterinary store and has evolved into a holistic “ecosystem” to provide not only goods, but also pet care services. Now let’s talk about the “secret of success” for Petco Health and Wellness.
Petco’s unique advantage over the competition is that it sells a wide range of products, from premium food to accessories and apparel. Petco positions itself as the sole seller of full-cycle pet care products.
In addition, the company pays great attention to the safety of pet products. For example, in 2014, Petco was the first to remove Chinese-made treats from the shelves when toxic substances were found in them. In the spring of 2019, the company stopped selling food with synthetic ingredients. Last fall, Petco launched a media campaign against electro-shock collars for dog training, and in addition removed them from its range. Thus, the company demonstrates a responsible attitude towards consumers of its products and their owners.
Clients of the company can use the services of an online consultant on the selection of a healthy diet for their pet and take out Vital Care insurance.
Petco Health and Wellness has invested 300 million USD to digitalize their business, which is driving an increase in visits to Petco.com and users of the Petco mobile app. The offline part of the company’s business includes 1470 representative offices, which are located less than 6 kilometers from 54% of potential customers. Thanks to this strategy, the number of buyers has grown by 20% in three years, and more than 80% of them have returned for purchases and have become regular customers. This indicates a high level of customer focus of the company.
A separate branch of the business is the registered or under registration trademarks of Ruff & Mews, So Phresh, Vetco, Well & Good, WholeHearted, You & Me., Leaps & Bounds, Pals Rewards, Petco, PetCoach, PupBox, Reddy, Bond & Co ., Good 2 Go, Good Lovin ‘, Harmony, Imagitarium.
Thus, we see that the company has an effective development strategy, a growing loyal customer base and diversifies its business in this area. From 2002 to 2006, the company was public, but was completely bought out by private individuals. In many ways, this became possible due to the specifics of the market.
Pet Products Market
We believe that all our readers who have a cat, dog or other pet, rightfully consider them to be family members. Many sociological studies show that 94% of pet owners adhere to this point of view.
There is a steady trend towards the “humanization” of animals, as evidenced by the data on sales of goods of the corresponding category in the United States.
This market covers about 72 million families in the United States alone. The market volume in 2020 is estimated at USD 97 billion. The CAGR from 2008 to 2019 was 5%. This market is not affected by economic cycles: owners tend to save on themselves, not on their animals. Between 2008 and 2010, sales growth rates were 6%. It is expected to grow at a CAGR of 7% through 2024.
During the pandemic, people were locked at home, in many countries it was only possible to walk with pets. Therefore, many have got themselves pets, in addition, they served as psychological support for lonely people. Thus, this area received a growth impetus during the lockdown and the economic crisis. Customers are increasing their spending on accessories that make pets look more human.
Financial performance of Petco
Petco Health and Wellness is unprofitable at the time of filing an IPO application, so we will analyze revenue and gross profit.
Revenue over the past 12 months amounted to USD 4.73 billion. The reporting date is the end of the third quarter of 2020. The growth of this indicator for the three quarters of 2020 relative to the same period in 2019 is 9%.
Gross profit for the indicated period increased by 83.5% and amounted to USD 124.7 million. The net loss decreased by 77.3% to USD 20.3 million. The company’s debt is 3.3 billion USD.
In general, we see a positive trend in revenue growth, loss and debt reduction.
Strengths and weaknesses of Petco Health and Wellness
The main risk factors for investing in a company are:
- Reducing quarantine restrictions will lead to a drop in revenue growth rates to the average values of the last 10 years.
- At the same time, the deterioration of the epidemiological situation will still force to reduce the consumption of goods for pets: people will have fewer pets, feed with cheaper food, etc.
- The company’s sector is less liquid than the technology or healthcare sectors – the popularity of the placement may not meet the expectations of the underwriters.
- Great debt of the company.
- The company is unprofitable.
The strengths of Petco include the following factors:
- The company’s business is practically not affected by the negative general economic situation: sales are growing even during a crisis.
- The company has an effective strategy for promoting its products and services, the business is diversified within the industry. Over the past three years, the loyal customer base has been growing and investment in digitalization has grown.
- According to the financial statements, we see an increase in revenue and gross profit, while reducing losses.
- Successful marketing of the company in the media sphere, which contributes to brand awareness and the creation of a positive image of a responsible business.
IPO details and capitalization estimate for Petco Health and Wellness
The company was thinking about an IPO 5 years ago, but was bought out by the Canadian Pension Plan Investment Board and CVC Capital Partners. The transaction amount at that time was USD 4.6 billion. The placement was underwritten by the leading investment divisions of banks: Robert W. Baird & Co. Incorporated, Wells Fargo Securities, LLC, Guggenheim Securities LLC, Credit Suisse Securities (USA) LLC, UBS Securities LLC, Goldman Sachs & Co. LLC, BofA Securities, Inc. and Citigroup Global Markets Inc.
The volume of the application was the minimum required USD 100 million. Part of the funds raised will be used to pay interest on the company’s debt. To estimate the potential capitalization, we use the P / S (capitalization / revenue) multiplier (ratio). Currently Petco’s closest competitor, Chewy, is estimated by market participants at 6.26 in revenue. Therefore, the company’s capitalization may reach USD 29.86 billion (USD 6.26 * 4.73 billion).
Taking into account all of the above, we recommend that you consider this company for long-term investment. Taking into account the example of Chewy’s placement, the upside potential could be more than 100% in the Lock-up period.
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