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Petco CEO highlights the resiliency of the pet industry as COVID-19 drives increase in adoption

MarketWatch logo MarketWatch 1/19/2021 Tonya Garcia
a person standing next to a dog © Getty Images
IPO REPORT

Petco Health and Wellness Co. began trading on Thursday, with shares quickly soaring, and closing up more than 63%.

The first trade at 12:13 p.m. ET was at $26 after shares priced at $18.

IPOs have skyrocketed over the past year despite the COVID-19 pandemic. The Renaissance IPO ETF has more than doubled over the past year, up 104.7% in the last 12 months, while the benchmark S&P 500 index has gained 132%.

Petco’s Chief Executive Ron Coughlin says its business has rallied, in part, because of the pandemic.

“People are home for COVID, they’re a little depressed, and they want that bundle of joy,” he told MarketWatch shortly after the company’s stock began trading.

Coughlin has been chief executive since June 2018, joining from HP Inc.’s personal systems business.

In a CEO letter published with the company’s prospectus, Coughlin cites data from consumer market research firm Packaged Facts, which expects the number of households with pets to increase 4% in 2020, creating $4 billion in incremental annual demand.

Packaged Facts says 56% of U.S. households keep pets, with dogs in 40% of households. Dog ownership rates have risen “exponentially” over the last decade. 

U.S. households added more than 3.3 million pets in 2020, according to data provided by Petco.

The U.S. pet care industry serves 72 million households and had a total addressable market (TAM) of $97 billion in 2020, according to the Petco prospectus. Since 2008, the industry has had a compound annual growth rate (CAGR) of 5%.

“It had proven resilient in the Great Recession,” Coughlin said, referring to the pet care industry. “Cutting back on pets is one of the last things people will do.”

And, Coughlin said, millennials are even more hesitant to cut back on items and services for their pets.

See: Jobless claims surge to 5-month high of 965,000 as winter coronavirus surge hits business

Founded in 1965 and based in San Diego, Petco aims to offer everything a “pet parent” would need in one place, from vet services to grooming to food and toys. Petco’s prospectus cites data showing that half of pet owners prefer a “one-stop experience.”

Moreover, Petco engages in pet advocacy, for instance, removing shock collars in October 2020 and pressing for training that emphasizes rewards for good behavior.

Petco’s fiscal year 2019 sales totaled $4.43 billion, up from $4.39 billion in 2018.

Fiscal 2020 third-quarter revenue totaled $3.58 billion, up from $3.29 billion for the same period the previous year.

Petco does not plan to pay a dividend for the foreseeable future. And will use a portion of the proceeds from the IPO to pay interest accrued on floating rate senior notes that mature on Jan. 26, 2024 and had a weighted average interest rate of 9.1% as of Oct. 31, 2020.

One of the risk factors Petco highlights in its prospectus is its “substantial indebtedness,” which totaled $3.30 billion as of Oct. 31, 2020.

Another is the competition, particularly from “internet-based” competitors.

Amazon.com Inc. and eBay Inc. sell pet products on their sites.

And Walmart Inc. has also recently announced beefed up pet offerings, including dog-walking services.

In pet food, General Mills Inc. talked about the strength of that category in its most recent earnings.

Read: General Mills says economic troubles will drive at-home dining even after the pandemic is over

And: Target’s holiday sales show the importance of stores even as COVID-19 drives business online

Petco also emphasizes the $300 million investment in e-commerce and digital capabilities that have helped it to compete, including the introduction of same-day delivery and in-store and curbside pickup, which have made bricks-and-mortar locations even more valuable.

“Stores used to be albatrosses,” Coughlin told MarketWatch. “Now there are “structural advantages based on leveraging pet care centers.”

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