Petco is hoping its stock, which begins trading tomorrow, is as popular with investors as dogs and cats are with Americans.
The pet retailer is betting on soaring pet adoption rates, ever-increasing spending on pet products, and its strategy of using its stores to provide services like pet hospitals, grooming, and animal training classes to win Wall Street’s love for its stock, which will trade under the ticker WOOF on Nasdaq NDAQ .
Petco’s IPO priced late Wednesday at $18 a share for 48 million shares sold, above the $14 to $17 range forecast by Petco, generating $864 million.
Pet goods and services are among the fastest growing categories in retail, but Petco faces challenges that could scare off investors.
In the video Petco prepared for its virtual IPO roadshow, CEO Ron Coughlin and his executives make the case that Petco is uniquely positioned to outpace competitors, both in brick and mortar and online, with its ability to leverage its 1,470 stores to serve as online fulfillment centers, pet health clinics, grooming and training destinations, as well as places to buy pet food or toys.
“Many of you may think you already know Petco,” Coughlin says in the video. But don’t confuse the old Petco with the new one, he said. The new Petco, according to Coughlin, is “a radically transformed company that’s redefining the pet care industry.”
During the pandemic, Coughlin said, 3.3 million new pets joined U.S. households. “Those new pets are going to need to be fed, walked, and groomed for years to come,” and will be an ongoing sales driver.
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“Millennials are even more likely to spend on their pets so there’s a demographic tailwind to our business” as well, he said.
New pet owners, and growth in per-pet spending translates into “a $4 million annual increase in total addressable market over the next four years,” Coughlin said.
“We see these as lasting trends that will pay dividends for years to come,” he said.
Petco is positioned to grab the lion’s share of that new spending, Coughlin said in his presentation, because of these strengths:
- Its store network. The chain’s close to 1,500 stores gives Petco an advantage over an online competitor like Chewy because customers can pick up onllne orders at stores, or orders can be delivered locally from stores, saving shipping costs.
- Its health and wellness edge. Petco has added veterinary hospitals to 105 of its stores, and plans to expand that to 900 stores. The hospitals not only meet demand for one-stop pet services, but they also boost store sales. Stores that have added the hospitals have seen a 600 basis point lift in sales of retail goods. Petco offers mobile vaccinations at 1,300 stores, and is expanding its telehealth offerings.
- Its digital transformation is working. Petco spent the past two years upgrading its e-commerce systems, and was ready when the pandemic caused online sales to spike. It added 3.5 million new online customers over the past year, many of them first-time Petco customers.
But Petco also faces some hurdles that could give investors pause, including:
- It’s a dog-eat-dog world, competitively speaking. Amazon AMZN , Target TGT , Walmar WMT t, PetSmart and online success story, Chewy, not to mention dozens of new online pet retailers, are all playing tug of war for pet market share
- Can Wall Street love more than one pet stock? Chewy’s success, with its shares up fivefold over a year ago, may make it harder for some investors to get behind Petco if they already have fallen in love with Chewy.
- That debt. Petco says in its IPO prospectus that it will use the proceeds from the stock offering to pay off interest, and $300 million in principal on its debt. but notes that it will still have substantial debt on its books. It had $3.3 billion in debt as of October, 2020. In other IPOs, investors have been reluctant to spend their money to reduce corporate debt.