Petco (NASDAQ:WOOF) got the timing right for its IPO. It was in mid-January and the market was very much in the bull mode. On the first day of trading, WOOF stock soared by 63%. Not bad for a brick-and-mortar retailer, right?
Yet this was actually not the first IPO for Petco. Consider that the company had gone public twice before – once 1994 and again in 2002. Of course, each of these were followed by private equity buyouts.
But since the latest IPO, WOOF stock has come under pressure, as have many other stocks. The shares have gone from $31 to $21, and the market capitalization is about $6.3 billion.
So, might now be a good time for a purchase? Well, I think so – and here are three reasons for this:
Petco’s first quarterly report as a public company showed that the company is growing at a nice pace. Revenues increased by 16% to $1.3 billion and there were roughly 1 million new customers added.
While there was a net loss of $6.2 million, this was mostly due to a one-time charge for debt extinguishment. With the IPO proceeds, the company was able to cut the net debt in half to $1.3 billion.
Besides, the free cash flows have been robust – and continue to grow. Last year, they came to about $109 million.
Now a key to the success of Petco has been the diversification of the platform. To this end, the company has built businesses for grooming, veterinary care and training. Then there has been the development of in-house products as well as PubBox, which is a monthly subscription service. All in all, the focus for Petco is to create more recurring revenue sources — and for the most part, the strategy has been a success.
Yes, most traditional retailers tout their digital efforts. But in the case of Petco, the company really has much to brag about.
During the past three years, there has been a $150 million investment in digital and ecommerce platforms. Then there have been some important partnerships, such as with DoorDash (NYSE:DASH), to provide same-day delivery.
Yet Petco’s 1,500 pet-care centers have been a synergistic asset. Note that about 80% of online orders are fulfilled through them.
A critical part of the digital investments has been with the development of the mobile apps, which attracted 3 million downloads in the recent quarter. But there has also been a focus on analytics, digital marketing capabilities and CRM (Customer Relationship Management).
In terms of the growth of the digital business, the latest quarter showed an impressive 92% increase.
The Market Opportunity for WOOF Stock
The U.S. pet care market is enormous, with the spending at $97 billion in 2020. The growth rate since 2008 has been an average of 5% or so per year on average. And the fastest categories include services, e-commerce and veterinary.
Of course, the novel coronavirus has been a catalyst. Households in the U.S. have adopted more than 3.3 million pets last year.
Now with the pandemic fading because of the vaccines from Pfizer (NYSE:PFE), Moderna (NASDAQ:MRNA) and Johnson & Johnson (NYSE:JNJ), there likely will not be as much growth. But then again, Petco will nonetheless benefit from the ongoing needs to care for animals.
As the company’s CEO, Ron Coughlin, said on the earnings call: “Conversely, once a cute puppy becomes part of your home, that will need to be fed, that will need to be groomed and vaccinated for a decade or more. And importantly, to spend per pet has increased 4% annually for years, as pet owners increasingly embrace their pets as part of their family.”
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.