Will the Petco IPO Resonate With Millennials?

Initial public offerings are characteristically quiet during summer, but Petco just threw its hat into the Wall Street ring

Petco is no stranger to dealmaking, having gone private twice since 2000, but does that guarantee a smooth initial public offering for the animal supplies retailer?

Will the Petco IPO Resonate With Millennials?Yeah, probably. Petco is, after all, a dominant player in an industry that continues to see growth.

Founded in 1965 as a mail order operation, Petco has gone on to build a massive footprint of 1,409 locations across all 50 states, the District of Columbia, Puerto Rico and Mexico (through a joint venture).

To better target the market, the company has also gone beyond its traditional big-box format with its 130 Unleashed stores, which have an average of 5,000 square feet. For the most part, Petco is targeting millennial customers in urban areas.

Petco IPO: Winning Millennials Is Key

As should be no surprise, Petco gets the bulk of its revenues from supplies, yet has been smart to provide complementary services, such as grooming, training and even vaccinations. These certainly have helped to pump up store traffic.

Another key is the highly successful Pals loyalty card, which had 19.1 million active members as of the end of 2014. This program helps Petco better understand customer trends and also allows for better targeted promotions. Consider that the top 10% of the Pals customers visit a store 18 times per year and spend an average of $856.

And yes, Petco has been investing heavily in its digital platform, with sites including Petco.com, DrsFosterSmith.com, Liveaquaria.com and Unleashed.com. During the first two quarters of fiscal 2015, e-commerce sales from these sites accounted for a net of $185 million, comprising 8.5% of overall sales. For context, e-commerce only accounts for 4% of total expenditures in pet food and supply, so clearly Petco is doing something right on this front.

To grow the business among millennials, Petco formed a partnership with Instacart (same-day delivery service), and has actively courted the younger generation through social media, reaching millions of fans on Facebook (FB), Twitter (TWTR), Instagram and Pinterest.

In terms of financials, Petco has been solid: During the past 21 consecutive quarters, Petco posted positive comparable-sales growth. The average rate during this period was about 3.5%. As for net sales, Petco achieved an 8% compound annual growth rate from fiscal 2005 to 2014.

Bottom Line

All in all, the growth is likely to continue for some time, especially considering that Petco’s SEC filing pegs the U.S. pet industry to go from $74 billion in 2014 to $92 billion in 2019, representing a CAGR of 4.3%. Drivers of growth include the impact of the millennials (who tend to spend more on pets), as well as the growth of premium and natural pet foods.

Now, Petco’s IPO filing did not provide any terms of the upcoming deal, but the offering should be attractive for investors because of the company’s strong market position, consistent growth in comparable sales, thriving loyalty program and successful digital strategy.

As for the timing, the IPO is likely to happen some time in late September. lead underwriters include Goldman Sachs (GS), Bank of America’s (BAC) Merrill Lynch and JPMorgan Chase (JPM).

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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