Petco Health and Wellness is once again a publicly listed company after spending the past three years fixing a once severely damaged business that is now armed with a road map to build on its recent turnaround.
The company’s shares started trading at around $26 midday Thursday and rose as high as $31 after pricing the night before at $18, beating its own estimates in a reflection of strong demand for the stock. Shares closed the day up 63%.
When Ron Coughlin, a former Silicon Valley executive, took the reins of Petco in 2018, it was a declining retailer with too many stale stores, a negligible e-commerce presence, and merchandise easily found elsewhere.
But as detailed in a Fortune story in May, Coughlin has moved aggressively to reposition Petco stores as service hubs by adding veterinarian care and grooming at many of them, using them as e-commerce order fulfillment nodes, and vastly improving Petco’s assortment with moves such as adding the higher-end JustFoodforDogs brand. The company has remodeled hundreds of stores, with more coming. (Coughlin uses the term “pet care centers” rather than stores to drive home his point.)
The result has been an improvement in fortunes that the pet adoption boom—to the tune of 3.3 million pets finding a home during the pandemic—has only amplified. So far this year, Petco’s comparable sales have risen 9.6% and its operating profit has doubled; the chain should pass the $5 billion milestone in annual sales this fiscal year.
“The pet category just got completely lifted,” Coughlin told Fortune as he waited for Petco shares to start trading on the Nasdaq. “But we are gaining [market] share in vet and grooming services, in e-commerce, and in high-end food.” Petco’s bet on higher-grade food is paying off, since the lower-end part of the market is characterized by razor-thin margins.
Petco is getting about $816.5 million in net proceeds from the IPO, a big chunk of which will pay down its considerable debt load stemming from its years under private equity ownership. (CVC and the CPPIB acquired Petco in 2016 for $4.6 billion from fellow private equity firms TPG and Leonard Green, 10 years after they took Petco private. Petco first went public in 1994 before going private in 2000. Then it went public again in 2002.)
And that will help lower Petco’s interest expense at a time Coughlin wants to keep investing in the company to help it fight rivals, notably Chewy.com. That includes a faster, easier-to-use website, which Petco relaunched recently, and strengthening Petco’s same-day delivery capability. (Petco quickly set up curbside pickup in the spring, beginning a service it hadn’t offered until the start of the pandemic forced its hand at a time shoppers wanted to minimize store visits.)
By better blending its stores and e-commerce, Petco is looking to build a moat against Chewy and the multitudes of digital pet service companies. That has centered to a large extent on a full suite of vet services at more of its stores, which it barely offered until two years ago and where PetSmart is overhauling its offering. Such services are key to getting people into stores and giving them something online competitors can’t easily match.
“I don’t know how you do a comprehensive veterinarian checkup without putting your hands on a dog,” says Coughlin. “At the end of the day, the fundamental services have to be executed in person.”
Beyond supporting e-commerce, the stores being remodeled are getting homey touches like wood shelf panels and signage, a Treatery stand for baked goods for dogs, and a station where pet owners can get nutritional advice that involves Petco’s premium WholeHearted food brand. Such stores are seeing the most striking increases, says Coughlin.
“The lift for that store is dramatic, so we want to go as fast as possible,” he noted.
To keep pace with Chewy, which is diving more aggressively into areas like services and online pharmacies, Petco plans to keep improving with moves such as digital online schedule of services, and other initiatives.
As much as people like to compare Petco to PetSmart, its longtime big-box rival, Coughlin sees the most intense competition coming from the likes of Chewy and other digital-first players.
“The online competitors are much more front and center in terms of who we are trying to compete with,” says Coughlin—exactly the kind of thing Wall Street likes to hear from a traditionally brick-and-mortar rival.