Research: Rating Action: Moody’s upgrades Petco’s CFR to B1 – Moody’s

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New York, June 27, 2022 — Moody’s Investors Service, (“Moody’s”) today upgraded Petco Health and Wellness Company, Inc.’s (“Petco”) corporate family rating (CFR) to B1 from B2 and probability of default rating to B1-PD from B2-PD. Additionally, Moody’s upgraded the rating on Petco’s senior secured term loan to B1 from B2. Petco’s speculative grade liquidity rating of SGL-1 remains unchanged. The outlook is stable.

“While the challenging macroeconomic environment including high freight and product cost inflation will crimp margins, resilient demand in the pet category as demonstrated through Petco’s solid same store sales performance across major merchandise and service categories coupled with the company’s growth initiatives supports a level of earnings that will sustain solid credit metrics for the B1 rating level,” stated Moody’s Vice President Stefan Kahandaliyanage. “The stay-at-home conditions caused by the coronavirus pandemic generated increased pet ownership which will sustain the retail pet care industry for many years to come,” Kahandaliyanage added.

Upgrades:

..Issuer: Petco Health and Wellness Company, Inc.

…. Corporate Family Rating, Upgraded to B1 from B2

…. Probability of Default Rating, Upgraded to B1-PD from B2-PD

…. Senior Secured1st Lien Term Loan, Upgraded to B1 (LGD4) from B2 (LGD4)

Outlook Actions:

..Issuer: Petco Health and Wellness Company, Inc.

….Outlook, Remains Stable

RATINGS RATIONALE

Petco’s B1 CFR is supported by the company’s solid credit metrics, very good liquidity, including solid free cash flow generation and no near-term maturities, and its market position.  Petco is the second largest specialty retailer of pet products and services in the US behind PetSmart LLC in terms of store count. While by revenue, Petco is third largest behind Chewy, a pure online player, and PetSmart. Petco has improved its leverage profile significantly from the combination of repaying over $1.0 billion in debt using proceeds from its January 2021 IPO and higher than expected revenue and EBITDA generation. For LTM Q1 April 30, 2022, debt/EBITDA improved to 3.2x from about 5.5x pre-IPO.  We forecast leverage to be in the low-to-mid 3x range for the fiscal year ending January 28, 2023, reflecting single digit growth in revenue offset by pressure on margins from a higher mix of consumables, digital and services sales, supply chain disruption, and higher labor costs.

Moody’s expects demand for the pet category to remain resilient driven by the higher “installed base” of pets post-pandemic and their recurring care needs, continuing humanization trend and demand for premium products and specialty services such as food, grooming, and training, most of which are non-discretionary in nature for pet owners.

Competition in the pet category is intense, particularly from e-commerce retailers like Amazon.com, Inc. (A1 stable) and Chewy, Inc. (not rated), but also from mass retailers and grocery stores. However, the strength and scale of Petco’s in-store service offering, which includes grooming and training in nearly all locations as well as veterinary hospitals in about 200 stores and growing creates a competitive advantage versus pure-play online competition and traditional bricks-and-mortar competitors. Retail space dedicated to specialty pet services helps drive greater customer engagement, foot traffic and front-store productivity.

Although Petco has paid down debt and improved its credit metrics, its credit profile is constrained by governance considerations. The company is majority owned by private equity sponsors, which creates risk of shareholder friendly strategies.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Petco’s ratings could be upgraded if the company demonstrates sustained growth in revenue, profitability, and market share as well as continued free cash flow generation while demonstrating a commitment to conservative financial policies. Quantitatively, ratings could be upgraded if debt/EBITDA is sustained below 3.5 times and if EBIT/interest expense is sustained above 3.5 times while maintaining very good overall liquidity.

Petco’s ratings could be downgraded if overall operating trends decline or if operating margins erode, indicating that the company’s industry or competitive profile is weakening. Ratings could also be downgraded if the company’s financial policies were to become aggressive or if liquidity deteriorates. Quantitatively, a ratings downgrade could occur if debt/EBITDA is sustained above 4.5x times or EBIT/interest is sustained below 2.5 times.

The principal methodology used in these ratings was Retail published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356421. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Petco Health and Wellness Company, Inc. is a national specialty retailer of premium pet consumables, supplies and companion animals and services with 1,427 retail locations across 50 states, the District of Columbia and Puerto Rico as of April 30, 2022. Revenue was about $5.9 billion for the LTM period ended of April 30, 2022. The company remains majority owned by CVC Capital Partners and Canada Pension Plan Investment Board following its April 2021 IPO.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of  the guarantor entity.  Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Stefan Kahandaliyanage, CFA
Vice President – Senior Analyst
Corporate Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Margaret Taylor
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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