Research: Rating Action: Moody’s upgrades PetSmart’s CFR to B1 – Moody’s
New York, June 27, 2022 — Moody’s Investors Service, (“Moody’s”) today upgraded PetSmart LLC’s (“PetSmart”) corporate family rating (CFR) to B1 from B2 and probability of default rating to B1-PD from B2-PD, respectively. Additionally, Moody’s upgraded the rating on PetSmart’s unsecured notes to B3 from Caa1. Moody’s affirmed the B1 rating on the senior secured term loan and senior secured notes. The outlook is changed to stable from positive.
“While the challenging macroeconomic environment including high freight and product cost inflation will crimp margins, resilient demand in the pet category as demonstrated through PetSmart’s exceptional 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. “Futhermore, we expect PetSmart to maintain very good liquidity including strong free cash flow generation,” Kahandaliyanage added.
Upgrades:
..Issuer: PetSmart LLC
…. Corporate Family Rating, Upgraded to B1 from B2
…. Probability of Default Rating, Upgraded to B1-PD from B2-PD
…. Senior Unsecured Regular Bond/Debenture, Upgraded to B3 (LGD5) from Caa1 (LGD5)
Affirmations:
..Issuer: PetSmart LLC
…. Senior Secured Bank Credit Facility, Affirmed B1 (LGD3)
…. Senior Secured Regular Bond/Debenture, Affirmed B1 (LGD3)
Outlook Actions:
..Issuer: PetSmart LLC
….Outlook, Changed To Stable From Positive
RATINGS RATIONALE
PetSmart’s B1 CFR is supported by the company’s very good liquidity, including strong free cash flow generation and no near-term maturities, and its position as the largest specialty retailer of pet products and services in the US. PetSmart improved its leverage profile significantly through debt reduction as a result of the February 2021 refinancing and cash contribution received from its parent related to the Chewy distribution as well as higher than expected revenue and EBITDA generation. For the LTM period ended Q1 May 1, 2022, debt/EBITDA was 3.7x, down from 6.1x for the fiscal year ended January 31, 2021. Moody’s forecast leverage to be in the mid-3x range for the fiscal year ending January 29, 2023, reflecting single digit growth in revenue offset by pressure on margins from a higher mix of consumables, continuing supply chain disruption, digital and services sales, 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, demand for premium products and specialty services such as food, grooming, training, and lodging, most of which are non-discretionary in nature for pet owners. The stay-at-home conditions caused by the pandemic generated increased pet ownership which will sustain the retail pet care industry for many years to come.
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 PetSmart’s in-store service offering, which includes grooming salons in substantially all of its stores, training, over 200 PetsHotels, and full-service veterinary hospitals in about 750 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 PetSmart has paid down debt and improved its credit metrics, governance is a key rating constraint due to the sponsors’ history of taking shareholder friendly actions, including extracting large periodic dividends and monetizing PetSmart’s previous investment in Chewy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
PetSmart’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 transparent and strong 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.
PetSmart’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 particularly in terms of dividends and acquisitions 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.
PetSmart LLC is the largest specialty retailer of supplies, food, and services for household pets in the U.S. The company currently operates 1,663 stores in the U.S., Canada, and Puerto Rico as of May 1, 2022. LTM revenue as of May 1, 2022 was about $9.7 billion (excluding Chewy). PetSmart has an omnichannel capability consisting of buy online, pick up in store (“BOPIS”), curbside pickup, ship-to-home, ship-from-store (only in Canada), and a DoorDash partnership. The company is indirectly controlled by a consortium including funds advised by BC Partners, Inc., La Caisse de dépôt et placement du Québec, affiliates of GIC Special Investments Pte Ltd, affiliates of StepStone Group LP, and Longview Asset Management, LLC.
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