Petco or Chewy: Which Is the Better Buy?

Will Ashworth - Barchart - Tue Jan 23, 4:20PM CST

Gone are the days when petcare stocks were booming during the pandemic.

I looked at Barchart.com’s list of the Bottom 100 Stocks to Buy. Petco Health and Wellness (WOOF) was 72nd, down 76% over the past 52 weeks. That got me thinking about Chewy (CHWY), the online retailer of pet food and products co-founded by Ryan Cohen, GameStop’s (GME) so-called savior.

Both companies need help making money. Both stocks have performed horribly over the past year, with Petco winning the honors for worst performance, down 22 percentage points more than Chewy.

Is this a race to the bottom? Or is there some hope for either WOOF, CHWY, or neither?

Here’s my two cents.

Petco Has Not Delivered for IPO Buyers

Petco went public in January 2021 at $18 a share. WOOF is down 85% in the 36 months since its IPO.

From a disappointment factor, Petco IPO buyers still holding have to be highly disappointed compared to Chewy buyers. However, something tells me that the private equity companies that took the two businesses public made out just fine despite the stocks crapping the bed in the years since.

Let’s consider their respective IPOs.

When Petco went public in 2021, it was supposed to be the third time’s a charm, given the company had done IPOs twice before. The first time was in 1994 -- it went private in 2000, acquired by private equity firms TPG (TPG) and Leonard Green for $600 million -- and the second time was in 2002, only to be acquired by the two firms for a second time in July 2006. That time, they paid $1.68 billion.

They turned it around in November 2015, selling it to private equity firm CVC Capital Partners and the Canadian Pension Plan Investment Board, the managers of Canada’s pension plan, for $4.6 billion, netting themselves $2.7 billion in profits from their second time around.

As for the latest private owners who took it public in 2021, they didn’t sell any shares in the IPO, maintaining 81% voting control. In May 2021, they sold 22 million shares at $24, generating $519 million in net proceeds. According to the IPO prospectus, they invested $1.56 billion in equity buying Petco in 2015.

As of April 2023, they held approximately 184 million shares, which means they could only sell another four million after the secondary offering in May 2021. Its existing shares are worth $486 million, putting it underwater by about $560 million.

I guess the third time isn’t a charm.

What About Chewy?

Chewy went public In June 2019 at $22 a share. CHWY stock is down 10% over 55 months.

PetSmart acquired the online retailer for $3.35 billion in May 2017. PetSmart was bought by a private equity consortium led by BC Partners in March 2015. The consortium paid $8.7 billion.

PetSmart took Chewy public to pay down some of its debt. It sold 41 million shares in the IPO for net proceeds of $860 million. BC Partners retained 352 million shares of Chewy post-IPO. As of May 17, 2023, its share count had dropped to slightly more than 311 million.

Those are worth $6.2 billion. According to the IPO prospectus, BC Partners and company contributed $3.2 billion in equity to Chewy. Its unrealized gains from the acquisition in 2017 sit at nearly 100%, with PetSmart remaining privately owned.

Although BC Partners looked at doing an IPO in 2022, it opted instead to sell a minority stake in PetSmart to Apollo Global Management (APO) in July 2023. The transaction was expected to close in Q4 2023. No details were released.

It will be interesting to see what Apollo was willing to pay for a minority stake in PetSmart. Apollo tried to buy it for an estimated $8 billion around the same time BC Partners was actively looking to buy it.

Ultimately, BC Partners will likely do much better with Chewy than the IPO investors. It should also make a nice gain from PetSmart.

Should You Buy Either?

There’s a saying that when the low man on the totem pole wins, everyone does. That’s just not the case with either stock. Their private equity owners have done much better despite stagnant stock prices.

Of the 20 analysts covering CHWY stock, 12 rate it a Buy, with a target price of $24.79 and a 25% upside. Of the 14 covering WOOF, five rate it a Buy, with a $3.38 target price, 28% higher than its current price.

If you have to buy one, Chewy is the better bet, although its adjusted EBITDA profit margin of 1.2% leaves a lot to be desired.

There are better options when it comes to petcare stocks.

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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.