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Rating Action: Moody's upgrades Petco's ratings; CFR to B2
Global Credit Research - 20 Jan 2021
New York, January 20, 2021 -- Moody's Investors Service, ("Moody's") today upgraded Petco Animal Supplies, Inc.'s (Petco) corporate family rating to B2 from Caa1 and upgraded the company's probability of default rating to B2-PD from Caa1-PD. Moody's also upgraded the company's senior secured term loan to B2 from B3 and assigned a speculative grade liquidity rating of SGL -1. The outlook is stable.
"The upgrade is driven by governance considerations particularly regarding Petco's financial strategy as demonstrated by the significant debt reduction using the proceeds from its IPO", Moody's Vice President Mickey Chadha stated. "In addition, Petco's operating performance has been above expectations in 2020 despite the disruption caused by the coronavirus pandemic, demonstrating the resilience of the pet products business and we expect momentum to continue over the next 12 months due to the growth in pet ownership and Petco's increasing e-commerce penetration coupled with the improving services business", Chadha further stated.
..Issuer: Petco Animal Supplies, Inc.
.... Probability of Default Rating, Upgraded to B2-PD from Caa1-PD
.... Corporate Family Rating, Upgraded to B2 from Caa1
....Senior Secured Bank Credit Facility, Upgraded to B2 (LGD3) from B3 (LGD3)
..Issuer: Petco Animal Supplies, Inc.
.... Speculative Grade Liquidity Rating, Assigned SGL-1
..Issuer: Petco Animal Supplies, Inc.
....Outlook, Changed To Stable From Positive
Petco's B2 corporate family rating reflects its improved leverage from the combination of repaying just over $1.0 billion in debt using the proceeds from its IPO and its improved EBITDA due to better margins related to a change in sales mix. Pro forma for the debt repayment, lease-adjusted debt/EBITDA declined to below 4.0x at October 31, 2020 from the pre-IPO level of about 5.5x. Moody's expects lease adjusted deb/EBITDA and EBIT/interest to be around 3.7x and 1.5x respectively in the next 12 months as same store sales are expected to remain positive supporting further EBITDA growth. On a funded debt/reported EBITDA basis leverage will be higher at about 5.0 times. Traffic will continue to be pressured in the first half of fiscal 2021 as consumers consolidate trips to the store however transaction size will remain high and will offset the weak traffic trend. The company will remain majority owned by private equity sponsors, CVC Capital Partners and Canada Pension Plan Investment Board, which inherently has certain risks specifically as it relates to the high likelihood of a shareholder friendly financial policy. Petco has a strong market presence in the pet retail and services industry and the company's sizeable offering of exclusive premium pet nutrition products drives a recurring stream of customer traffic. Additionally, its wide assortment of pet toys and selected pet services such as grooming or vaccinations make it a destination retailer for many pet owners.
Although still relatively low, Petco's e-commerce penetration has also improved significantly in the past year with the growth in the company's Omni channel approach (Buy online pick-up in store, same day delivery, and curbside pick-up). However, the company faces increasing competition from other pure online retailers like Chewy (owned by PetSmart) and Amazon, mass retailers like Walmart and grocery stores, and other pet specialty stores in the food and nutrition categories. While Petco's market presence is substantial, the competitive landscape is getting tougher.
Petco's ratings are supported by its very good liquidity, well-known brand, and broad national footprint. The pet products industry also remains relatively recession-resilient, driven by factors such as the replenishment nature of consumables and services and increased pet ownership.
The speculative grade liquidity rating of SGL-1 reflects very good liquidity largely supported by Moody's expectation of positive free cash flow of just over $100 million in 2021, cash balances maintained above $80 million over the next twelve months and a $500 million asset based revolving credit facility of which at least $350 million is expected to remain available.
The stable outlook reflects Moody's expectation that Petco's same store sales growth will continue, credit metrics will not deteriorate and the company will continue to generate free cash flow in the next 12 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Petco's ratings could be upgraded if the company's operating performance continues to improve with same store sales and profitability growth being sustained while maintaining good liquidity and financial policies that are focused on improving credit metrics. Specific metrics include maintaining lease-adjusted debt/EBITDA below 4.0 times and maintaining EBIT/interest expense over 2.0 times.
Petco's ratings could be downgraded if operating trends are reversed, financial policies become more aggressive, or if liquidity erodes. Specifically ratings can be lowered if operating margins or free cash flow deteriorates. Quantitatively, a downgrade could occur if lease-adjusted debt/EBITDA is sustained above 5.75 times or if EBIT/interest expense remains below 1.5 times.
Petco Health and Wellness Company, Inc. (Parent of Petco Holdings, Inc.) is a national specialty retailer of premium pet consumables, supplies and companion animals and services with 1,468 retail locations in 50 states, the District of Columbia and Puerto Rico as of October 31, 2020. The Company also offers an expanded range of consumables and supplies through its www.petco.com, www.unleashed.com and www.drsfostersmith.com websites. Revenue exceeded $4.7 billion for the latest twelve month period ended October 31, 2020. The company is majority owned by CVC Capital Partners Advisory (U.S.) and Canada Pension Plan Investment Board.
The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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 ratings tab on the issuer/entity page for the respective issuer on www.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 www.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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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 www.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 www.moodys.com.
Please see www.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 ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Manoj Chadha VP - Senior Credit Officer 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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