UPDATE: July 16, 2019: Following S&P Global's decision to upgrade PetSmart's credit rating, Moody's Investor Service on Tuesday upgraded the specialty pet retailer's Corporate Family Rating and probability of default rating from "Caa1" to "B3," partially due to the success from Chewy's initial public offering, according to a note emailed to Retail Dive.
"The upgrade follows the recent successful IPO of Chewy and the subsequent debt repayment from the proceeds of the IPO thereby improving leverage to 7.2x from 7.8x. The current implied Chewy valuation of about $14 billion is also a positive in terms of coverage for lenders as PetSmart currently owns about 67% of Chewy," Moody's Vice President Mickey Chadha said in a statement. "We also expect credit metrics to improve further in the next twelve months as the company further monetizes its stake in Chewy and uses proceeds to repay more debt."
Dive Brief:
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S&P Global has upgraded PetSmart Inc.'s credit rating to "B-" from "CCC," according to a note emailed to Retail Dive.
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The upgraded rating is due in part to the proceeds from Chewy's initial public offering, which resulted in the retailer being able to repay about 15% of its term loan, according to S&P Global.
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"The stable outlook reflects our view that PetSmart's store performance will improve modestly over the next 12 months and Chewy will continue to grow revenue at a fast pace, resulting in positive free operating cash flow and modest deleveraging," S&P said.
Dive Insight:
PetSmart is already reaping the benefits of Chewy, which it acquired in 2017 for $3.35 billion.
The proceeds from the online pet retailer's IPO last month, which was priced at $22 a share, or over $1 billion, is helping to shave down PetSmart's debt. A little over a year ago, the specialty pet retailer hired investment bank Houlihan Lokey to advise on its debt load.
S&P also announced it is raising the issue-level ratings on PetSmart's first-lien debt from "CCC" to "B," due to its debt reduction and "an upward reassessment of enterprise value at simulated default following the IPO of Chewy." S&P also raised its issue-level rating on PetSmart's senior unsecured debt to "CCC+" from "CC."
The upgraded rating to the struggling specialty retailer comes as the space is getting increasingly more saturated. In January, startup Brandless expanded into the pet category with products including organic beef bone broth, non-toxic toys, degradable waste bags and hemp collars, among other things. Amazon, which has ramped up its own private label offerings in the category through its Wag brand, also added BarkBox subscriptions to its subscription box store in May this year. Walmart has also expanded its services in the category with plans to open 100 in-store veterinary clinics over the next year.
While the upgraded rating could indicate Chewy's potential to fuel future success for PetSmart, as well as improving performance at PetSmart itself, S&P did note that "industry headwinds remain a risk."
