Chewy Inc., an online retailer of pet food, products and supplies, is set to take center stage on the New York Stock Exchange here on Friday... dogs included.
Shares of the Florida-based retailer have been set at $22 each ahead of the listing, slightly higher than the expected range of $19 to $21 forecast earlier this week. The company will begin trading under the ticker symbol (CHWY) .
Chewy was valued at $8.77 billion after more stock was sold than originally planned under its initial public offering (IPO) as the company is proving to be popular among investors favoring the trend of "humanizing" pets among families.
The global pet care market is expected to reach $202.6 billion by 2025, according to a recent report by Grand View Research.
"Driving growth at the premium end of the market, consumers are spending more on their pets," the report reads. "An increasing number of Americans consider them to be part of the family."
The consumer behavior shift that mimics expenditures on children drove U.S. spending on pet products to an eye-popping $72.6 billion in 2018, according to the American Pet Products Association.
If Chewy can be a leader in this space and expand beyond the already-burgeoning U.S. market, its big IPO valuation could prove conservative.
PetSmart to Profit
The lofty valuation is especially beneficial for PetSmart, which acquired Chewy in 2017 for $3.35 billion. Chewy's opening day valuation on the NYSE looks to nearly triple that figure.
About 46.5 million Chewy shares were sold in the initial public offering, up from the anticipated 41.6 million as majority owner PetSmart sold more shares than originally planned, according to Reuters.
PetSmart will receive almost $900 million from the sale of its stock. Chewy raised $123 million.
Sifting Through the S-1
As Pets.com, with its sock puppet mascot, is often cited as one of the bellwethers of the IPO madness that led the late 1990s tech bubble, investors can be forgiven for a degree of caution regarding Chewy.
Pets.com hit public markets at $11 per share and raised a cool $82 million in 1998. About two years and one Super Bowl ad later, it was defunct.
With that in mind, financials are fundamental to Chewy's story and its ability to avoid a similar fate.
In contrast to Pets.com, Chewy's growth plan appears encouraging.
"For the thirteen weeks ended May 5, 2019, we expect net sales to be $1.1 billion compared to $763.5 million during the thirteen weeks ended April 29, 2018," the SEC filing states, noting a rapid expansion of Chewy's customer base a driving factor. "For the thirteen weeks ended May 5, 2019, we expect gross profit to be $253.9 million compared to $150.0 million during the thirteen weeks ended April 29, 2018."
Over the course of 2016 to the close of 2018, sales at Chewy increased from $901 million to $3.5 billion, nearly quadrupling in a two-year span.
Still, in a familiar refrain for IPO names in 2019, Chewy only has registered net losses from operating activities thus far.
The path to profitability is somewhat uncertain as well in light of the sporadic nature of the losses incurred in recent years. Chewy reported a net loss of $107.2 million in 2016, $338.1 million in 2017 and $267.9 million in 2018.
"We have a history of losses and have accumulated $1.6 billion in stockholders' deficit since our inception through February 3, 2019," the company said in its S-1 filing. "We expect our operating losses to continue in the near term as we increase investment in our business. Furthermore, it is difficult for us to predict our future results of operations."
Chewy also will not be operating in a vacuum, but likely will face increased competition as the pet market becomes an undeniable opportunity for other "e-tailers." Chewy currently dominates market share in online pet food and products, but that is not a fact set in stone.
For example, Amazon.com Inc. (AMZN) launched its own pet-centric "Wag" business in May 2018 and brings with it an unmatched scale that could curb Chewy's remarkable growth story. At the very least, it will make prices substantially more competitive and likely impact margins for the online vendor.
Dual Share Dilemma?
Then there is the ownership structure of Chewy post-IPO, with PetSmart hanging on to 70% of the shares in Chewy overall and 77% of voting shares.
"PetSmart controls the direction of our business and PetSmart's concentrated ownership of our common stock will prevent you and other stockholders from influencing significant decisions," the company's S-1 states. "As long as PetSmart continues to control a majority of the voting power of our outstanding common stock, it will generally be able to determine the outcome of all corporate actions requiring stockholder approval, including the election and removal of directors."
Following this offering, each share of Chewy Class A common stock is entitled to one vote, while each share of Class B common stock is entitled to 10 votes. Petsmart's 278.4 million shares of Class B stock will thus remain dominant.
"PetSmart's control over Chewy should raise significant concerns for public shareholders due to the intertwined nature of the two companies," the filing warns. "Chewy sells PetSmart branded products online, and PetSmart sells Chewy's private label brands in its stores. If PetSmart continues to struggle, it may use its control over Chewy to subsidize the brick and mortar operations in a way that would disadvantage CHWY shareholders."
For retail investors unfamiliar with the more complicated dynamic, the inclusion of the above language should provide a modicum of caution.
Shares are set for their first trade after the opening bell here on Friday. For a live look in on the dog-filled day on the exchange and Jim Cramer's take on the new name, head over to TheStreet's Facebook (FB) page for a live stream at 10 a.m. ET.