Is PetSmart barking up the right tree with its Chewy.com IPO?

Discussion
Photo: Chewy.com
Apr 30, 2019

Chewy.com is going public.

The pet products retailer, acquired by PetSmart in 2017 for $3.53 billion, announced it will pursue an initial public offering to help raise working capital to support a business that has significantly increased sales in recent years, but has yet to turn a profit.

Chewy reported 2018 sales of $3.5 billion, up from $2.1 billion the year before. The e-tailer cut its net loss to $268 million in 2018, down from $338 million over the same period.

According to a Wall Street Journal report, Chewy’s autoship subscriptions generate “the bulk” of the company’s revenues. Chewy has expanded its private label offerings in recent years and moved into the online pet pharmacy business in the face of growing online competition.

PetSmart will remain the majority owner of Chewy after the IPO. Neither company has stated how much they expect to generate from the sale of Chewy’s shares, which will trade under the CHWY ticker symbol.  

CNBC, citing S&P Global Ratings, reports that previous valuations of Chewy have placed the company’s worth at between $4.15 billion and $4.75 billion.

DISCUSSION QUESTIONS: Will going public be a positive or negative for Chewy.com? What do you think it will take for Chewy to become profitable?

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Braintrust
"Going public is a significant strategic marker for any company. It says that their business model is sufficiently sound to withstand quarterly financial reporting..."
"Going public is a great way to raise capital and expand the business, however, with this comes greater accountability to the shareholders unless you level-set expectations."
"Monetizing successful .com’s prior to profitability has been a winning strategy so far. Who doesn’t want to turn debt into capital with a ring of the opening bell?"

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8 Comments on "Is PetSmart barking up the right tree with its Chewy.com IPO?"


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Art Suriano
Guest

It won’t hurt, and I don’t know how much it will help if Chewy.com goes public. There is no doubt that the pet food/product industry is enormous, but there is also intense competition. What will make Chewy.com stand out begins with more awareness followed by reasons for customers to shop them and I see that is the bigger problem for PetSmart to solve. So raising cash is good assuming they can raise enough, but how they invest that money into Chewy.com will be the determining factor on whether or not the brand becomes a winner.

Kai Clarke
BrainTrust

Going public will allow Chewy.com increased operating capital so that it can make system-wide improvements to better reflect customer expectations that align with Amazon level customer service, delivery and management. It will take at least 3 years for Chewy to become profitable, but segmenting it away from PetSmart and its store-centric model will allow it to better focus and react.

Charles Dimov
Guest

Chewy.com’s order volumes are huge. They had 7 DCs and were on expansion plans to deploy the 8th or 9th. Chewy needs to watch some of Amazon’s tactics, and start copying them. Once they are on the stock exchange they won’t have as much leeway as Amazon (which has multiple businesses). In that regard, they will have to start focusing on means of turning a profit. With their volumes, it is a matter of tweaking, and I think they can get there. There may be a few ruffled customer feathers — from a few strategic price increases (to enhance margins) — but done thoughtfully, they have a good chance. I vote YES to it being a good idea. My only proviso is that they should have tried to make it profitable before taking it IPO.

Ken Morris
BrainTrust
Ken Morris
Managing Partner Cambridge Retail Advisors
3 years 27 days ago

Going public should be a good thing for Chewy.com, assuming they use the proceeds wisely. Chewy said in its filing that “it plans on using IPO proceeds for working capital and general corporate purposes. That is a pretty vague statement. I suspect that investments in technology and process improvements are needed to improve profit margins.

Free 1-2 day shipping on orders over $49 may be eating into Chewy’s profits, especially for items that are very heavy (like dog food) and expensive to ship. Finding ways to cut costs out of order processing and shipping processes and refining pricing are probably top priorities to achieving profitability.

Mohamed Amer, PhD
BrainTrust

Going public is a significant strategic marker for any company. It says that their business model is sufficiently sound to withstand quarterly financial reporting and managing capital market expectations. It’s a mark of the confidence in the management team and the go-forward strategy. It’s also the means by which existing investors can achieve a desired capital event and return on their investments.

For Chewy.com and PetSmart, this should be a very positive step especially as the capital infusion allows further investments in intelligent systems and supply chain network reflective of today’s demanding consumers and their pet family members. Path to profitability will occur as they increase their customer base, boost their share of subscription (auto ship) business, and solidify their pet prescription offering.

Ben Ball
Guest

Monetizing successful .com’s prior to profitability has been a winning strategy so far. Who doesn’t want to turn debt into capital with a ring of the opening bell? The strategic question turns on whether the parent intends to continue operating the business or simply monetize the investment. If they want to continue operating, they have to maintain majority control. PetSmart is doing that. It still won’t be a stroll in the rose garden — but PetSmart already understands the pressures public companies face. Good move.

Steve Dennis
BrainTrust

I see two driving factors for this move, both of which seem eminently sensible.

The first is a capital raise strategy. Given the cash needed to fund hyper-growth (including significant operating losses for the foreseeable future), it’s wise to seek funding outside of the main corporate entity.

The second piece is a risk reduction strategy in light of current market conditions. DTC and “disruptive” models are having their IPO moment (Lyft, Uber, WeWork) and valuations are sky high (some might argue insanely so).

Opportunistically raising capital at (likely) inflated prices is smart. Moreover as investors start to better understand the underlying customer economics with future earnings reports, these valuations aren’t likely to remain so lofty.

Shelley E. Kohan
BrainTrust

Going public is a great way to raise capital and expand the business, however, with this comes greater accountability to the shareholders unless you level-set expectations. How the funding will be used to further drive profitable strategies will be most important. Chewy has deep loyalty with subscriptions and should look for ways to to drive AOV with their existing customers.

wpDiscuz
Braintrust
"Going public is a significant strategic marker for any company. It says that their business model is sufficiently sound to withstand quarterly financial reporting..."
"Going public is a great way to raise capital and expand the business, however, with this comes greater accountability to the shareholders unless you level-set expectations."
"Monetizing successful .com’s prior to profitability has been a winning strategy so far. Who doesn’t want to turn debt into capital with a ring of the opening bell?"

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