In many ways, 2020 was the year of the pet. After all, many of us spent more time at home with our animals than usual, and the number of adoptions rose as many people decided this was the year to adopt a furry friend or two. All of that pet love resulted in an estimated $99 billion in pet supplies, up from $95.7 billion in 2019.
Petco, which was once publicly traded and is now private, recently announced plans for an initial public offering (IPO) under the ticker WOOF on the NASDAQ. While we don't have details yet on the amount of share or share price, this could be good news for real estate investment trust (REIT) investors because more money may mean more stores or at least a steady stream of funds for leases and other real estate expenses.
The increased doting on our animals has been good news for a lot of pet brands, especially Chewy (NASDAQ: CHWY), which first went public in June 2019 at $22 per share but spiked in a pandemic-driven e-commerce economy, trading for over $100 a share toward the end of 2020. Chewy has become the leader in auto-shipped pet supplies, meaning that pet owners don't have to go to a store like Petco to pick up their essentials.
Chewy reported that in the third quarter, revenue was up by 45% to reach $1.78 billion. It brought in 1.2 million active customers during the quarter. Chewy's pharmacy business is growing well and is expected to bring in $500 million of gross revenue in 2020. Its next move is to expand into virtual veterinary care. Dog treats subscription service BarkBox recently announced plans to go public via a $1.6 billion SPAC merger, and other direct-to-consumer pet brands have thrived.
Petco plans a bricks-and-clicks strategy
With the shopping economy moving online, is there still room for physical pet stores? In November, Pet Valu announced it was closing all of its 358 U.S. stores and warehouses. However Petco's same-store sales were up nearly 10% in 2020. Petco can also take advantage of one of the biggest trends in retail, BOPIS. Chewy customers must wait for delivery, but Petco customers can order online and pick up immediately at one of approximately 1,470 stores. As of the end of October 2020, approximately 80% of Petco.com's orders were fulfilled by its stores.
These stores also offer services including grooming, training, and pet daycare, things an online-only company can't provide. Part of what makes Petco appealing is that it allows pets in stores, so it becomes not just a retail store but also an experience for both the pet and the consumer. The value of some of those ancillary services became a little lower during the pandemic, but people may be more interested in taking pets in for these types of care in the coming months. In fiscal 2019, Petco groomed 2 million pets and trained 180,000 pets. In Petco's S-1, it noted that its training customers spent 3.3 times as much as nontraining customers. This news should be particularly important to REIT investors because it could mean that Petco will continue to need more space for these services as it grows its customer base.
REITs that have Petco as a tenant
In general, pet retail doesn't take up a large part of any REIT's portfolio. However, several retail REITs that hold large shopping center properties could benefit from Petco's IPO. Kimco Realty (NYSE: KIM) has 46 properties with Petco as a tenant, and Petco represents 1.1% of Kimco's annual base rent (ABR). Currently, Regency Centers (NYSE: REG) has 3% of its spaces leased to pet retailers, and Petco in particular is responsible for 0.8% of ABR. Whitestone REIT (NYSE: WSR) gets 2% of its ABR from pet retail.
Despite a spate of recent successful IPOs, there's no guarantee that Petco's debut will be greeted with acclaim. After all, Petco appeared on watch lists for retail REITs over the summer. Investors may see Petco as an also-ran to Chewy. However, if the IPO is successful, it may not only be good news for Petco, but it may also give retail REITs faith in the overall future of pet stores.