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Rating Action:

Moody's changes Petco's outlook to positive; affirms Caa1 CFR

08 Oct 2020

New York, October 08, 2020 -- Moody's Investors Service, ("Moody's") today changed the outlook for Petco Animal Supplies, Inc.'s (Petco) to positive. Moody's also affirmed the company's corporate family rating and probability of default rating at Caa1 and Caa1-PD. Additionally, Moody's affirmed the company's senior secured term loan at B3.

"Petco's operating performance has been above expectations in the first half of 2020 despite the disruption caused by the coronavirus pandemic, demonstrating the resilience of the pet products business," Moody's Vice President Mickey Chadha stated. "The positive outlook reflects that 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.

Affirmations:

..Issuer: Petco Animal Supplies, Inc.

.... Corporate Family Rating, Affirmed Caa1

.... Probability of Default Rating, Affirmed Caa1-PD

....Senior Secured Bank Credit Facility, Affirmed B3 (LGD3)

Outlook Actions:

..Issuer: Petco Animal Supplies, Inc.

....Outlook, Changed To Positive From Negative

RATINGS RATIONALE

Petco's Caa1 corporate family rating reflects its high financial leverage that stems from the acquisition of the company by the CVC Capital Partners Advisory (U.S.) and Canada Pension Plan Investment Board in January 2016. Lease-adjusted debt/EBITDA remains high at about 5.5 times for the twelve month period ended August 1, 2020, and interest coverage is modest with EBIT/interest at 1.0 times. On a funded debt to reported EBITDA basis leverage is higher at about 7.0 times. Moody's expects credit metrics to improve modestly in the next 12 months as same store sales continue to be positive and margins improve due to the change in sales mix. Traffic will continue to be pressured as consumers consolidate trips to the store however transaction size will remain high and will offset the weak traffic trend. As a result Moody's expects debt/EBITDA and EBIT/interest in the next 12 months to improve towards 5.0 times and over 1.0 times respectively. The company is owned by a private equity sponsor, which inherently has certain risks specifically as it relates to the high likelihood of a shareholder friendly financial policy that can lead to the maintenance of a highly leveraged capital structure. The rating also acknowledges that while Petco's market presence is substantial, the competitive landscape is getting tougher as consumers are increasingly shopping online at company's like Chewy (owned by Petsmart) and Amazon and the mass channel which includes supermarkets, Walmart, and Target continues to price aggressively. These channels have seen increased sales during the coronavirus related disruptions. Petco's ratings are supported by its good liquidity, well-known brand, 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 positive outlook reflects Moody's expectation that Petco's same store sales growth will continue, credit metrics will improve 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 including refinancing debt well in advance of its maturity and financial policies that are focused on improving credit metrics. Specific metrics include maintaining lease-adjusted debt/EBITDA below 6.0 times and maintaining EBIT/interest expense over 1.25 times even after any refinancing of its debt.

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 or company does not refinance its debt well in advance of maturities. Quantitatively, a downgrade could occur if lease-adjusted debt/EBITDA is sustained above 7.0 times or if EBIT/interest expense remains below 1.0 time.

Petco Holdings, Inc. is a national specialty retailer of premium pet consumables, supplies and companion animals and services with 1,474 retail locations in 50 states, the District of Columbia and Puerto Rico as of Aug 1, 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 $4.5 billion for the latest twelve month period ended August 1, 2020. The company is 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.

REGULATORY DISCLOSURES

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_1133569.

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.

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

No Related Data.
© 2023 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

​
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