PETCO's public offering to speed superstore stardom

Discount Store News, March 21, 1994

SAN DIEGO -- PETCO, long a conventional pet store chain, with small stores of 3,500 sq. ft., is rapidly joining the superstore era after switching in 1993 to an everyday low price strategy from promotional sales and broadening its narrow selection of pet foods and supplies.

In a bid to speed its conversion into a superstore chain, PETCO has filed to go public, hoping to raise a net of $41.3 million to pay down the debt that is killing net profits and fund expansion of its superstore format.

PETCO thus will become the third major pet supplies chain to go public over the past nine months. Petstuff, Atlanta, went public last November as did PETsMART, Phoenix, last July. In 1990, Pet Food Warehouse, an eight-store chain based in St. Louis Park, Minn., went public and filed a secondary stock offering in December 1993 to raise $25 million for expansion.

PETCO registered to sell 3 million shares, or a 49.4% stake, at an expected price of $15 a share, for a net after underwriting expenses of $41.3 million.

Out of the proceeds, PET-CO plans to use $20 million to pay down long term debt and $3 million to pay down revolving credit. The balance of $18 million world fund store expansion.

The majority of PETCO's 198 stores (or 131) still are conventional, averaging 3,500 sq. ft. But the chain also operates 67 superstores, now designed to a 10,000-sq.-ft. prototype, and is shifting to the superstore formats as it builds new stores, and relocates, expands and closes its conventional stores. The chain's average size is about 4,800 sq. ft., and revenues per store average $765,000.

In comparison, a superstore operated by PETs-MART, which pioneered the superstore concept, runs about 25,000 sq. ft., and the superstores of Petstuff, a 1992 start-up that unabashedly patterend itself on PETsMART average about 20,000 sq. ft.

During fiscal '94, PETCO expects to open 39 super-stores, including 14 relocations or expansions, and 25 new stores. It intends to close six traditional stores, for a year-end total of 217 units. Almost 50%, or 106 units, will be superstores. PETCO said in the preliminary prospectus filed with the Securities and Exchange Commission last month.

In fiscal '95, it expects to open 50 more superstores, for a year-end total of 239, including 156 superstores.

Last year, it closed a net of 26 conventional stores and opened 14 superstores.

PETCO superstores carry 7,000 skus, compared to 4,000 for its traditional stors, 1,000 for the typical independent pet store, 800 for a supermarket, 500

for a discount department store, and 20 for a warehouse club.

PETCO stocks supermarket and premuim pet foods, as well as the usual lines of accessories, including collars, grooming products, toys, cat furniture, dog houses and veterinary supplies. It also stocks a private label premium dog and cat food line called Petgold.

Its superstores stock fish, aquariums, reptiles, birds and other small animals, but no puppies or kittens. PETCO stores refer prospective puppy and kitten customers to local breeders and provide other services, such as, pet grooming, adopt-a-pet (in cooperation with humane societies), in-store vacciation clinics, referals to vets, a preferred customer program and free samples of premium pet food.

For the fiscal year ended Jan. 29, 1994, sales jumped 26.8% to $148.5 million from $117.1 million in 1992. Comparable store sales gained 15% for the year, compared to 2.1% in 1992.

Operating income declined to $4.2 million from $4.9 million and interest expenses of $5.1 million produced a net

loss of $925,000. Due to accumulated deficits, stock-holders equity stands at a minus $36.5 million. Gross margins slipped in '93 to 25.5% from 28.1% the previous year and 28.7% in '91.