PetSmart Inc.-controlled Chewy Inc. surged in its first day of trading after raising $1.02 billion in an initial public offering, as investors bet that pet owners will do more of their shopping online for cat food, dog sweaters, horse vitamins and other pet products.
Chewy’s shares rose as much as 88% in the first hour of trading Friday from the $22 offer price. The shares closed up 59% to $34.99, giving the company a market value of about $13.95 billion. PetSmart last year pegged the value of Chewy at $4.45 billion in private documents shared with investors, according to people with knowledge of those documents.
Americans spent more than $72 billion on their pets last year, with Chewy’s 31% of U.S. online sales surpassed only by Amazon.com Inc.’s 55% share, according to the American Pet Products Assn. The Chewy site, which started in 2011, logged sales of $3.53 billion for the year ended Feb. 3, up from $2.1 billion from the previous fiscal year, according to the company’s prospectus.
“Pet parents” continue to spend even in times of economic uncertainty. During the 2008-2010 recession, overall consumer spending in the U.S. declined, while pet spending increased by 12%, Chewy has said, citing APPA.
Chewy plans to continue growing by expanding its private-label products and health services, including prescription drugs, Chief Executive Sumit Singh said in an interview.
“Our active customers spend more and more the longer they stay with us,” Singh said. “We have a lot more to do out there, a lot more customers to add.”
The offering follows a heated dispute between PetSmart and its creditors over the transfer of Chewy assets ahead of the IPO.
PetSmart and its private equity owners, a group led by BC Partners, moved a portion of the Chewy unit to an unrestricted subsidiary and another to the parent company, both out of creditors’ reach. Lenders sued, arguing that PetSmart was insolvent at the time of the transfer and that the move was fraudulent.
PetSmart resolved the dispute by amending its loan agreement, promising to give lenders a portion of the proceeds from any eventual sale of the online business, according to people with knowledge of the situation. The exact amount of PetSmart’s proceeds from the IPO that will go to pay down debt has yet to be determined.
Before Chewy’s offering was expanded, current investors were to have retained a 90% stake in the company as well as 99% of the voting rights as a result of the dual-class share, according to its filings with the U.S. Securities and Exchange Commission. PetSmart was to have 70% of the total shares and 77% of the voting power, the filings show.
Chewy’s IPO should give some financial relief to PetSmart, which is saddled with more than $8 billion of debt due over the next six years. After Chewy raised the price range for its IPO on Wednesday, PetSmart’s bonds rallied to the highest level in two years.