Moody’s upgrades Petco as operational turnaround fuels voluntary debt reduction

Investing.com -- Moody’s Ratings upgraded Petco Health and Wellness Company's (NASDAQ: WOOF) corporate family rating to B2 from B3, citing the pet retailer’s operational turnaround and ongoing balance sheet deleveraging. The rating agency also raised its ratings on Petco’s probability of default to B2-PD, as well as its senior secured first-lien term loan B and senior secured first-lien notes, while maintaining a stable outlook and preserving the company's top-tier SGL-1 liquidity score.

The operational rebound stems from strategic shifts aimed at protecting profitability rather than pursuing volume at any cost. Petco has scaled back promotions, overhauled its product assortment, closed underperforming stores, and expanded its footprint in higher-margin products and veterinary services.

Moody’s expects these initiatives to keep adjusted leverage around 3.5x debt-to-EBITDA and maintain interest coverage of 1.5x EBITDA-minus-capex over the next 12 to 18 months. Meanwhile, the retailer's SGL-1 liquidity score underscores strong cash generation, full access to its asset-based lending facility, and substantial cash reserves.

Despite the upgrade, the credit profile remains constrained by execution risks as value-conscious consumers shop cautiously across a crowded retail landscape. Furthermore, majority ownership by private equity firms CVC Capital Partners and Canada Pension Plan Investment Board presents potential governance considerations should shareholder returns take precedence over creditor protection.

Offsetting those headwinds is Petco's significant scale as a leading national specialty retailer generating roughly $6.0 billion in annual revenue across more than 1,500 locations. Investors will be watching whether the company can sustain market share gains and maintain debt-to-EBITDA below 4.5x to trigger further rating upgrades.

Original Article

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