Debunking the rumors: is Petco really at risk of bankruptcy?

Petco has been in the spotlight recently as Forbes reported that the financial risk platform Credit Risk Monitor included the pet retailer as one of 11 companies at an elevated bankruptcy risk this year. 

The San Diego-headquartered company has long-term debt of around $1.6 billion (€1.5B), accompanied by a dip in shares and Walmart’s latest announcement that it opened its first pet services center. 

Current status 

Petco reduced its debt in Q1 2021 by over half, leaving the company with $1.7 billion (€1.6B) in long-term debt with a 3.5% interest rate at the time, according to its financials. 

Currently, the business is paying 9% back on that debt, which is taking its toll on its free cash flow. In Q2, almost 25% of cash flow went on interest payments, as explained by The Motley Fool. That being said, free cash flow increased during the quarter compared to the previous year, reaching $44.6 million (€42M) compared to $27.7 million (€26M) in 2022.

Free cash flow is important to a business because it shows whether the company can generate enough positive cash flow to help grow and maintain operations. If a company does not have substantial free cash flow, it may need financing from external parties.

“The shift in consumer spending and pressures on our discretionary business mean we’re revising our guidance accordingly. Looking ahead, we remain focused on debt paydown and cash flow, both of which will be supported by our productivity initiatives in addition to tightly controlled expense management,” said Chief Financial Officer (CFO) Brian LaRose in the presentation of the firm’s Q2 earnings last August.

Public pressure and Walmart emerging as a new competitor have not gone unnoticed by investors, as Petco’s shares fell by a substantial 20% in September. 

Is Petco up-to-date on repayments?

Last March, Petco said it repaid $35 million (€32.9M) on its loan, stating this was $31 million (€29.2M) over the required amount. The company set a target of $100 million (€94.2M) in total repayments for the year. 

Free cash flow during this period dropped to $51.1 million (€48.1M) compared to $68 million (€64M) in Q1 2022.

Then, during Q2, Petco reported that it paid $25 million (€23.5M) on its loan and an additional $15 million (€14.1M) in August, bringing the total amount to $75 million (€70.6M) so far. Therefore, the company is seemingly on target for its $100 million (€94.2M) repayment plan.

Expert’s views 

Diana Rosero-Pena, Equity Research Analyst at Bloomberg Intelligence, commented on the bankruptcy speculation: “Petco has been prioritizing debt repayment. I don’t think they will face bankruptcy.” 

“The business is not doing a lot of shareholder returns at the moment because they’re focusing on investing in the business as well as servicing their debt, so I don’t necessarily see it at risk of bankruptcy,” the analyst adds.