It’s certainly working out for debt holders of PetSmart, whose 2023 bonds sold for just 56 cents on the dollar as recently as December. After Chewy’s IPO—which raised about $1 billion after the price and size was boosted to meet demand—PetSmart’s notes were almost back to par.
The timing for such deals is right, according to Rett Wallace at Triton Research, a New York investment advisory firm. “You could take a ham sandwich to the public market right now and it would be received positively,” said Wallace, Triton’s chief executive.
Chewy.com had one of the best trading debuts in a decade, with the shares now up almost 60 percent. Investors who hold the company’s more than $8 billion of debt are slated to receive more than half of the IPO proceeds. The sale is a positive for creditors any way you look at it, said Mickey Chadha at Moody’s Investors Service Inc.
“It’s not even where the money flows to, just the fact that the company is a de-levered, stronger company, which indirectly benefits the lenders because they are invested in a healthier company,” Chadha said in an interview. “If there’s a market for it, that’s great. But you have to have the asset and the opportunity, and those ingredients don’t happen every time.”
A representative for Dallas-based Neiman Marcus declined to comment. The company said in April it’s considering strategic alternatives for MyTheresa, without specifying what they might be.
J. Crew, based in Lynchburg, Virginia, declined to comment. But in April, the company said a Madewell IPO “could unlock significant value and generate meaningful proceeds that would strengthen our balance sheet and increase our overall financial flexibility to address our 2021 debt maturities, giving us an improved platform to support J.Crew’s turnaround and allowing Madewell to achieve its full potential.”
Different Models
The assets that Neiman Marcus and J. Crew might spin off have some key differences with Chewy. For starters, both of those chains deal in fashion, whose customers can be harder to please compared with Chewy, which sells food and toys online to doting pet parents. And while Neiman Marcus’s MyTheresa unit also is web-based, Madewell is primarily a brick-and-mortar chain.
That said, sales at MyTheresa and Madewell are growing fast, and they can draw hope from online fashion retailer Revolve Group Inc., whose trading debut in early June saw the shares more than double after its $212 million IPO. It was the year’s third-best U.S. trading debut at the time, valuing Revolve at about $2.33 billion and about 5.5 times revenue.
Based in Cerritos, Calif., Revolve is profitable, earning $31 million on sales of $499 million last year. MyTheresa, Neiman’s German online business, generates positive earnings and is only slightly behind Revolve, posting $414 million of sales. Madewell’s sales for the year totaled $529 million; the public report didn’t include the unit’s profit.
Chewy has been driving much of PetSmart’s revenue gains, reporting a 45 percent year-over-year increase to around $1.14 billion for the first quarter of this year. By contrast, brick-and-mortar sales were stagnant.
Given the value the markets have ascribed to businesses like Revolve and Chewy, investors should be receptive to MyTheresa going public, Christina Boni of Moody’s said. If Neiman does choose to sell some or all of MyTheresa, that value should flow through to debt holders, she said.
A Madewell sale or spinoff by J. Crew could help the preppy retailer carry its approximately $1.9 billion of junk-rated borrowings and make it easier to fund a turnaround. A similar move involving MyTheresa by Neiman Marcus could quell doubts about its $4.7 million of debts, which S&P Global Ratings says could wind up in default within a year.
“All of these guys should be racing to get to market. You want to get there while your growth is still strong,” said Carla Casella, high-yield analyst at J.P. Morgan Securities. “It used to be retailers focused on managing the business. Now they’re managing the portfolio brands.”
Reporting by Katherine Doherty.