Thesis on Petco(WOOF)

My two cents on Petco. Petco’s equity is priced for bankruptcy, while its cash flow, liquidity, and credit markets price it as a surviving, self-funding business, creating massive upside if operations merely stabilize. The company is trading at \~5.5x EBITDA and a \~11-13% FCF yield on normalized numbers. The balance sheet, while levered, is structured with a long runway (2028) and flexible covenants. The operational pivot under Joel Anderson is already beginning to show in the form of margin expansion and cash generation. Just a point I want to make, most screeners show Petco trading at EV/EBITDA of \~11x, whilst showing the EV as \~$3.55 billion. I think this is incorrect as the EV includes the operating leases capitalised on the balance sheet. The cost of these leases have already hit the P&L through either COGS or SG&A. EBITDA is the earnings attributable to equity and debt holders. The amounts paid to lessors has already been accounted for in the EBITDA metric. If we want to include operating leases as part of EV, the we should use the EBITDAR metric. Alternatively, we can just strip out the operating leases. The market views Petco as a structurally impaired discretionary retailer facing a liquidity event. This framing is wrong. Petco is primarily a recurring consumables and services business with positive and growing FCF, a covenant lite capital structure, no meaningful debt maturities until 2028, credit markets signalling survival, not distress. The equity market is extrapolating past capital misallocation and near term revenue declines into a solvency crisis that the numbers do not support. For equity to be impaired, three conditions must occur simultaneously: 1. Material EBITDA collapse 2. Inability to service interest 3. Lender ability to force action None are present today as EBITDA grew 21% YoY in Q3 2025 despite declining revenue, interest is covered \~3x, the \~$1.6 billion Term Loan is covenant-lite and matures in 2028, the ABL is undrawn with substantial excess availability. Petco is now self-funding and does not rely on capital markets to operate. This is not a growth story. Equity upside requires only EBITDA stabilization, continued FCF generation, gradual deleveraging toward \~3x net leverage. Under this base case, bankruptcy risk collapses, short interest (\~20%) unwinds and the stock rerates from \~5.5x to \~7x EV/EBITDA. This implies \~50–70% upside without heroic assumptions. Even in a stressed scenario (continued revenue decline, margin pressure, tariffs), interest remains covered, FCF remains positive, and liquidity runway extends beyond 24 months. Downside is owning a slow growth, cash generative retailer, not a zero. The market is pricing a liquidity event that the math does not support. If the company simply stabilizes, the equity is materially undervalued. Happy to answer any questions and get information from other investors who have looked at this.