Ryan Cohen, The Millennial Activist Investor and Business Builder

Ryan Cohen and Tylee, his beloved toy poodle:

Welcome to the latest edition of the High Yield Harry newsletter!

The goal of the High Yield Harry newsletter is to be a contra to typical newsletters: While traditional newsletters highlight several topics with brevity, I’d rather have this monthly newsletter focus more on deep-dives or topical items that interest me and share my findings. Anyways, let’s get into it.

As a more entrepreneurial guy, I’ve been reading up on interesting founders. One person that’s been creating a lot of noise is Ryan Cohen, the current Chairman of GameStop and the co-founder and former CEO of Chewy. In 2011, at the age of 25, Cohen founded pet supplies e-commerce company Chewy, rapidly growing the company into a giant that was purchased by PetSmart for $3.35bn in April 2017. In September 2020, Cohen amassed a ~10% stake in GameStop that has been a solid 20 bagger since the time of this post.

Cohen may legit be the first new era/millennial activist investor. Cohen has been in the news lately for taking an activist position in Bed Bath & Beyond and publicly calling for the company to pursue a sale. I’ll touch on this a bit at the end of the newsletter – but for the majority of this newsletter I want to talk about Cohen’s meteoric rise to becoming a non-software bro 30-something year old billionaire. In this deep-dive, I’ll explore how Ryan Cohen built his $2.1bn Net Worth by age 35-36 in a relatively non-traditional manner and the key lessons he learned (and how he’s implemented them in his newest endeavors). 

Founding Chewy: Cohen, born in Canada and now based in Florida, was always a very entrepreneurial guy at heart, starting an e-commerce referral business at the age of 15. Cohen never went to college (and had no desire to) and was inspired to the world of entrepreneurship by his late father, who ran a glassware importing company. In 2011, at 25 years old, he and co-founder Michael Day wanted to start an e-commerce company, and initially pursued starting a jewelry e-commerce business. Right before the company was about to launch, he had a revelation. Upon a routine visit to a dog food store, Cohen realized that jewelry wasn’t his passion and he should focus on what he was obsessed with. He realized he didn’t care much about jewelry and was very concerned about food for his toy poodle, Tylee. Cohen was buying food for Tylee and felt that the pet supply industry was missing having a human touch, so he set out to build a company that was obsessed with providing a hyper-specialized, competitively priced, neighborhood friendly experience with fast shipping that would delight each customer. Cohen believed that this focus was far more valuable longer term than pursuing short-term profits. This would eventually pay off – as by 2018, 90% of revenue was from repeat customers. Just like that – Cohen sold all the jewelry they acquired and pivoted to a business he actually had a passion for.

It wasn’t an easy path – it took 2 years for Cohen to get serious funding. During the first two years, Chewy was funded with cash and small loans.  Cohen flew out to meet 100 VCs during his first couple of years, but got turned down by all of them. Silicon Valley just had a bad taste in their mouth following the prolific Dot Com bubble failure of Pets.com and were worried about competition with Amazon. Cohen didn’t let this stop him though and he believed this was time was different and consumers were now significantly more comfortable making purchases online. Eventually, Larry Cheng at Volition Capital, who initially rejected Cohen got on board after Chewy beat the initial projections Cohen had previously showed him. Volition provided $15mm in funding, driving Cohen to feel even more committed to Chewy after having someone go out on a limb for him.

Cohen’s strategy for building a first-class business focused on two core competencies 1) customer service and 2) fulfillment: The first step was being customer centric – Cohen invested in employees to work phones in a call center, live chat, and respond to emails. Chewy kept notes on customer interactions, with representatives jotting down the names of pets and relevant notes and sending personalized, handwritten holiday cards. Cohen made sure that a large portion of the company were dedicated customer service representatives.  On a 24/7 basis – they were there for customers with answers for topics as specific as gluten-free diets or the best poultry-flavored toothpaste to use (Bloomberg).

After the Series A, attention turned to scaling the business. – now they could invest in systems, technology, and teams needed to scale up, with stocking and in-house shipping the big focus. This was a crucial infrastructure investment for Chewy, because throughout the growth of the company, the inability to keep up with orders was hurting the brand. Cohen’s distaste for consultants (he's been beefing with BCG lately) showed when he was able to get a warehouse up and running in 6 months, despite being told by consultants that it’d take 18 months. The path to getting fulfillment up and running wasn’t easy though, as on a 24/7 basis issues arose (hiring took awhile, scanner guns would stop working, WiFi or ERP would go down), but after several weeks of 16-hour days, the team got the necessary infrastructure in place and functioning.

Cohen’s recent spat with consultants:

Following the investment in these two core competencies, the next step was focusing heavily on marketing. Cohen recruited via reaching out on Linkedin, and while 98% of respondents ignored him, Cohen found the 2% who wrote back to be true believers, team players, and business builders that had tremendous heart, fire in bellies, and a will to win. Cohen learned about frugality from his late father, who as an entrepreneur kept track of every expense (power bills, gasoline prices, individual prices, etc.), and applied this to his management of Chewy. Cohen prioritized cash flow as the best lever of growth – with capital only used for opening distribution centers and acquiring new customers. Cohen also learned during each round to underpromise and overdeliver on sales. He certainly did – but the level of what he achieved in such a short time frame was incredible. By 2016 – they had $901mm in revenue, 100% revenue growth, 7,000 employees and 6 warehouses. Chewy was able to raise $350mm by 2017 and the business was ready for an IPO. Something that struck me as fascinating, and pretty humble, was that the company was able to achieve this in 5 years while laying low/staying out of the press. Cohen received this advice from a mentor, but it’s still incredible how quickly they built in relative stealth mode.

Following preparation for an IPO, Petco reached out to Chewy on a potential merger, but Petco couldn’t meet Chewy’s terms. Shortly after, BC Partners (a private equity firm) Chairman Raymond Svider reached out on an acquisition by portfolio company PetSmart. Cohen wasn’t interested in giving out proprietary information to a competitor, and was nearing an all-cash IPO, so he told Svider to act quickly if they wanted to make a deal – and he got his deal.

Selling Chewy: After six years of hard work, Cohen cashed out and sold Chewy.com for $3.35bn to PetSmart in April 2017, the largest e-commerce acquisition at the time. PetSmart ended up being able to IPO Chewy at a $9bn valuation in June 2019 – securing solid returns for the Sponsor. I don’t want to get too into this given that I’m supposed to be talking about Cohen…but Chewy ended up causing A LOT of drama in the high yield world. The general weakness of credit agreements was on full display as BC was able to move a stake in Chewy to an unrestricted subsidiary basket in a clever move to reap a nice divvy recap (At the expense of lenders)…don’t want to ramble – but you can read about it here.

Cohen at the Chewy IPO:

Back to Cohen. Before the $9bn IPO in June 2019, Cohen had decided to leave the company in March 2018. Cohen felt he had completed what we wanted to do, but also didn’t want to have a boss. Cohen said “I’m a business builder, not a manager. My work was complete." Looking back, Cohen acknowledges it's now a lot harder to beat Amazon. Ryan hasn’t been one for public appearances or a large amount of interviews, but he made the rounds in June 2019 to celebrate the IPO of Chewy. During his interviews with CNBC, CNN, and Yahoo Finance – it was clear that Cohen was not ready to retire – leading us into the next stage of this article…

Cohen’s advice for new entrepreneurs: via Forbes: 

Larry Cheng, Co-Founder and Managing Partner of Volition Capital (the guy who took a shot on Chewy). In June 2021, Cheng followed Cohen, joining GameStop’s Board of Directors.

Post Chewy – Ryan Cohen, the millennial activist investor:

Since Chewy, Cohen deployed a significant amount of his proceeds from the Chewy sale into Apple and Wells Fargo. As of the latest data we have, he has 6.2mm shares in Apple and is the largest individual shareholder. Initially, he picked a 50/50 approach for the stocks he buys…literally just buying Apple and Wells Fargo. When asked about his stake, Cohen said “Apple’s the king of the jungle. What the iPhone has done for our lives is unbelievable." I don’t necessarily get the Wells Fargo investment, but hey, to each their own.

People talk about how Roaring Kitty/Keith Gil nailed the GameStop call – but Ryan Cohen has made an absolute killing – amassing a $1.5bn fortune in GameStop and roughly a 20 bagger return: In September 2020, Cohen amassed a ~10% stake in GameStop, growing the stake to 12.9% in December, 2020 at an average cost of $8.43/share. Cohen joined the board in January, 2021 and became Chairman in June, 2021. Upon becoming Chairman, Larry Cheng (remember the VC that took a shot on Cohen?) joined the GameStop Board of Directors. Cohen later increased his stake by 100k shares in mid-march 2022 at prices between $96.81 and $108.82 a share. Cohen now officially owns 9.1mm shares of GameStop, bringing his ownership to 11.9% (Note - GME issued additional equity in 2021, reducing his initial 12.9% stake). We all remember the craziness – when GameStop was up to $500/share. While things have cooled down, this stock still goes strong at a $165/price and $12.6bn market cap. In February 2022, the company announced they're building a NFT marketplace, and have been hiring ppl with blockchain gaming/tech backgrounds since 4Q21. From the latest earnings call - the gameplan is to turn GameStop into a “customer-obsessed technology company…with more competitive pricing, faster shipping, stronger customer service, an easier shopping experience.” Sound familiar? Sounds like Cohen is whipping out the Chewy playbook here. I have issues with the valuation that GameStop trades at…and I’m sure I’m not alone. I can download my PS4 games without going to a store, or if I wanted a disc I could go to a number of different retail outlets instead. But then again, in 2019 I thought this business was dis-intermediated, but clearly the market finds enough merit in a potential GME turnaround plan.

Bed Bath and Beyond activism: Cohen has been in the news most recently following his March 6th, 2022 announcement that he had amassed a 10% stake in retailer Bed Bath & Beyond at an average cost of $15.34/share. His activist letter criticized under-performance and high executive compensation. Cohen called for spinning off or selling the baby store business, suggesting it may be worth more than the entire business, and even suggested exploring a sale of the entire company. Bed Bath & Beyond has been struggling for some time – the company used to be well known for their promotional discount strategies, but had to tighten their wallets after continued foot traffic/SSS issues.

Cohen was able to strike a deal fairly quickly though. On March 25th, 2022, Bed Bath & Beyond announced three board members nominated by RC Ventures would join the board as independent directors effective immediately. As of current pricing of $22.82/share – Cohen is already up 48% on Bed Bath & Beyond in relatively short order.

So I guess Cohen is pretty sick right? Because seriously, he seems like just an average dude who worked his tail off to become an activist investor in his own right. But look, these newer businesses he's getting involved in have faced a lot of structural challenges and are facing significant headwinds. While Cohen made his career as a business builder – is Cohen over his head in trying to become an activist investor in the retail space?

One of my favorite accounts on twitter made a fair point – Ryan Cohen is acting pretty similar to Eddie Lampert. In the TLDR version Lampert was the CEO and Chairman of Sears Holdings, and is the founder of Transform Holdco, LLC (Which is pretty much post C11 Sears lol). Lampert started early on as a hedge fund guy, but eventually found himself trying to Sears alive for two decades, despite prevailing macro and consumer trends that destroyed the brick & mortar business. Obviously, Lampert never stopped the rot. So there's that comparison. On the other side of that coin - there's even jokes floating around Twitter too that Ryan Cohen is trying too hard to act like Elon Musk.

So is Cohen biting off more than he can chew? Look, I’m rooting for Cohen, but it’s a fair ask right? Brick & Mortar businesses are fixed cost heavy and there was probably a ton of pull forward demand related to covid-19 right? Cohen has a robust background, but building out a business like Chewy vs. being an activist investor in a structurally challenged business are two different things.

I’m not going to judge him on this activist push, I just more so wanted to lay out how incredible the story behind his building of Chewy was. Maybe his GameStop revitalization plan is worth a follow-up deep-dive – but clearly Cohen is now a key player in the industry and def someone we should keep following closely.

That’s all for now – until next time.