Petco Health & Wellness Company, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended April 29, 2023 (fiscal 2023 first quarter), compared with the 13 weeks ended April 30, 2022. The period in the request metadata is inconsistent with the filing’s reported dates. Amounts below are in U.S. dollars.
Business context and operating results
Petco operates an omnichannel pet health and wellness business, with more than 1,500 pet care centers across the U.S., Mexico and Puerto Rico, digital channels, and an expanding veterinary and services business. It reported one operating segment.
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $1,555.9 million | $1,476.0 million |
| Gross profit / margin | $604.5 million / 38.9% | $607.7 million / 41.2% |
| Operating income | $27.6 million | $49.9 million |
| Net income (loss) attributable to Class A and B-1 stockholders | $(1.9) million | $24.7 million |
| Adjusted EBITDA / margin (non-GAAP) | $111.0 million / 7.1% | $119.2 million / 8.1% |
| Operating cash flow | $37.7 million | $57.5 million |
| Capital expenditures | $62.1 million | $65.9 million |
| Free cash flow (non-GAAP) | $(24.4) million | $(8.4) million |
Material changes and financial position
- Sales grew 5.4%, with comparable sales up 5.1%. Consumables rose 11.2% to $763.1 million and services and other rose 25.4% to $239.3 million; supplies and companion animals fell 7.6% to $553.5 million. Management attributed the decline in supplies partly to reduced discretionary spending.
- Gross margin declined 2.3 percentage points. Management cited sales mix, including strong consumables and softer supplies, greater contribution from digital, services and veterinary channels, and moderately higher distribution costs. SG&A rose 3.4% to $576.9 million, though it declined as a share of sales to 37.1% from 37.8%.
- Interest expense increased 89.5% to $37.2 million, primarily because of higher rates on variable-rate debt. The company recorded a $0.4 million loss on partial debt extinguishment.
- Cash and cash equivalents were $148.9 million at April 29, 2023, down from $201.9 million at January 28, 2023. Total current assets were $976.8 million and current liabilities were $996.9 million.
- First Lien Term Loan principal was $1,635.3 million ($1,615.3 million net of unamortized discount and issuance costs); its weighted-average interest rate was 8.5%. No ABL revolver borrowings were outstanding, and $443.9 million was available after letters of credit. Management reported total liquidity of $592.8 million and compliance with debt covenants.
- In March, Petco voluntarily repaid $35 million of term-loan principal; a further $25 million repayment occurred in May, after quarter-end. The May payment is not reflected in the April 29 balance sheet.
- Cash decreased by $62.2 million during the quarter. Investing activities used $62.8 million, primarily for capital expenditures, and financing activities used $37.1 million, primarily for the term-loan repayment.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or EBITDA guidance. Management said cash, expected operating cash flows and revolver capacity should be sufficient to fund operations and anticipated capital investment for at least the next 12 months; additional financing may be sought, but availability and terms are uncertain.
- Management cited inflation, higher interest rates, supply-chain constraints and geopolitical and economic developments as factors that may affect demand, costs and liquidity. Other identified risks include competition, vendor reliance, labor, technology and cybersecurity, product safety, and access to capital and vendor credit.
- Petco entered into interest-rate caps and a collar to limit exposure on part of its variable-rate debt. The filing estimates that a 100-basis-point increase in variable rates would increase annual cash interest by approximately $16.6 million, before considering hedge effects.
- In April, Petco sold its Rover Group shares under an arrangement with proceeds to be determined using an agreed pricing formula and paid over the remainder of fiscal 2023. The quarter included $2.8 million of other non-operating income; the filing does not state that all of this amount arose from the Rover transaction.
- Equity-based compensation expense increased to $22.1 million from $12.2 million. The company reported no material change in risk factors, no material adverse effect expected from ordinary-course litigation, and effective disclosure controls as of April 29, 2023.
Important facts for investors to verify
- Confirm the reporting-period identification: the filing is for the 13 weeks ended April 29, 2023, not a 2022 quarter.
- Track whether sales growth converts into improved gross margin, operating income, net income and free cash flow, particularly as discretionary supplies sales remain soft.
- Monitor variable-rate debt, interest expense, hedge coverage and the impact of further rate changes; confirm the effect of the May $25 million repayment.
- Assess capital spending, cash generation and revolver availability against management’s stated 12-month liquidity outlook.
- Review the timing and final proceeds from the Rover share sale and the basis of reported other non-operating income.