Petco Health & Wellness Company, Inc. — Form 10-K Summary
Period clarification: The request identifies “2020 Q4,” but the supplied filing is Petco’s Form 10-K for the 52-week fiscal year ended January 29, 2022 (fiscal 2021), with comparisons to fiscal 2020 and 2019. It is not a standalone fourth-quarter report.
Business context
Petco operates an omnichannel pet health and wellness business spanning merchandise, veterinary care, grooming, training, and e-commerce. At year-end it operated 1,433 pet care centers in the U.S. and Puerto Rico, 197 full-service veterinary hospitals, and approximately 1,000 weekly Vetco mobile clinics; it also operated 108 Mexico locations through a joint venture. Pals Rewards members accounted for about 80% of fiscal 2021 transactions.
Financial performance
| Metric | Fiscal 2021 | Fiscal 2020 |
|---|---|---|
| Net sales | $5.807 billion | $4.920 billion |
| Comparable sales growth | 18.9% | 11.4% |
| Gross profit / margin | $2.427 billion / 41.8% | $2.107 billion / 42.8% |
| Operating income / margin | $266.1 million / 4.6% | $194.4 million / 3.9% |
| Net income (loss) attributable to Class A and B-1 stockholders | $164.4 million | $(26.5) million |
| Adjusted EBITDA / margin (non-GAAP) | $591.5 million / 10.2% | $484.3 million / 9.8% |
| Cash from operating activities | $358.2 million | $268.6 million |
| Capital expenditures | $239.1 million | $159.6 million |
| Free cash flow (non-GAAP) | $119.1 million | $109.1 million |
Fiscal 2021 sales rose 18.0%. Consumables grew 19.3%, supplies and companion animals 11.8%, and services and other 43.2%. E-commerce and digital sales increased 21.1%; pet care center merchandise sales increased 15.4%.
Gross margin fell 1.0 percentage point, primarily from a higher consumables mix, channel mix and moderately higher distribution costs. SG&A rose 13.0% to $2.161 billion, but declined as a share of sales to 37.2% from 38.9%, reflecting operating leverage. Interest expense decreased to $77.4 million from $219.1 million, largely following the IPO-related debt reduction and refinancing.
Debt, liquidity and balance sheet
At January 29, 2022, cash and cash equivalents were $211.6 million. Reported liquidity was $649.8 million, including $438.2 million available under the $500 million asset-based revolving credit facility; there were no revolver borrowings outstanding. Total debt, including finance leases, was $1.687 billion and net debt was $1.476 billion, down from $1.549 billion a year earlier. The $1.7 billion first-lien term loan matures in 2028; the revolving facility matures in 2026. The company reported compliance with debt covenants at year-end. Management said available resources and expected operating cash flows should fund operations and planned capital investment for at least the next 12 months.
Operating lease liabilities totaled approximately $1.362 billion. The balance sheet showed current assets of $1.071 billion and current liabilities of $1.053 billion. Purchase obligations and commitments totaled $507.5 million, of which $454.4 million was considered short-term.
Material changes and unusual items
- Net income attributable to Class A and B-1 stockholders improved from a $26.5 million loss to $164.4 million of income, reflecting higher gross profit and lower interest expense, partly offset by higher SG&A and taxes.
- The company refinanced its term and revolving credit facilities in March 2021. Fiscal 2021 included a $20.8 million loss on debt extinguishment and modification.
- Other non-operating income included a $34.5 million non-cash gain from remeasuring the Rover investment after it became publicly traded.
- Equity-based compensation expense increased to $49.3 million from $12.9 million, including awards issued in connection with the IPO.
- Advertising expense, net of vendor reimbursements, was $227.9 million, up from $168.4 million; management cited a $59.5 million year-over-year increase to support digital and sales growth.
- The company reported no goodwill or trade-name impairment in fiscal 2021; it recorded $10.9 million of asset impairments and write-offs, primarily related to locations and fixed assets.
Outlook, commentary and risks
Management expects fiscal 2022 capital expenditures of approximately $275 million to $325 million, including investments in locations, veterinary hospitals, digital capabilities and supply chain. The filing discusses annual guidance but does not provide a clear numeric fiscal 2022 revenue or earnings forecast in the supplied text. Management plans to expand its veterinary hospital platform over time, with approximately 900 hospitals contemplated, and reported a planned fiscal 2022 distribution-center addition.
Management attributed strong results to business transformation, higher pet ownership, customer demand, and investments in digital, services and veterinary care. It also noted inflationary pressure on merchandise, wages and other costs; price increases had helped mitigate these pressures, with no material aggregate unit impact reported to date. Key uncertainties include whether pandemic-era demand and pet ownership trends persist, supply-chain and labor constraints, commodity and freight inflation, competition, veterinarian recruitment, cybersecurity and privacy, and extensive regulation of veterinary services and pet products.
Substantial variable-rate debt exposes the company to higher interest costs: management estimated that a 100-basis-point increase in rates would raise annual cash interest by approximately $17.1 million. Other notable risks include restrictive debt covenants, long-term lease commitments, dependence on vendor allowances, and sponsor control. CVC-affiliated funds and CPP Investments, through the principal stockholder, controlled approximately 69% of voting power. The company does not anticipate regular cash dividends in the foreseeable future.
The auditor issued an unqualified opinion on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective as of year-end. The filing identifies vendor allowances as a critical audit matter because of the number and differing terms of vendor agreements. The company disclosed a 2020 e-commerce malware incident involving customer personal and payment-card information; it said identified security events had not had a material financial impact.
Investor verification priorities
- Confirm the applicable reporting period: this filing covers fiscal 2021 ended January 29, 2022, not fiscal 2020 Q4.
- Review the quality and sustainability of sales growth, including comparable sales, digital growth, category mix and pandemic-related demand.
- Track gross-margin pressure, inflation pass-through, wage and freight costs, and whether SG&A leverage continues.
- Verify debt balances, interest-rate exposure, revolver availability, covenant headroom and planned capital spending against cash generation.
- Assess veterinary hospital expansion economics, veterinarian staffing and the planned acquisition of the remaining 50% of the veterinary joint venture, announced in March 2022.
- Examine the Rover gain and other adjustments when comparing GAAP results with Adjusted EBITDA and free cash flow.
- Review vendor allowance accounting, litigation accruals, cybersecurity disclosures and the risks associated with sponsor voting control and the absence of expected dividends.