Petco Health & Wellness Company, Inc. — Form 10-Q summary
Business context and period. The filing covers the 13 and 26 weeks ended July 30, 2022, compared with the corresponding periods ended July 31, 2021. Petco operates as one reportable segment, combining retail, digital, services and veterinary care. It reported 1,428 pet care centers and more than 200 in-store veterinary hospitals. All amounts below are U.S. dollars; financial figures are in millions unless stated otherwise.
Key financial results
| Metric | 13 weeks ended July 30, 2022 | Prior-year quarter | 26 weeks ended July 30, 2022 | Prior-year first half |
|---|---|---|---|---|
| Net sales | $1,480.8; +3.2% | $1,434.5 | $2,956.8; +3.8% | $2,849.5 |
| Comparable sales growth | 3.8% | 19.7% | 4.4% | 23.9% |
| Gross profit / margin | $594.5 / 40.1% | $599.4 / 41.8% | $1,202.2 / 40.7% | $1,196.4 / 42.0% |
| Operating income / margin | $50.0 / 3.3% | $73.5 / 5.1% | $99.9 / 3.4% | $121.2 / 4.3% |
| Net income attributable to Class A and B-1 stockholders | $13.5 | $75.1 | $38.1 | $82.7 |
| Adjusted EBITDA / margin | $142.0 / 9.6% | $155.1 / 10.8% | $274.5 / 9.3% | $280.8 / 9.9% |
| Operating cash flow | Not separately provided | Not separately provided | $100.1 | $202.4 |
| Free cash flow | Not separately provided | Not separately provided | $(36.1) | $102.5 |
Sales and profitability. Quarterly sales growth came from consumables and services, partly offset by lower supplies and companion-animal sales. For the quarter, consumables rose 12.3%, services and other rose 21.4%, and supplies and companion animals fell 9.5%. Digital sales increased 9.8% and services sales increased 13.1%. Management attributed the supplies decline partly to softer discretionary spending amid inflation and comparison with prior-year stimulus-driven demand.
Quarterly gross profit fell despite higher sales, and gross margin contracted 1.7 percentage points. Management cited sales mix, channel mix, higher distribution costs and costs associated with integrating the veterinary joint venture purchase. SG&A rose 3.5% in the quarter; first-half SG&A rose 2.5%, with SG&A as a share of sales declining to 37.3% from 37.7%. Higher interest rates also lifted interest expense. Adjusted EBITDA, a non-GAAP measure, declined 8.5% in the quarter and 2.2% in the first half.
Liquidity, debt and cash flow
- At July 30, 2022, cash and cash equivalents were $125.2, and total reported liquidity was $569.1, including $443.9 available under the asset-based revolving credit facility. The facility had no borrowings and $56.1 of letters of credit outstanding.
- First-lien term-loan principal was $1,678.8; its carrying amount was $1,655.5 net of unamortized discount and issuance costs. The weighted-average interest rate was 5.6%, up from 4.1% at January 29, 2022. Quarterly principal payments are $4.25; maturity is March 2028. The company said it was in compliance with debt covenants.
- First-half operating cash flow declined to $100.1 from $202.4. Management cited lower operating income, higher cash paid for inventory and payment of prior-year incentive bonuses, partly offset by working-capital benefits and rent-payment timing.
- First-half capital spending was $136.2, compared with $99.9 a year earlier. Investing cash use also included $35.0 to buy the remaining 50% of the veterinary joint venture. Net cash decreased by $94.2 over the first half.
- Management believes cash, expected operating cash flows and borrowing capacity will fund operations and anticipated capital investment for at least the next 12 months, while noting future financing may not be available on favorable terms or at all.
Material changes, outlook and risks
- Quarterly net income attributable to common stockholders fell 82.1%. A major driver was the year-over-year swing in non-cash Rover investment remeasurement, from $45.2 of income in the prior-year quarter to $10.3 of loss. The quarter also included $10.9 of acquisition-related integration costs; first-half integration costs were $13.1.
- In May 2022, Petco paid $35.0 to acquire the remaining 50% of its veterinary joint venture, making it wholly owned. More than 50 veterinary hospitals had been added since July 2021, according to management.
- The filing provides no specific forward-looking revenue, earnings or margin guidance. Management described ongoing inflation, supply-chain constraints, the COVID-19 pandemic and geopolitical and economic developments as difficult-to-quantify factors affecting results.
- Other identified risks include competition, consumer demand, vendor reliance, labor availability and costs, supply-chain disruption, information security, regulatory or legal developments, and interest-rate and credit-market conditions. A 100-basis-point increase in variable rates would increase annual cash interest by approximately $17.0, based on debt outstanding at July 30, 2022.
- Ordinary-course legal matters were disclosed; management did not expect them to have a material adverse effect, but noted litigation outcomes are uncertain. The company reported no material changes to previously disclosed risk factors and concluded disclosure controls were effective at a reasonable-assurance level.
Most important facts for investors to verify
- Whether sales growth and comparable-sales trends remain resilient as discretionary supplies demand softens and prior-year comparisons normalize.
- Whether gross-margin pressure, inflation and distribution costs ease, and whether veterinary integration costs are temporary as management describes.
- Whether operating cash flow recovers after the first-half decline and capital spending remains supportable without increased borrowing.
- How variable-rate debt costs evolve, given the 5.6% loan rate and disclosed sensitivity to a 100-basis-point increase.
- How much reported earnings fluctuate with the Rover investment valuation, and how non-GAAP Adjusted EBITDA reconciles to GAAP results.
- Whether the company’s 12-month liquidity assessment remains valid under changing consumer, supply-chain and financing conditions.