Petco Health & Wellness Company, Inc. — Form 10-Q
Reporting period: Fiscal quarter ended October 30, 2021 (13 weeks), with year-to-date results for the 39 weeks ended October 30, 2021. Comparable periods ended October 31, 2020. The request metadata labels this “2020 Q3,” but the filing itself reports Q3 2021.
Business context
Petco operates more than 1,500 locations across the U.S., Mexico and Puerto Rico, alongside e-commerce, services and veterinary care. It reported one operating segment. Management attributed growth to its integrated digital and store model, new pet ownership, customer investment and veterinary hospital expansion.
Financial performance
| Metric | 13 weeks ended Oct. 30, 2021 | 13 weeks ended Oct. 31, 2020 | 39 weeks ended Oct. 30, 2021 | 39 weeks ended Oct. 31, 2020 |
|---|---|---|---|---|
| Net sales | $1,443.3 million | $1,260.0 million | $4,292.8 million | $3,582.5 million |
| Comparable sales growth | 15.5% | 16.3% | 20.9% | 9.6% |
| Gross profit | $594.7 million | $541.4 million | $1,791.1 million | $1,537.5 million |
| Gross margin | 41.2% | 43.0% | 41.7% | 42.9% |
| Operating income | $61.9 million | $46.0 million | $183.2 million | $127.4 million |
| Net income (loss) attributable to Class A and B-1 common stockholders | $52.8 million | $3.4 million | $135.4 million | $(20.3) million |
| Adjusted EBITDA (non-GAAP) | $138.5 million | $118.1 million | $419.3 million | $335.7 million |
| Operating cash flow | Not provided separately | Not provided separately | $288.4 million | $201.5 million |
| Free cash flow (non-GAAP) | Not provided separately | Not provided separately | $124.1 million | $105.2 million |
Material changes and drivers
- Quarterly sales rose 14.5%; comparable sales increased 15.5%. Digital sales grew 31.9% in the quarter. Services and other sales increased 28.3%, supported by service recovery and veterinary growth; veterinary practices rose to 172 from 105 a year earlier.
- Quarterly gross margin fell 1.8 percentage points, primarily reflecting a higher consumables mix, channel mix and moderately higher distribution costs. Management noted consumables customers have higher lifetime value.
- SG&A increased in dollars but fell to 36.9% of sales from 39.3%, reflecting operating leverage. Higher advertising, stock-based compensation, incentive compensation and growth-related costs contributed to the dollar increase; year-to-date SG&A also included a legal settlement accrual.
- Quarterly interest expense declined to $18.8 million from $53.8 million, mainly following prior debt repayment and recapitalization. Year-to-date results included a $20.8 million loss on the March 2021 debt refinancing.
- Year-to-date other non-operating income of $64.9 million, including $19.8 million in the quarter, reflected non-cash fair-value gains on Petco’s Rover Group investment.
Cash, debt and liquidity
- At October 30, 2021, cash and cash equivalents were $221.5 million; total current assets were $989.9 million and current liabilities were $1,031.5 million.
- Total debt, including finance leases, was $1,675.3 million; reported net debt was $1,453.8 million. Net debt was down 52.2% from October 31, 2020, according to the filing.
- The $1.7 billion first-lien term loan matures in March 2028; outstanding principal was $1,691.5 million, with a 4.1% weighted-average interest rate at quarter-end. The $500 million asset-based revolving facility matures in March 2026; no borrowings were outstanding and $441.1 million was available, net of letters of credit.
- Management reported total liquidity of $662.6 million and expected available resources, operating cash flow and revolver capacity to fund operations and anticipated capital investments for at least the next 12 months.
- Year-to-date capital expenditures were $164.3 million, up from $96.3 million, largely for digital investments, veterinary hospitals, innovation and supply-chain capacity. Year-to-date cash increased by $105.8 million, including restricted cash.
Outlook, risks and unusual items
- The filing provides no numerical forward guidance. Management said pandemic-era pet ownership and spending trends had supported results, but the duration and economic effects of COVID-19 remained uncertain.
- Management cited inflation and vendor cost increases, supply-chain interruptions, labor availability and costs, competition, consumer demand, interest-rate exposure, and reliance on vendors and technology among relevant risks. Pricing actions had offset some product cost increases; management said impacted-product unit sales had not decreased in aggregate.
- A 100-basis-point increase in variable interest rates was estimated to increase annual cash interest by approximately $17.1 million. The company said the applicable underlying rates were at contractual floors at quarter-end.
- Rover investment gains were non-cash and subject to quarterly fair-value remeasurement. Petco sold approximately 11% of its Rover shares in a November 23, 2021 secondary offering for $6.1 million net proceeds, after the reporting date.
- Ordinary-course litigation was disclosed; management did not expect the matters to have a material adverse effect, while noting outcomes remain uncertain. The company reported compliance with debt covenants and effective disclosure controls.
Important facts for investors to verify
- Whether sales and digital growth can persist as pandemic-related comparisons normalize, and whether the expanded veterinary and services business can continue scaling.
- Whether gross-margin pressure from product mix, channel mix and distribution costs stabilizes, and how pricing actions interact with inflation and demand.
- The cash-flow impact of elevated inventory and capital spending, including returns from digital, hospital and supply-chain investments.
- Debt refinancing terms, variable-rate exposure, covenant headroom and the availability of the asset-based revolver under its borrowing-base limits.
- The sustainability of earnings excluding Rover fair-value gains and other non-recurring adjustments included in non-GAAP measures.