Petco Health and Wellness Company, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
Petco operates one reportable segment comprising approximately 1,454 U.S. and Puerto Rico pet care centers, e-commerce channels, grooming and training, veterinary services, owned brands, and a 50% Mexico joint venture. Fiscal 2020 covered 52 weeks ended January 30, 2021; the comparable fiscal 2019 period ended February 1, 2020.
The company completed its initial public offering in January 2021, issuing 55.2 million Class A shares at $18.00 per share and receiving approximately $936.0 million of net proceeds. The shares began trading on Nasdaq under the symbol WOOF on January 14, 2021.
Key financial metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $4.920 billion | $4.435 billion | +11.0% |
| Comparable sales | +11.4% | +3.9% | +7.5 percentage points |
| Gross profit | $2.107 billion | $1.907 billion | +10.5% |
| Gross margin | 42.8% | 43.0% | -0.2 percentage points |
| Operating income | $194.4 million | $110.6 million | +75.8% |
| Operating margin | 3.9% | 2.5% | +1.4 percentage points |
| Net loss attributable to Class A and B-1 stockholders | $26.5 million | $95.9 million | Improved by $69.4 million |
| Net loss per share | $0.13 | $0.46 | Loss reduced |
| Adjusted EBITDA | $484.3 million | $424.5 million | +14.1% |
| Adjusted EBITDA margin | 9.8% | 9.6% | +0.2 percentage points |
| Net cash from operating activities | $268.6 million | $110.3 million | +143.4% |
| Free cash flow | $109.1 million | $(46.6) million | Improved by $155.6 million |
Fiscal 2020 sales included $2.123 billion of dog and cat food, $2.329 billion of supplies and companion animals, and $468.0 million of services and other revenue. E-commerce and digital sales increased 103%; supplies and companion animal sales increased 20.1%; dog and cat food increased 3.4%; and services and other sales increased 6.1%.
Cash, debt, liquidity, and balance sheet
- Cash and cash equivalents were $111.4 million at January 30, 2021, compared with $148.8 million a year earlier.
- Total debt was $1.660 billion, comprising $1.646 billion of senior secured credit facilities and $13.6 million of finance leases, compared with $3.270 billion at the prior year-end.
- Net debt was $1.549 billion, and net debt to Adjusted EBITDA was 3.2x versus 7.4x in fiscal 2019.
- Reported liquidity was $499.0 million, including cash of $111.4 million and $387.6 million of availability under the revolving facility.
- Capital expenditures were $159.6 million, including $80.8 million for pet care centers, $68.2 million for digital and information technology, and $10.6 million for supply chain and other projects.
- Operating lease liabilities totaled $1.342 billion, excluding current lease liabilities, and total lease liabilities were approximately $1.356 billion.
Material changes versus the prior comparable period
- Growth benefited from increased pet ownership, pandemic-related demand, higher spending on pets, and investments in digital capabilities, owned brands, veterinary services, and the multi-channel platform.
- Digital sales accelerated sharply, supported by buy online, pick up in store, curbside pickup, ship-from-store, and same-day delivery. Approximately 83% of Petco.com orders were fulfilled by pet care centers.
- Gross margin declined modestly because of the shift toward lower-margin e-commerce sales, $9.6 million of COVID-19-related cost of sales expenses, and a lower actuarial true-up benefit.
- SG&A increased 7.6% to $1.912 billion, but declined to 38.9% of sales from 40.1%. Advertising expense increased by $70.7 million to support digital growth; net advertising expense was $168.4 million.
- Interest expense declined $33.9 million to $219.1 million, primarily because of lower interest rates and debt repayments.
- No goodwill or trade-name impairment was recorded in fiscal 2020, compared with a $19.0 million trade-name impairment charge in fiscal 2019.
- The company consolidated its veterinary joint venture beginning in fiscal 2019; the venture generated a noncontrolling interest loss of $5.3 million in fiscal 2020.
Guidance, outlook, commentary, risks, and unusual items
Management stated that it expected fiscal 2021 capital expenditures of approximately $185 million to $235 million. The filing does not provide a clear fiscal 2021 revenue or earnings guidance range. Management expects current resources, operating cash flow, and revolving-credit availability to fund operations, scheduled debt payments, and anticipated capital investments for the next 12 months.
On March 4, 2021, after year-end, Petco refinanced its debt with a $1.700 billion First Lien Term Loan maturing in 2028 and a $500 million ABL Revolving Credit Facility maturing in 2026. The prior term loan and revolving facility were repaid or terminated. The new term loan requires quarterly principal payments of $4.25 million beginning June 30, 2021 and bears variable interest.
- COVID-19 increased demand but also caused temporary service suspensions, reduced grooming capacity, labor shortages, supply-chain risks, additional safety costs, and uncertainty regarding the sustainability of elevated pet ownership and demand.
- In September 2020, malware on a business-unit website exposed customer names, contact information, payment-card data, CVV codes, and account passwords. Lawsuits were filed in late 2020; management stated that the financial impact was not material as of filing, but the matter remains subject to litigation and regulatory risk.
- Key risks include substantial leverage and variable-rate debt, covenant compliance, competition from online and mass retailers, veterinarian recruitment, supply-chain disruption, commodity costs, pet-food safety, privacy and cybersecurity, veterinary regulation, labor costs, long-term lease obligations, and consumer spending trends.
- The company is controlled by its Sponsors, which held approximately 79.1% of voting power. It qualifies as a Nasdaq controlled company and relies on exemptions from certain independent-board and committee requirements.
- The company does not expect to pay regular cash dividends in the foreseeable future; debt covenants and the holding-company structure further restrict distributions.
- The filing reports routine litigation and states that no pending matter was expected to have a material effect, while acknowledging that litigation outcomes are inherently uncertain.
- The independent auditor issued an unqualified opinion on the financial statements. Because Petco was newly public, the filing did not include management’s assessment or the auditor’s attestation regarding internal control over financial reporting.
Important facts for investors to verify
- Whether fiscal 2020 demand gains, particularly the 103% digital-sales increase and pandemic-related pet ownership growth, persist after consumer behavior normalizes.
- The terms, interest expense, borrowing-base availability, covenants, and refinancing benefits of the March 2021 First Lien Term Loan and ABL facility.
- Future gross-margin performance as e-commerce, services, owned brands, and veterinary revenue change the sales mix.
- The ultimate cost, settlements, regulatory consequences, and reputational impact of the 2020 cybersecurity incident and related litigation.
- Execution of the planned $185 million to $235 million of fiscal 2021 capital expenditures and the resulting effect on free cash flow.
- Recruitment and retention of veterinarians, service labor availability, wage inflation, and supply-chain reliability.
- The extent of Sponsor control, potential resale of restricted shares, multi-class voting effects, and the absence of planned dividends.
- Management’s future internal-control reporting, including whether any material weaknesses emerge as the company transitions from newly public status.