Petco Health & Wellness Company, Inc. — FY2022 Form 10-K
Business context and reporting period. This is an annual report for the 52-week fiscal year ended January 28, 2023, not a standalone fourth-quarter report. Petco operates an omnichannel pet-health and wellness business spanning retail products, e-commerce, grooming, training and veterinary care. At year-end, it had 1,430 U.S. and Puerto Rico pet care centers, 247 veterinary hospitals and more than 25 million active customers.
Key financial metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $6.036 billion | $5.807 billion | +3.9% |
| Comparable sales | +4.5% | +18.9% | Growth moderated |
| Gross profit / margin | $2.427 billion / 40.2% | $2.427 billion / 41.8% | Margin down 1.6 percentage points |
| Operating income / margin | $225.6 million / 3.7% | $266.1 million / 4.6% | Operating income down 15.2% |
| Net income attributable to Class A and B-1 stockholders | $90.8 million | $164.4 million | Down 44.8% |
| Operating cash flow | $346.0 million | $358.2 million | Down $12.2 million |
| Capital expenditures | $278.0 million | $239.1 million | Up $38.9 million |
| Free cash flow (non-GAAP) | $68.0 million | $119.1 million | Down $51.1 million |
| Interest expense | $101.6 million | $77.4 million | Up 31.3% |
Sales were mixed by category: consumables rose 12.9% to $2.860 billion, services and other rose 20.2% to $805.5 million, and supplies and companion animals declined 8.9% to $2.371 billion. E-commerce and digital sales increased 10.5%. Management attributed pressure on gross margin to sales mix, including stronger consumables and lower supplies sales, and elevated supply-chain costs. SG&A rose 1.9% to $2.202 billion, but declined as a share of sales from 37.2% to 36.5%.
Liquidity and debt. At January 28, 2023, cash and cash equivalents were $201.9 million and reported liquidity was $645.8 million, including $443.9 million available under the asset-based revolving credit facility; no revolver borrowings were outstanding. The First Lien Term Loan had $1.670 billion of principal outstanding, with a March 2028 maturity. Its weighted-average interest rate was 8.2%, compared with 4.1% a year earlier. The company reported compliance with debt covenants. Operating lease liabilities totaled about $1.458 billion; these are separate from the term-loan balance.
Material changes versus FY2021
- Revenue growth slowed from 18.9% comparable-sales growth to 4.5%; supplies and companion animal sales reversed to a decline, while consumables and services continued to grow.
- Gross profit was essentially flat despite higher sales, and gross margin fell 160 basis points. Operating income and attributable net income declined.
- Higher prevailing rates drove a $24.2 million increase in interest expense. A non-cash Rover investment remeasurement moved from $34.5 million of income in FY2021 to $12.7 million of loss in FY2022, a $47.2 million adverse year-over-year change.
- Operating cash flow declined modestly, while higher capital spending reduced free cash flow. Investment included veterinary hospitals, digital and IT, and supply-chain capacity.
- Petco acquired the remaining 50% stake in its veterinary joint venture for $35 million in May 2022; the business became wholly owned. Veterinary practices increased from 197 to 247.
Outlook, commentary and risks
- Management expects FY2023 capital expenditures of approximately $225 million to $250 million and stated that available resources, anticipated operating cash flows and revolver capacity should fund operations and planned investments for at least 12 months. The filing does not provide a clear FY2023 revenue or earnings forecast.
- In March 2023, after year-end, Petco repaid $35 million of term-loan principal using cash on hand. The company also entered into interest-rate caps effective December 2022, covering a portion of variable-rate debt when three-month SOFR exceeds 4.5%; exposure remains on uncapped borrowings.
- Management cited inflation, higher labor and merchandise costs, rising interest rates and reduced discretionary spending as pressures. It reported using selective price increases and other measures to mitigate costs, while noting it may not be able to pass future increases through without affecting demand or margins.
- Other material business risks include competition, veterinarian recruitment and retention, vendor and distribution disruptions, consumer demand, cybersecurity and privacy, product safety, and compliance requirements for veterinary services and prescription medications. The company also has substantial debt and long-term lease commitments.
- Routine litigation and other claims are disclosed; management did not expect them to have a material adverse effect, but outcomes are inherently uncertain. No material goodwill or trade-name impairment was recorded in FY2022.
- Adjusted EBITDA is non-GAAP. The filing presents FY2022 Adjusted EBITDA of $582.3 million under the definition used through FY2022 and $530.8 million under the definition beginning FY2023; the definitions exclude different adjustments, so comparisons require care.
Most important facts for investors to verify
- Whether sales growth and services expansion can offset weaker discretionary-category demand without further gross-margin erosion.
- How higher variable interest rates affect interest expense, cash flow and debt-service capacity; confirm the current debt balance and interest-rate-cap coverage.
- Whether planned capital spending translates into returns and whether free cash flow improves from FY2022’s $68.0 million.
- The basis used for Adjusted EBITDA comparisons, given the change in its definition beginning FY2023.
- Developments in veterinary staffing, supply-chain costs, litigation and regulatory matters; the filing provides no clear quantified estimate of potential exposure for matters not accrued.