Petco Health & Wellness Company, Inc. — Form 10-K Summary
Reporting period: Fiscal 2023, the 53 weeks ended February 3, 2024; comparable fiscal 2022 had 52 weeks and ended January 28, 2023. The filing is an annual report, not a quarterly report. Petco operates an omnichannel pet products and services business, including veterinary care, grooming, training, e-commerce, and 1,423 U.S. and Puerto Rico pet care centers.
Financial performance
| Metric | Fiscal 2023 | Fiscal 2022 |
|---|---|---|
| Net sales | $6.255 billion | $6.036 billion |
| Gross profit / margin | $2.354 billion / 37.6% | $2.427 billion / 40.2% |
| Operating income (loss) | $(1.180) billion | $225.6 million |
| Net income (loss) attributable to common stockholders | $(1.280) billion | $90.8 million |
| Adjusted EBITDA / margin (non-GAAP) | $401.1 million / 6.4% | $530.8 million / 8.8% |
| Operating cash flow | $215.7 million | $346.0 million |
| Free cash flow (non-GAAP) | $(9.9) million | $68.0 million |
- Sales rose 3.6%; comparable sales increased 1.8%, versus 4.5% in fiscal 2022. The extra fiscal week contributed approximately $116.6 million of sales.
- Consumables sales increased 7.1% and services and other increased 21.9%; supplies and companion animal sales declined 6.8%. Digital and e-commerce sales grew 8.5%, and service-related sales grew 15.3%.
- Gross margin fell 260 basis points. Management attributed the decline primarily to sales mix, including stronger consumables and digital/services and weaker supplies, and the addition of lower-priced national brands.
- The $1.223 billion goodwill impairment was the principal driver of the reported loss. Excluding specified adjustments, Adjusted EBITDA still declined about 24% year over year.
- Capital expenditures were $225.6 million. Cash and cash equivalents were $125.4 million at year-end, down from $201.9 million. Inventory was $684.5 million, compared with $652.4 million.
Debt and liquidity
- At February 3, 2024, first-lien term-loan principal was $1.595 billion; the weighted-average interest rate was 9.0%. There were no ABL revolver borrowings, and $446.6 million was available after letters of credit.
- Reported liquidity was $572.0 million, including cash and ABL availability. Management said resources, anticipated operating cash flow, and revolver capacity should fund operations and planned investments for at least 12 months.
- Operating lease liabilities totaled approximately $1.427 billion, in addition to debt. The company reported $349.0 million of purchase obligations and commitments, $281.1 million of which were short-term.
- In March 2024, after year-end, the ABL facility’s stated total availability was increased from $500 million to $581 million, with a portion extended to March 2029. The facility remains subject to a borrowing base.
Changes, outlook, and notable items
- Business performance reflected softer discretionary consumer spending amid inflation. Petco broadened its assortment toward national brands and used pricing actions to appeal to value-focused customers; management noted these products are typically less profitable.
- Interest expense rose 48.5% to $150.9 million, primarily due to higher interest rates. A 100-basis-point increase in variable rates would have added approximately $16.2 million in annual cash interest based on year-end debt.
- The fiscal 2023 interim impairment test followed a share-price decline and macroeconomic pressures; the $1.223 billion goodwill charge reduced goodwill to $980.3 million. The trade name was not impaired.
- Management expected fiscal 2024 capital expenditures of approximately $140 million, citing fewer anticipated veterinary hospital build-outs and a more balanced investment and cash-flow approach. The filing text does not provide a clear numerical fiscal 2024 revenue or earnings guidance figure.
- Other subsequent event: in March 2024, Petco appointed R. Michael Mohan interim CEO and disclosed the separation of Ronald Coughlin, Jr. The filing was signed April 2, 2024.
- Key risks include consumer demand and competitive pricing, margin pressure and cost control, veterinarian and other labor availability, supply-chain and vendor reliance, data security and privacy, extensive veterinary and product regulation, and substantial variable-rate debt with restrictive covenants. The company stated it was in compliance with debt covenants at year-end. Routine litigation was disclosed; management did not expect pending matters to have a material adverse effect, while noting outcomes are uncertain.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded internal controls were effective.
Important facts for investors to verify
- Whether sales and comparable-sales trends improve beyond the modest fiscal 2023 growth, particularly in discretionary supplies and companion animals.
- Whether gross margin and Adjusted EBITDA stabilize or recover as the sales mix shifts and pricing and cost initiatives take effect.
- Cash generation and capital spending relative to debt service, lease obligations, and the approximately $140 million fiscal 2024 capex plan.
- Term-loan interest exposure, hedging coverage, ABL borrowing-base availability, and the terms and effect of the March 2024 credit amendment.
- Assumptions underlying goodwill valuation and any further impairment indicators, along with progress in veterinary staffing and hospital economics.