Business context and reporting period
Petco Health and Wellness Company, Inc. operates an omnichannel pet-products and services business, including retail locations, e-commerce, grooming and veterinary care. This unaudited Form 10-Q covers the 13 weeks ended April 30, 2022; comparisons are with the 13 weeks ended May 1, 2021. The filing’s period is 2022 Q1, notwithstanding the request metadata’s “2021 Q1.”
Financial results
| Metric | 13 weeks ended Apr. 30, 2022 | Prior comparable period | Change |
|---|---|---|---|
| Net sales | $1,476.0 million | $1,415.0 million | +4.3% |
| Comparable sales | +5.1% | +28.4% | Slower growth |
| Gross profit / margin | $607.7 million / 41.2% | $597.0 million / 42.2% | Profit +1.8%; margin down 1.0 percentage point |
| Operating income / margin | $49.9 million / 3.4% | $47.7 million / 3.4% | +4.6% |
| Net income attributable to Class A and B-1 common stockholders | $24.7 million; $0.09 per diluted share | $7.6 million; $0.03 per diluted share | +226.6% |
| Adjusted EBITDA / margin | $132.6 million / 9.0% | $125.7 million / 8.9% | +5.4% |
| Operating cash flow | $57.5 million | $115.0 million | Down $57.5 million |
| Capital expenditures / free cash flow | $65.9 million / ($8.4) million | $47.4 million / $67.7 million | Free cash flow decreased |
Consumables sales rose 15.3% to $685.9 million and services and other rose 18.1% to $190.9 million; supplies and companion-animal sales fell 9.0% to $599.2 million. E-commerce sales increased 10.5% and services sales increased 18.9%.
Liquidity, debt and balance sheet
At April 30, 2022, cash and cash equivalents were $190.9 million and reported liquidity was $629.7 million, including $438.8 million available under the ABL revolving credit facility. The $1.7 billion secured term loan had $1.683 billion principal outstanding, a 4.3% weighted-average interest rate and quarterly principal payments of $4.25 million. No revolving borrowings were outstanding; $61.2 million of letters of credit reduced availability. The company reported compliance with debt covenants. Cash, cash equivalents and restricted cash declined $23.7 million during the quarter.
Material changes, outlook and risks
- Sales growth reflected consumables, new-pet demand, digital initiatives and veterinary and grooming services. Management cited inflation and selective pricing actions, while noting some softening in discretionary spending.
- Gross margin declined primarily because of the sales mix shift toward consumables, channel mix and moderately higher distribution costs. SG&A rose in dollars to support growth and investment, but declined as a share of sales from 38.8% to 37.8%.
- Net income rose substantially in part because the prior-year period included a $20.8 million loss on debt refinancing; there was no comparable charge this quarter. Interest expense also decreased modestly.
- Operating cash flow fell amid higher payroll and benefits, inventory spending and interest-payment timing. Capital expenditures increased, primarily for veterinary hospitals, digital assets and innovation.
- Management said existing resources, anticipated operating cash flows and revolver capacity should fund operations and planned capital investment for at least 12 months. The filing provides no specific full-year revenue or earnings guidance.
- In May 2022, after quarter-end, Petco paid $35.0 million to acquire the remaining 50% of its veterinary joint venture, making it wholly owned.
- Key stated risks include inflation and broader macroeconomic uncertainty, supply-chain disruption, labor availability and costs, competition, consumer demand, vendor dependence, variable interest rates, technology and cybersecurity, and legal or regulatory developments. Ordinary-course litigation was not expected by management to have a material adverse effect, but outcomes are uncertain.
Important facts for investors to verify
- Whether the slower comparable-sales growth and decline in discretionary-category sales persist.
- Whether pricing and operating leverage can offset inflation, distribution costs and the lower reported gross margin.
- Whether cash generation improves after the quarter’s lower operating cash flow and elevated capital spending.
- The effect of variable rates on debt costs; management estimated a 100-basis-point rate increase would add approximately $17.1 million to annual cash interest.
- The financial and operational impact of the post-quarter $35.0 million veterinary joint-venture buyout.
- Adjusted EBITDA and free cash flow are non-GAAP measures; review the filing’s definitions and reconciliations alongside GAAP results.