Business context and reporting period
Petco operates more than 1,500 locations, an e-commerce platform and in-store veterinary hospitals, reporting as one operating segment. Although the request metadata says “2020 Q2,” this filing is for the 13 weeks ended July 31, 2021 (fiscal 2021 Q2), with the 13 weeks ended August 1, 2020 as the comparable period. Year-to-date figures cover 26 weeks.
Key financial metrics
Amounts below are in millions of dollars, except percentages, per-share data and ratios.
| Metric | Q2 2021 | Q2 2020 | 26 weeks 2021 | 26 weeks 2020 |
|---|---|---|---|---|
| Net sales | $1,434.5 | $1,209.0 | $2,849.5 | $2,322.5 |
| Gross profit / margin | $599.4 / 41.8% | $529.8 / 43.8% | $1,196.4 / 42.0% | $996.0 / 42.9% |
| Operating income / margin | $73.5 / 5.1% | $65.0 / 5.4% | $121.2 / 4.3% | $81.4 / 3.5% |
| Net income (loss) attributable to Class A and B-1 holders | $75.1 | $7.4 | $82.7 | $(23.7) |
| Adjusted EBITDA / margin | $155.1 / 10.8% | $130.8 / 10.8% | $280.8 / 9.9% | $217.6 / 9.4% |
| Diluted EPS | $0.28 | $0.04 | $0.31 | $(0.11) |
For the 26 weeks, operating cash flow was $202.4 million versus $92.4 million; capital expenditures were $99.9 million versus $50.0 million; and company-defined free cash flow was $102.5 million versus $42.3 million.
At July 31, 2021, cash and cash equivalents were $203.4 million. Reported liquidity was $644.5 million, including $441.1 million of available ABL capacity. The term loan principal was $1,695.8 million; the $500 million ABL revolver had no borrowings outstanding. Net debt was $1,475.2 million and net debt/Adjusted EBITDA was 2.7x, compared with 6.9x at August 1, 2020. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Q2 sales rose 18.7% and comparable sales increased 19.7%; six-month sales rose 22.7% and comparable sales increased 23.9%.
- Q2 growth included consumables sales up 24.3%, supplies and companion animals up 8.3%, and services and other up 52.8%. Management cited new pet ownership, execution across digital and stores, and recovery in services. Digital sales increased 14.3% in Q2 and 17.9% year to date.
- Gross margin declined 2.0 percentage points in Q2 and 0.9 points year to date. Management attributed the pressure to a shift toward lower-margin consumables, channel mix, and moderately higher distribution costs.
- SG&A increased in dollars but fell as a share of sales to 36.7% from 38.4% in Q2 and to 37.7% from 39.4% year to date, reflecting operating leverage. Advertising spending was up $45.5 million year to date.
- Interest expense fell to $19.2 million from $54.5 million in Q2 and to $39.7 million from $115.3 million year to date, primarily following debt reduction and refinancing. Operating cash flow also benefited from lower interest payments and working-capital effects.
- Reported Q2 net income includes a $45.2 million non-cash gain from remeasurement of Petco’s Rover investment. Year-to-date results also include a $20.8 million debt extinguishment and modification loss.
- Pet care centers numbered 1,451 versus 1,474 a year earlier; centers with veterinary practices increased to 155 from 93.
Outlook, commentary, risks and unusual items
The filing provides no specific earnings or sales guidance. Management said cash, expected operating cash flows and available revolver capacity should be sufficient for operations, current requirements and anticipated capital investments for at least the next 12 months. It noted that additional financing may be sought, with no assurance it will be available on favorable terms or at all.
Management said pandemic-era increases in pet ownership and spending had supported results, but the duration and severity of COVID-19 and its economic effects remained uncertain. The filing also highlights variable-rate debt exposure: a 100-basis-point increase in rates would have increased annual cash interest by approximately $17.2 million. Cash deposits were described as likely exceeding insured limits. Ordinary-course litigation remains pending; the company said it did not expect current matters to have a material adverse effect, while noting outcomes are uncertain. SG&A included a class-action settlement accrual and higher IPO-related stock compensation.
The March 2021 refinancing established a $1.7 billion term loan maturing in 2028 and a $500 million ABL facility maturing in 2026. Management reported no material changes to risk factors from its prior quarterly filing. Disclosure controls were deemed effective at a reasonable assurance level as of July 31, 2021.
Important facts for investors to verify
- Confirm the intended period: this is fiscal Q2 2021, not Q2 2020.
- Assess how much reported earnings growth depends on the $45.2 million non-cash Rover gain and other adjustments used in Adjusted EBITDA.
- Monitor gross-margin trends, product and channel mix, distribution costs, and whether strong comparable sales persist against pandemic-era comparisons.
- Review debt terms, variable-rate exposure, covenant compliance, and the borrowing-base conditions governing reported ABL availability.
- Track inventory and capital spending: inventory rose to $628.5 million from $538.7 million at fiscal year-end, while year-to-date capital expenditures nearly doubled year over year.
- Follow COVID-19 developments, litigation and settlement exposure, and the company’s ability to sustain liquidity and cash generation.