Business context and reporting period
Petco Health & Wellness Company, Inc. operates a multichannel pet-care retail, digital, veterinary and services business, with more than 1,450 pet care centers and 137 in-store veterinary hospitals reported at quarter-end. This Form 10-Q covers the 13 weeks ended May 1, 2021; despite the request metadata, it is not a quarter ended in 2020. The comparable period ended May 2, 2020.
Financial performance
| Metric | 13 weeks ended May 1, 2021 | Comparable period |
|---|---|---|
| Net sales | $1,415.0 million | $1,113.5 million |
| Comparable sales growth | 28.4% | 2.1% |
| Gross profit / margin | $597.0 million / 42.2% | $466.3 million / 41.9% |
| Operating income / margin | $47.7 million / 3.4% | $16.4 million / 1.5% |
| Net income (loss) attributable to Class A and B-1 stockholders | $7.6 million; $0.03 per share | $(31.2) million; $(0.15) per share |
| Adjusted EBITDA / margin | $125.7 million / 8.9% | $86.8 million / 7.8% |
| Cash from (used in) operating activities | $115.0 million | $(32.3) million |
| Free cash flow | $67.7 million | $(60.2) million |
Sales increased 27.1%. Supplies and companion animal sales rose 33.3%, dog and cat food 13.2%, and services and other 71.9%. E-commerce and digital sales increased 21.2%; store sales rose 26.1%. The company attributed growth to execution across channels, increased pet ownership and spending, and government stimulus payments. The services comparison also benefited from the prior-year temporary suspension of some grooming, training and clinic services.
Liquidity, debt and cash flow
At May 1, 2021, cash and cash equivalents were $174.0 million and total liquidity was $594.5 million, including $420.5 million available under the asset-based revolving facility. The company reported total debt of $1,682.9 million, including finance leases, and net debt of $1,508.9 million. The new term loan had $1.7 billion principal outstanding; no revolver borrowings were outstanding. The company said it was covenant-compliant and believed resources and expected cash flows were sufficient for operations and planned investment for at least 12 months.
Operating cash flow improved to $115.0 million, while capital expenditures were $47.4 million. Cash increased by $60.4 million during the quarter, to $174.0 million on the balance sheet (cash, cash equivalents and restricted cash totaled $180.0 million for cash-flow reporting). The March refinancing resulted in $20.8 million of debt extinguishment and modification expense. The new term loan matures in 2028, has variable rates, and requires quarterly principal payments of $4.25 million beginning June 30, 2021. A 100-basis-point rate increase would raise annual cash interest by approximately $17.2 million, based on quarter-end debt and facility terms.
Material changes, outlook and risks
- Gross margin improved 0.3 percentage points and SG&A declined to 38.8% of sales from 40.4%, reflecting operating leverage; SG&A dollars rose 22.1%, including a $40.7 million increase in advertising.
- Interest expense fell to $20.5 million from $60.8 million, principally following earlier debt repayment and note redemptions. The March 2021 refinancing generated the $20.8 million one-time debt-related loss.
- The filing provides no specific forward revenue, profit or comparable-sales guidance. Management cited favorable pandemic-related pet ownership and spending trends but emphasized uncertainty about COVID-19’s duration and economic effects.
- Key risks include pandemic-related demand and operating uncertainty; vendor and product-supply disruption; higher commodity costs and inability to pass them through; variable-rate debt exposure; payment fraud, data security and Petco Pay credit performance; and litigation. Management said vendor disruptions had not materially affected results to date and did not expect existing litigation to have a material adverse effect, while noting outcomes remain uncertain.
- On June 1, 2021, the principal stockholder sold 22 million existing shares at $24 per share; Petco received no proceeds. Management concluded disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether exceptional comparable-sales growth and pandemic-related tailwinds persist as prior-year comparisons normalize and stimulus effects fade.
- Whether sales growth translates into durable margins given higher advertising, labor, supply-chain and merchandise costs.
- Debt terms, variable-rate exposure, future required repayments, and the availability of the borrowing-base-limited revolver.
- Whether services and digital growth continue, including the economics of expanding veterinary hospitals and other services.
- Potential impacts of vendor disruptions, commodity inflation, payment-program credit losses, and the uncertain COVID-19 outlook.