Petco Health + Wellness Company, Inc. Reports Second Quarter Earnings

August 24, 2023

Q2 2023 Operating Results

  • Comparable sales grew 3.2 percent year-over-year and 7.0 percent on a two-year basis, resulting in the 19th consecutive quarter of comparable sales growth
  • Net revenue of $1.53 billion increased 3.4 percent year-over-year
  • Net loss of $14.6 million, or $(0.05) per share compared to net income of $13.5 million, or $0.05 per share in the prior year
  • Adjusted Net Income1 decreased $27.2 million to $16.3 million
  • Adjusted EBITDA1 of $112.6 million compared to $133.5 million in the prior year
  • Adjusted Earnings Per Share1 of $0.06, compared to $0.16 per share in the prior year
  • Operating Cash Flow of $96.6 million compared to $42.6 million in the prior year
  • Free Cash Flow1 of $44.6 million, compared to $(27.7) million in the prior year

SAN DIEGO, Aug. 24, 2023 /PRNewswire/ -- Petco Health and Wellness Company, Inc. (Nasdaq: WOOF), a complete partner in pet health and wellness, today announced its second quarter 2023 financial results.    

In the second quarter of 2023, Petco delivered net revenue of $1.53 billion, up 3.4 percent versus prior year, driven by strength in the company's consumables business, up 6.8 percent versus prior year, and services and other business, up 30.6 percent versus prior year.  Second quarter revenue growth was partially offset by the company's supplies and companion animal business, down 9.4 percent versus prior year.  Net loss was $14.6 million or $(0.05) per share, driven in part by a $0.04 per share increase in interest expense year-over-year, compared to net income of $13.5 million or $0.05 per share in the prior year.  Adjusted Net Income1 was $16.3 million or $0.06 per share, compared to $43.5 million or $0.16 per share in the prior year.  Adjusted EBITDA1 was $112.6 million compared to $133.5 million in the prior year.

"We continue to focus on execution through an uncertain environment, delivering our 19th consecutive quarter of comp sales growth, with ongoing strength in consumables and services, particularly in vet," said Petco CEO Ron Coughlin. "With discretionary spending continuing to be pressured, we're taking numerous strategic actions to strengthen our business, including initiatives to unlock a targeted $150 million in cost savings and productivity enhancements by the end of fiscal 2025. These actions, combined with the enduring competitive advantages of our differentiated offering, will position us even better to deliver sustainable and profitable growth for the long term."

"In Q2, we delivered solid top line results and strong free cash flow," said Petco CFO Brian LaRose. "That said, the shift in consumer spending and pressures on our discretionary business mean we're revising our guidance accordingly. Looking ahead, we remain focused on debt paydown and cash flow, both of which will be supported by our productivity initiatives in addition to tightly controlled expense management." 

In the second quarter of 2023, Petco paid down $25 million in principal on its term loan.  In August, the company further paid down an additional $15 million in principal on its term loan for a total of $75 million in principal payments year-to-date.  The company continues to target a total of $100 million in principal payments for fiscal 2023 and remains committed to strengthening its balance sheet through de-levering.

The company also initiated a cost action plan in the quarter and estimates annualized gross run rate cost savings of $150 million by the end of fiscal 2025, from merchandise, supply chain, and G&A categories.  In year one, the company expects to achieve $40 million in savings. In Q2 2023, the company recorded $6 million in headcount reduction-related charges related to the cost action plan.

(1)

Adjusted EBITDA, Adjusted Net Income, Adjusted Earnings Per Share ("Adjusted EPS"), and Free Cash Flow are non-GAAP financial measures. See "Non-GAAP Financial Measures" for additional information on non-GAAP financial measures and a reconciliation to the most comparable GAAP measures.

Fiscal 2023 Guidance:

The company is updating its fiscal 2023 guidance for Adjusted EBITDA, Adjusted EPS and Capital Expenditures and now expects:

Metric*

2023 Guidance

Net Revenue

$6.150 billion to $6.275 billion

Adjusted EBITDA

$460 million to $480 million

Adjusted EPS

$0.24 to $0.30

Capital Expenditures

$215 million to $225 million

 

*Assumptions in the guidance include that economic conditions, currency rates and the tax and regulatory landscape remain generally consistent. Adjusted EPS guidance assumes approximately $145 to $155 million of interest expense, an estimated $43 to $53 million increase in interest expense year-over-year, a 26 percent tax rate, and a 269 million weighted average diluted share count. The Company estimates that the increase in interest expense will impact Adjusted EPS by approximately $0.12 to $0.15 per share.  Furthermore, Fiscal 2023 will be a 53-week year, leading to an incremental week of operations.  Adjusted EBITDA and Adjusted EPS are non-GAAP financial measures and have not been reconciled to the most comparable GAAP outlook because it is not possible to do so without unreasonable efforts due to the uncertainty and potential variability of reconciling items, which are dependent on future events and often outside of management's control and which could be significant. Because such items cannot be reasonably predicted with the level of precision required, we are unable to provide outlook for the comparable GAAP measures. Forward-looking estimates of Adjusted EBITDA and Adjusted EPS are made in a manner consistent with the relevant definitions and assumptions noted herein and in our filings with the Securities and Exchange Commission.

Earnings Conference Call Webcast Information:

Management will host an earnings conference call on August 24, 2023 at 8:00 AM Eastern Time to discuss the company's financial results.  The conference call will be accessible through a live webcast. Interested investors and other individuals can access the webcast, earnings release, earnings presentation, and infographic via the company's investor relations page at ir.petco.com. A replay of the webcast will be archived on the company's investor relations page through September 7, 2023 until approximately 5:00PM Eastern Time.

About Petco, The Health + Wellness Co.:

Founded in 1965, Petco is a category-defining health and wellness company focused on improving the lives of pets, pet parents and our own Petco partners. We've consistently set new standards in pet care while delivering comprehensive pet wellness products, services and solutions, and creating communities that deepen the pet-pet parent bond. We operate more than 1,500 pet care centers across the U.S., Mexico and Puerto Rico, which offer merchandise, companion animals, grooming, training and a growing network of on-site veterinary hospitals and mobile veterinary clinics. Our complete pet health and wellness ecosystem is accessible through our pet care centers and digitally at petco.com and on the Petco app. In tandem with Petco Love, a life-changing organization, we work with and support thousands of local animal welfare groups across the country and, through in-store adoption events, we've helped find homes for nearly 7 million animals.

Forward-Looking Statements:

This earnings release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 as contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not statements of historical fact, including statements regarding our fiscal year 2023 guidance. Such forward-looking statements can generally be identified by the use of forward-looking terms such as "believes," "expects," "may," "intends," "will," "shall," "should," "anticipates," "opportunity," "illustrative," or the negative thereof or other variations thereon or comparable terminology. Although Petco believes that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to be correct or that any forward-looking results will occur or be realized. Nothing contained in this earnings release is, or should be relied upon as, a promise or representation or warranty as to any future matter, including any matter in respect of the operations or business or financial condition of Petco. All forward-looking statements are based on current expectations and assumptions about future events that may or may not be correct or necessarily take place and that are by their nature subject to significant uncertainties and contingencies, many of which are outside the control of Petco. Forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause actual results or events to differ materially from the potential results or events discussed in the forward-looking statements, including, without limitation, those identified in this earnings release as well as the following: (i) increased competition (including from multi-channel retailers and e-Commerce providers); (ii) reduced consumer demand for our products and/or services; (iii) our reliance on key vendors; (iv) our ability to attract and retain qualified employees; (v) risks arising from statutory, regulatory and/or legal developments; (vi) macroeconomic pressures in the markets in which we operate, including inflation and prevailing interest rates; (vii) failure to effectively manage our costs; (viii) our reliance on our information technology systems; (ix) our ability to prevent or effectively respond to a data privacy or security breach; (x) our ability to effectively manage or integrate strategic ventures, alliances or acquisitions and realize the anticipated benefits of such transactions; (xi) economic or regulatory developments that might affect our ability to provide attractive promotional financing; (xii) business interruptions and other supply chain issues; (xiii) catastrophic events, political tensions, conflicts and wars (such as the ongoing conflict in Ukraine), health crises, and pandemics; (xiv) our ability to maintain positive brand perception and recognition; (xv) product safety and quality concerns; (xvi) changes to labor or employment laws or regulations; (xvii) our ability to effectively manage our real estate portfolio; (xviii) constraints in the capital markets or our vendor credit terms; (xix) changes in our credit ratings; and (xx) the other risks, uncertainties and other factors identified under "Risk Factors" and elsewhere in Petco's Securities and Exchange Commission filings. The occurrence of any such factors could significantly alter the results set forth in these statements.

Petco cautions that the foregoing list of risks, uncertainties and other factors is not complete, and forward-looking statements speak only as of the date they are made. Petco undertakes no duty to update publicly any such forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required by applicable law, regulation or other competent legal authority.

 

PETCO HEALTH AND WELLNESS COMPANY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited and subject to reclassification)












13 Weeks Ended




July 29,
2023


July 30,
2022


Percent
Change


Net sales


$     1,530,734


$     1,480,797


3 %


Cost of sales


937,730


886,320


6 %


Gross profit


593,004


594,477


(0 %)


Selling, general and administrative expenses


568,967


544,472


4 %


Operating income


24,037


50,005


(52 %)


Interest income


(764)


(137)


458 %


Interest expense


37,493


21,820


72 %


Loss on partial extinguishment of debt


305



N/M


Other non-operating (income) loss


(1,795)


10,259


N/M


(Loss) income before income taxes and income from
   equity method investees


(11,202)


18,063


N/M


Income tax expense


6,732


6,638


1 %


Income from equity method investees


(3,328)


(2,031)


64 %


Net (loss) income


(14,606)


13,456


N/M


Net loss attributable to noncontrolling interest




N/M


Net (loss) income attributable to Class A and B-1 common
   stockholders


$        (14,606)


$          13,456


N/M










Net (loss) income per Class A and B-1 common share:








Basic


$            (0.05)


$             0.05


N/M


Diluted


$            (0.05)


$             0.05


N/M










Weighted average shares used in computing net (loss) income per Class A
   and B-1 common share:








Basic


267,163


265,431


1 %


Diluted


267,163


265,835


0 %










 

PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited and subject to reclassification)






July 29,
2023



January 28,
2023


ASSETS







Current assets:







Cash and cash equivalents


$

173,014



$

201,901


Receivables, less allowance for credit losses1



66,258




49,580


Merchandise inventories, net



675,441




652,430


Prepaid expenses



54,880




51,274


Other current assets



55,247




60,809


Total current assets



1,024,840




1,015,994


Fixed assets



2,090,367




1,987,560


Less accumulated depreciation



(1,270,141)




(1,184,233)


Fixed assets, net



820,226




803,327


Operating lease right-of-use assets



1,401,834




1,397,761


Goodwill



2,196,664




2,193,941


Trade name



1,025,000




1,025,000


Other long-term assets



193,698




176,806


Total assets


$

6,662,262



$

6,612,829


LIABILITIES AND EQUITY







Current liabilities:







Accounts payable and book overdrafts


$

477,748



$

381,213


Accrued salaries and employee benefits



90,796




89,929


Accrued expenses and other liabilities



219,910




217,556


Current portion of operating lease liabilities



281,415




309,766


Current portion of long-term debt and other lease liabilities



5,077




22,794


Total current liabilities



1,074,946




1,021,258


Senior secured credit facilities, net, excluding current portion



1,588,523




1,628,331


Operating lease liabilities, excluding current portion



1,159,696




1,148,155


Deferred taxes, net



294,094




303,121


Other long-term liabilities



130,239




130,487


Total liabilities



4,247,498




4,231,352


Commitments and contingencies







Stockholders' equity:







Class A common stock2



230




228


Class B-1 common stock3



38




38


Class B-2 common stock4







Preferred stock5







Additional paid-in-capital



2,196,235




2,152,342


Retained earnings



216,470




232,967


Accumulated other comprehensive income (loss)



1,791




(4,098)


Total stockholders' equity



2,414,764




2,381,477


Total liabilities and stockholders' equity


$

6,662,262



$

6,612,829




(1)

Allowances for credit losses are $1,164 and $952, respectively

(2)

Class A common stock, $0.001 par value: Authorized - 1.0 billion shares; Issued and outstanding - 229.8 million and 228.3 million shares, respectively

(3)

Class B-1 common stock, $0.001 par value: Authorized - 75.0 million shares; Issued and outstanding - 37.8 million shares

(4)

Class B-2 common stock, $0.000001 par value: Authorized - 75.0 million shares; Issued and outstanding - 37.8 million shares

(5)

Preferred stock, $0.001 par value: Authorized - 25.0 million shares; Issued and outstanding - none

 

PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited and subject to reclassification)






26 Weeks Ended




July 29,
2023



July 30,
2022


Cash flows from operating activities:







Net (loss) income


$

(16,498)



$

37,258


Adjustments to reconcile net (loss) income to net cash provided by
  operating activities:







Depreciation and amortization



97,919




95,570


Amortization of debt discounts and issuance costs



2,446




2,456


Provision for deferred taxes



(11,002)




9,216


Equity-based compensation



46,248




25,117


Impairments, write-offs and losses on sale of fixed and other assets



1,035




1,369


Loss on partial extinguishment of debt



746





Amounts reclassified out of accumulated other comprehensive income (loss)



1,055





Income from equity method investees



(6,458)




(5,194)


Non-cash operating lease costs



211,576




210,946


Other non-operating (income) loss



(4,614)




9,945


Changes in assets and liabilities:







Receivables



(16,679)




10,856


Merchandise inventories



(23,011)




(48,225)


Prepaid expenses and other assets



(14,237)




(21,932)


Accounts payable and book overdrafts



97,062




12,626


Accrued salaries and employee benefits



1,221




(37,345)


Accrued expenses and other liabilities



(1,238)




5,148


Operating lease liabilities



(232,518)




(205,884)


Other long-term liabilities



1,212




(1,839)


Net cash provided by operating activities



134,265




100,088


Cash flows from investing activities:







Cash paid for fixed assets



(114,023)




(136,190)


Cash paid for acquisitions, net of cash acquired



(2,040)




(2,888)


Cash paid for interest in veterinary joint venture






(35,000)


Proceeds from investment



10,248





Proceeds from sale of assets






2,127


Net cash used in investing activities



(105,815)




(171,951)


Cash flows from financing activities:







Borrowings under long-term debt agreements






4,000


Repayments of long-term debt



(60,000)




(12,500)


Payments for finance lease liabilities



(3,349)




(2,964)


Proceeds from employee stock purchase plan and stock option exercises



2,454




2,591


Tax withholdings on stock-based awards



(4,873)




(13,461)


Net cash used in financing activities



(65,768)




(22,334)









Net decrease in cash, cash equivalents and restricted cash



(37,318)




(94,197)


Cash, cash equivalents and restricted cash at beginning of period



213,727




221,890


Cash, cash equivalents and restricted cash at end of period


$

176,409



$

127,693


 

NON-GAAP FINANCIAL MEASURES

The following information provides definitions and reconciliations of the non-GAAP financial measures presented in this earnings release to the most directly comparable financial measures calculated and presented in accordance with generally accepted accounting principles (GAAP). The company has provided this non-GAAP financial information, which is not calculated or presented in accordance with GAAP, as information supplemental and in addition to the financial measures presented in this earnings release that are calculated and presented in accordance with GAAP. Such non-GAAP financial measures should not be considered superior to, as a substitute for or alternative to, and should be considered in conjunction with, the GAAP financial measures presented in this earnings release. The non-GAAP financial measures in this earnings release may differ from similarly titled measures used by other companies.

The tables below reflect the calculation of Adjusted EBITDA (include Trailing Twelve Month Adjusted EBITDA), Adjusted Net Income, Adjusted EPS, and Free Cash Flow, for the thirteen weeks ended July 29, 2023, compared to the thirteen weeks ended July 30, 2022 as well as the twelve-month period ended January 28, 2023.

Adjusted EBITDA and Trailing Twelve Month Adjusted EBITDA

Adjusted EBITDA, including Trailing Twelve Month Adjusted EBITDA, is considered a non-GAAP financial measure under the Securities and Exchange Commission's (SEC) rules because it excludes certain amounts included in net income calculated in accordance with GAAP. Management believes that Adjusted EBITDA is a meaningful measure to share with investors because it facilitates comparison of the current period performance with that of the comparable prior period. In addition, Adjusted EBITDA affords investors a view of what management considers to be Petco's core operating performance as well as the ability to make a more informed assessment of such operating performance as compared with that of the prior period. Please see the company's Annual Report on Form 10-K for the fiscal year ended January 28, 2023 filed with the SEC on March 28, 2023 for additional information on Adjusted EBITDA.







(dollars in thousands)


13 Weeks Ended


Reconciliation of Net (Loss) Income Attributable to Class A and B-1
   Common Stockholders to Adjusted EBITDA


July 29,
2023


July 30,
2022


Net (loss) income attributable to Class A and B-1 common stockholders


$     (14,606)


$      13,456


Add (deduct):






Interest expense, net


36,729


21,683


Income tax expense


6,732


6,638


Depreciation and amortization


48,664


48,603


Income from equity method investees


(3,328)


(2,031)


Loss on partial extinguishment of debt


305



Asset impairments and write offs


1,031


1,207


Equity-based compensation


24,119


12,895


Other non-operating (income) loss


(1,795)


10,259


Mexico joint venture EBITDA (1)


8,544


6,501


Acquisition-related integration costs (2)



10,859


Other costs (3)


6,183


3,427


Adjusted EBITDA


$    112,578


$    133,497


Net sales


$ 1,530,734


$ 1,480,797


Net margin (4)


(1.0 %)


0.9 %


Adjusted EBITDA Margin


7.4 %


9.0 %


 

(dollars in thousands)


Trailing Twelve Months


Reconciliation of Net Income Attributable to Class A and B-1
   Common Stockholders to Adjusted EBITDA


July 29,
2023



January 28,
2023



July 30,
2022


Net income attributable to Class A and B-1 common stockholders


$

36,154



$

90,801



$

119,895


Add (deduct):










Interest expense, net



132,068




100,611




78,932


Income tax expense



24,433




35,347




40,422


Depreciation and amortization



196,177




193,828




185,156


Income from equity method investees



(14,240)




(12,976)




(11,224)


Loss on partial extinguishment of debt



746








Asset impairments and write offs



1,658




1,992




9,597


Equity-based compensation



81,915




60,784




51,272


Other non-operating (income) loss



(1,892)




12,667




20,609


Mexico joint venture EBITDA (1)



33,583




29,584




28,254


Acquisition-related integration costs (2)



2,219




15,314




13,095


Other costs (3)



8,860




2,817




3,448


Adjusted EBITDA


$

501,681



$

530,769



$

539,456


Net sales


$

6,165,821



$

6,035,967



$

5,914,409


Net margin (4)



0.6

%



1.5

%



2.0

%

Adjusted EBITDA Margin



8.1

%



8.8

%



9.1

%

 

Adjusted Net Income and Adjusted EPS

Adjusted Net Income and Adjusted diluted Earnings Per Share attributable to Petco common stockholders (Adjusted EPS) are considered non-GAAP financial measures under the SEC's rules because they exclude certain amounts included in the net income attributable to Petco common stockholders and diluted earnings per share attributable to Petco common stockholders calculated in accordance with GAAP. Management believes that Adjusted Net Income and Adjusted EPS are meaningful measures to share with investors because they facilitate comparison of the current period performance with that of the comparable prior period. In addition, Adjusted Net Income and Adjusted EPS afford investors a view of what management considers to be Petco's core earnings performance as well as the ability to make a more informed assessment of such earnings performance with that of the prior period.

(in thousands, except per share amounts)


13 Weeks Ended


Reconciliation of Diluted EPS to Adjusted EPS


July 29, 2023



July 30, 2022




Amount



Per share



Amount



Per share


Net (loss) income attributable to common stockholders / diluted EPS


$

(14,606)



$

(0.05)



$

13,456



$

0.05


Add (deduct):













Income tax expense



6,732




0.02




6,638




0.02


Loss on partial extinguishment of debt



305




0.00








Asset impairments and write offs



1,031




0.01




1,207




0.01


Equity-based compensation



24,119




0.09




12,895




0.05


Other non-operating (income) loss



(1,795)




(0.01)




10,259




0.04


Acquisition-related integration costs (2)









10,859




0.04


Other costs (3)



6,183




0.02




3,427




0.01


Adjusted pre-tax income / diluted earnings per share


$

21,969



$

0.08



$

58,741



$

0.22


Income tax expense at 26% normalized tax rate



5,712




0.02




15,273




0.06


Adjusted Net Income / Adjusted EPS


$

16,257



$

0.06



$

43,468



$

0.16


 

Free Cash Flow

Free Cash Flow is a non-GAAP financial measure that is calculated as net cash provided by operating activities less cash paid for fixed assets. Management believes that Free Cash Flow, which measures the ability to generate additional cash from business operations, is an important financial measure for use in evaluating the company's financial performance.







(in thousands)


13 Weeks Ended




July 29,
2023


July 30,
2022


Net cash provided by operating activities


$      96,614


$      42,569


Cash paid for fixed assets


(51,973)


(70,280)


Free Cash Flow


$      44,641


$     (27,711)


 

Non-GAAP Financial Measures Footnotes

(1)

Mexico Joint Venture EBITDA represents 50 percent of the entity's operating results for all periods, as adjusted to reflect the results on a basis comparable to Adjusted EBITDA. In the financial statements, this joint venture is accounted for as an equity method investment and reported net of depreciation and income taxes because such a presentation would not reflect the adjustments made in the calculation of Adjusted EBITDA, we include the 50 percent interest in the company's Mexico joint venture on an Adjusted EBITDA basis to ensure consistency. The table below presents a reconciliation of Mexico joint venture net income to Mexico joint venture EBITDA.





13 Weeks Ended


(in thousands)


July 29,
2023


July 30,
2022


Net income


$        6,656


$        4,064


Depreciation


6,443


4,711


Income tax expense


2,364


2,390


Foreign currency loss


395


444


Interest expense, net


1,230


1,392


EBITDA


$      17,088


$      13,001


50% of EBITDA


$        8,544


$        6,501




(2)

Acquisition-related integration costs include direct costs resulting from acquiring and integrating businesses. These include third-party professional and legal fees and other integration-related costs that would not have otherwise been incurred as part of the company's operations.

(3)

Other costs include, as incurred: restructuring costs and restructuring-related severance costs; legal reserves associated with significant, non-ordinary course legal or regulatory matters; and costs related to certain significant strategic transactions.

(4)

We define net margin as net income attributable to Class A and B-1 common stockholders divided by net sales and Adjusted EBITDA margin as Adjusted EBITDA divided by net sales.

 

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SOURCE Petco - Investor Relations

Investor Relations, Cathy Yao, cathy.yao@petco.com; Media Relations: Benjamin Thiele-Long, benjamin.thiele-long@petco.com