Petco Health and Wellness pany(WOOF) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Unaudited statements show a slight revenue decline, a wider net loss, and reduced cash flow from operations Consolidated Balance Sheets Total assets and stockholders' equity decreased slightly, driven primarily by an increased accumulated deficit Consolidated Balance Sheet Highlights (In thousands) | Account | August 3, 2024 | February 3, 2024 | | :--- | :--- | :--- | | Total current assets | $941,893 | $951,744 | | Total assets | $5,276,647 | $5,363,152 | | Total current liabilities | $1,117,851 | $1,113,143 | | Total liabilities | $4,145,164 | $4,178,723 | | Total stockholders' equity | $1,131,483 | $1,184,429 | Consolidated Statements of Operations The company reported a wider net loss on slightly lower net sales, with a sharp decline in operating income Statement of Operations Summary (In thousands, except per share data) | Metric | Thirteen Weeks Ended Aug 3, 2024 | Thirteen Weeks Ended Jul 29, 2023 | | :--- | :--- | :--- | | Total net sales | $1,523,755 | $1,530,734 | | Gross profit | $580,725 | $593,004 | | Operating income (loss) | $2,468 | $24,037 | | Net loss | $(24,823) | $(14,606) | | Diluted loss per share | $(0.09) | $(0.05) | Consolidated Statements of Cash Flows Net cash from operations decreased significantly year-over-year, while investing and financing cash outflows also reduced Cash Flow Summary (In thousands) | Activity | Twenty-six Weeks Ended Aug 3, 2024 | Twenty-six Weeks Ended Jul 29, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $60,956 | $134,265 | | Net cash used in investing activities | $(58,065) | $(105,815) | | Net cash used in financing activities | $(5,894) | $(65,768) | | Net decrease in cash | $(3,003) | $(37,318) | Notes to Unaudited Consolidated Financial Statements Notes detail revenue mix changes, credit facility amendments, interest rate hedging, and impairment testing results Net Sales by Type (In thousands) | Category | Thirteen Weeks Ended Aug 3, 2024 | Thirteen Weeks Ended Jul 29, 2023 | | :--- | :--- | :--- | | Consumables | $744,766 | $734,077 | | Supplies and companion animals | $518,983 | $544,521 | | Services and other | $260,006 | $252,136 | | Total Net Sales | $1,523,755 | $1,530,734 | - In March 2024, the company amended its ABL Revolving Credit Facility, increasing total availability from $500.0 million to $581.0 million and extending the maturity on a portion of the facility to March 29, 2029[25][30] - The company uses interest rate caps, collars, and a new swap agreement to hedge its exposure to interest rate variability on its variable-rate debt[19][21][22] - Due to a decline in share price, an interim impairment test was performed on goodwill and the trade name in Q1 2024; no impairment was recorded as the estimated fair values exceeded carrying values[40][41] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a sales mix shift that pressured margins, higher SG&A, and a drop in Adjusted EBITDA Results of Operations A 0.5% net sales decrease was driven by softer supplies sales, which also contracted the gross profit margin Q2 Net Sales Performance (dollars in thousands) | Category | Q2 2024 Sales | Q2 2023 Sales | % Change | | :--- | :--- | :--- | :--- | | Consumables | $744,766 | $734,077 | 1.5% | | Supplies and companion animals | $518,983 | $544,521 | (4.7%) | | Services and other | $260,006 | $252,136 | 3.1% | | Total Net Sales | $1,523,755 | $1,530,734 | (0.5%) | - Comparable sales increased by 0.3% in Q2 2024, a deceleration from the 3.2% growth in Q2 2023[59] - The decrease in gross profit rate was primarily due to the mix impact of higher consumables and services sales and softer supplies and companion animal sales[62] - The increase in SG&A expenses was driven by higher pet care center payroll and fringe benefits and depreciation expense, partially offset by lower stock compensation and advertising expenses[63] Reconciliation of Non-GAAP Financial Measures Non-GAAP measures show a 25.8% decrease in Adjusted EBITDA and a significant drop in Free Cash Flow Adjusted EBITDA Reconciliation (In thousands) | Metric | Thirteen Weeks Ended Aug 3, 2024 | Thirteen Weeks Ended Jul 29, 2023 | | :--- | :--- | :--- | | Net loss | $(24,823) | $(14,606) | | Adjustments (Interest, Tax, D&A, etc.) | $108,346 | $127,184 | | Adjusted EBITDA | $83,523 | $112,578 | | Adjusted EBITDA Margin | 5.5% | 7.4% | Free Cash Flow Reconciliation (In thousands) | Metric | Twenty-six Weeks Ended Aug 3, 2024 | Twenty-six Weeks Ended Jul 29, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $60,956 | $134,265 | | Cash paid for fixed assets | $(60,029) | $(114,023) | | Free Cash Flow | $927 | $20,242 | Liquidity and Capital Resources The company maintains strong liquidity of $655.2 million, supported by an expanded ABL credit facility - Total liquidity as of August 3, 2024 was $655.2 million, including $127.6 million in cash and $527.6 million in ABL availability[75] - Operating cash flow for the first twenty-six weeks of 2024 decreased to $61.0 million from $134.3 million in the prior year, driven by lower sales and higher cash paid for inventory[78][79] - The ABL Revolving Credit Facility was amended in March 2024, increasing its size to $581.0 million and extending the maturity of the larger tranche to 2029[83] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuation on its $1.6 billion variable-rate term loan - The company is subject to interest rate risk on its $1,595.3 million First Lien Term Loan; a 100 basis point increase in variable rates would increase annual interest expense by approximately $16.2 million[97] - To manage interest rate risk, the company has entered into interest rate caps, collars, and a swap agreement as cash flow hedges[97] - Credit risk is considered low as cash is held at major financial institutions, and foreign currency risk is not material[99][101] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - Based on an evaluation as of the end of the period, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[103] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[104] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings not expected to have a material adverse effect - The company is involved in ordinary course legal proceedings and has made accruals where appropriate, but does not currently anticipate a material adverse effect on its financial statements[49][107] Item 1A. Risk Factors No material changes have been made to the risk factors previously disclosed in the annual and prior quarterly reports - No material changes have been made to the risk factors disclosed in the 2023 Form 10-K and the Q1 2024 Form 10-Q[108] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued 1.47 million shares of common stock for $2.5 million in a private placement to its Executive Chairman - On May 13, 2024, the Company issued 1,470,589 shares of Class A Common Stock to GSSB Corporation (owned by Executive Chairman Glenn Murphy) at $1.70 per share, for total proceeds of $2.5 million[109] Item 5. Other Information No directors or Section 16 officers adopted or terminated any Rule 10b5-1 trading arrangements during the quarter - No directors or Section 16 officers adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter[110] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including agreements and required officer certifications