Petco Health and Wellness pany(WOOF) - 2022 Q4 - Annual Report

PART I Business Overview Petco is an integrated omnichannel pet wellness provider serving over 24 million customers through its extensive network and digital platforms Our Company - Petco has transformed from a traditional retailer into a disruptive, fully integrated omnichannel pet health and wellness provider[29] - The company serves over 24 million active customers through more than 1,500 pet care centers in the U.S., Mexico, and Puerto Rico, complemented by digital channels[29] - Services include veterinary care, with 197 full-service hospitals as of January 29, 2022, and plans to expand to approximately 900[31] - The Pals Rewards loyalty program is a core component, with members accounting for approximately 80% of transactions in fiscal 2021[32] Industry Dynamics - The U.S. pet care industry was a $119 billion market in 2021, demonstrating sustained growth[33] - Industry growth is driven by rising pet ownership and the pet humanization trend, showing resilience across economic cycles[33] - The COVID-19 pandemic accelerated pet adoption, particularly among Millennials and Gen Z, and is expected to drive a 7% CAGR for the pet category through 2024[34] - The company strategically focuses on the fastest-growing market segments: veterinary care, e-commerce, and services[34] Our Transformation - The company has transformed into a pet health and wellness company over the past four years by accelerating digital capabilities, launching its own veterinary hospital network, and expanding its product offerings[38] - Established leading omnichannel capabilities, combining digital assets with a national store network for services like BOPUS, curbside pickup, same-day delivery, and ship-from-store[38][39][40] - Launched a network of full-service veterinary hospitals (Vetco Total Care), operating 197 locations by the end of fiscal 2021 with a long-term plan to expand to approximately 900[41][42] - Digitally integrated and improved grooming and training services, launching online training courses in fiscal 2021[44] - Created a differentiated portfolio of owned and exclusive brands, such as Reddy and WholeHearted, after ceasing sales of pet food with artificial ingredients in May 2019[45][46] - In fiscal 2021, owned brand products accounted for approximately 27% of total product sales, achieving a double-digit CAGR from fiscal 2018 to 2021[46] - Established a data-driven culture using analytics for dynamic pricing, inventory optimization, personalization, and precision marketing[47] Marketing and Advertising - The company has repositioned its brand as a pet health and wellness company by eliminating products with artificial ingredients, shock collars, and traditional rawhide[49] - A 360-degree data ecosystem is utilized for precision marketing to drive customer acquisition, monetization, and retention across all channels[49] Human Capital - As of January 29, 2022, the company employed approximately 28,495 people and is committed to competitive compensation and career development[51] - The company fosters a diverse, equitable, and inclusive work environment, supported by seven Partner Resource Groups[52][53] - The Petco Partner Assistance Fund has provided over $1.8 million in financial support to nearly 1,700 partners in need[54] - In fiscal 2021, the average wage for pet care center partners increased by over 7%[56] - Over 500,000 hours of training were provided in fiscal 2021, with approximately 47% of General Manager and District General Manager positions filled by internal promotions[57] Distribution - The company operates six primary and two regional distribution centers, with plans to add at least one more primary center in fiscal 2022[58] - In fiscal 2021, over 82% of digital orders were fulfilled by pet care centers, including BOPUS, same-day delivery, and ship-from-store[58] Vendor Arrangements - The company sources from over 750 vendors, with the top ten suppliers accounting for about 30% of annual sales in fiscal 2021 and no single vendor exceeding 6%[60] - Products are primarily sourced directly from vendors who must comply with standardized legal, human rights, and product quality standards[60] Petco Love - Petco Love, a non-profit organization, has invested over $330 million since 1999 in adoption, medical care, and spay/neuter services[61] - The "Think Adoption First" program has helped find homes for over 6.5 million pets[61] - In April 2021, it launched Petco Love Lost, a facial recognition database that has helped reunite approximately 4,000 lost pets with their families[62] - A partnership with Merck in August 2021 aims to provide over 1 million free life-saving vaccines, with over 500,000 distributed by the end of fiscal 2021[63] Our Trademarks and Other Intellectual Property - The company owns numerous registered or pending trademarks, including Petco, Vetco, WholeHearted, and Reddy, as well as domain names like petco.com[64] - Trade secrets, proprietary know-how, and confidential information are protected through confidentiality and proprietary rights agreements[65] Government Regulation - The company's operations are subject to extensive federal, state, local, and foreign regulations covering public health, environment, product safety (FDA, USDA), and veterinary services (DEA)[66] - The FDA regulates the safety, manufacturing conditions, and labeling of animal feed, including pet food[66] - Certain state laws require veterinary medical practices to be wholly or majority-owned by licensed veterinarians, affecting the company's operational model for veterinary services in those states[71] - The company must also comply with state laws governing the dispensing of prescription pet medications and registration for pet insurance plans[72] Risk Factors The company faces significant risks related to business operations, legal matters, debt, and its Class A common stock Risks Related to Our Business - A decline in consumer spending or shifts in preferences could reduce sales or profitability, especially during economic downturns or if pet humanization trends slow[76][77] - Failure to accurately predict consumer trends, launch new products, or execute growth strategies like veterinary service expansion could adversely affect the business[78][79][86] - Intense market competition from online retailers, supermarkets, and mass merchants could lead to price wars and reduced profitability[83][84] - Difficulties in recruiting and retaining skilled veterinarians may disrupt veterinary services and increase labor costs[89] - As an e-commerce retailer, the company faces risks from technological changes, security breaches, insufficient order fulfillment capacity, government regulation, and rising shipping costs[90][92][93] - Reliance on key suppliers and supply chain disruptions (e.g., COVID-19, labor shortages, port congestion) could impact product availability and costs[97][106][107][108] - Failed acquisitions or strategic investments could result in unrealized benefits, resource diversion, or additional costs[109][110][111] - Cybersecurity breaches or data leaks, such as the September 2020 credit card information incident, could lead to legal liability, reputational damage, and operational disruptions[112][113][114] - Pet food safety, quality, and health issues could lead to a loss of consumer confidence, product recalls, and decreased sales[124] - Fluctuations in commodity prices (e.g., grains and meat proteins) and supply availability could adversely affect operating results[128] - Inflation may increase operating costs, and an inability to pass these on to consumers could reduce revenue and gross margins[139] Risks Related to Legal and Regulatory Matters - The company is subject to extensive laws and regulations, and non-compliance could result in fines, recalls, enforcement actions, and third-party claims[140] - Regulation of specific claims in pet food labeling, such as "natural," could lead to new labeling requirements and compliance costs[142][143] - Evolving laws related to veterinary services could prevent the company from offering services in certain states or lead to fines and litigation[144][145][147] - Risks associated with online payment methods and the Petco Pay promotional financing program include regulatory compliance, fraud, and increased transaction fees[148][150][152] - Evolving privacy laws (e.g., CCPA, CPRA, VCDPA, CPA) and online tracking trends could significantly harm business results and increase compliance costs and litigation risk[153][155][156][158] - Failure to establish, maintain, protect, and enforce intellectual property could harm the company's competitive position or result in costly enforcement actions[161][162] - Sustainability-related goals and public disclosures expose the company to operational, reputational, financial, and legal risks[173][174] Risks Related to Our Indebtedness - The company's substantial debt, including a $1.7 billion First Lien Term Loan and a $500 million ABL Revolving Credit Facility, could adversely affect cash flow and limit operational flexibility[175][177] - Failure to comply with restrictive covenants in debt agreements could result in default and accelerate debt repayment[180][185] - Variable-rate debt exposes the company to interest rate risk; a 100 basis point increase in interest rates would increase annual cash interest by approximately $17.1 million[187][359] - Changes in the availability of the LIBOR benchmark rate could have unpredictable consequences and may result in higher interest rates[190][191] Risks Related to Our Class A Common Stock - The company's sponsors (CVC Funds and CPP Investments) have significant influence with approximately 69% of voting power, potentially limiting other shareholders' influence on voting matters[192] - As a "controlled company" under Nasdaq rules, the company is exempt from certain corporate governance requirements, which may provide less protection to shareholders[194][196] - Anti-takeover provisions in the company's charter and Delaware law could make an acquisition more difficult and limit attempts by shareholders to replace management[198][199] - The company does not plan to pay regular cash dividends on its Class A common stock, making investment returns entirely dependent on stock price appreciation[201] - The company's multi-class stock structure may affect the eligibility of its Class A common stock for inclusion in certain indices, reducing its attractiveness to investors[203] General Risk Factors - An active, liquid trading market for the Class A common stock may not be sustained, leading to price volatility[206][207] - Future equity issuances could dilute shareholder ownership and reduce their influence on voting matters[210] - Sales of a substantial number of shares by major stockholders could cause a significant decline in the stock price[211][213] - If financial results fail to meet company guidance or analyst expectations, the Class A common stock price could decline[215] - Ineffective internal controls over financial reporting could lead to inaccurate financial statements, fraud, or failure to file reports, harming investor confidence and the stock price[216][218] - Unexpected changes in the effective tax rate or adverse outcomes from tax audits could negatively impact the company's financial condition and results of operations[219][220] Unresolved Staff Comments This report contains no unresolved staff comments - There are no unresolved staff comments[221] Properties The company leases all its corporate, retail, and distribution facilities, including its headquarters in San Diego and San Antonio - The company maintains dual headquarters in San Diego (approx. 257,000 sq. ft.) and San Antonio (approx. 73,000 sq. ft.), both under long-term leases[222] - All 1,433 pet care centers and distribution centers in the U.S. and Puerto Rico are operated under leases[223] - Pet care center leases typically have an initial term of ten years with renewal options[223] Legal Proceedings The company is involved in routine legal proceedings, none of which are expected to have a material adverse effect on its business - The company is involved in ordinary course legal proceedings related to wage and hour laws, product liability, consumer protection, and other matters[224] - Management believes that no pending litigation, individually or in the aggregate, will have a material adverse effect on the company's business or financial condition[224] Mine Safety Disclosures This item is not applicable to the company - Not applicable[225] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on Nasdaq under "WOOF," and no cash dividends are planned as earnings are retained for growth Market Information - The company's Class A common stock began trading on the Nasdaq Global Select Market on January 14, 2021, under the ticker symbol "WOOF"[228] - There is no public trading market for the company's Class B-1 and Class B-2 common stock[228] Holders - As of March 22, 2022, there were 38 registered holders of Class A common stock, one of Class B-1, and two of Class B-2[230] Recent Sales of Unregistered Equity Securities - None[232] Issuer Purchases of Equity Securities - None[234] Dividend Policy - The company does not intend to declare or pay any cash dividends on its Class A common stock in the foreseeable future[236] - Future earnings are planned to be retained to fund business growth and repay debt[236] Performance Graph - The performance graph compares the cumulative total return of the company's Class A common stock with the Nasdaq Composite and S&P Retail indices from January 14, 2021, to January 29, 2022[238] Cumulative Total Return Comparison (January 14, 2021 - January 29, 2022) | Index | 1/14/2021 | 1/29/2022 | | :----------------------------------- | :-------- | :-------- | | Petco Health and Wellness Company Inc. | 100.00 | 62.24 | | NASDAQ Composite | 100.00 | 111.23 | | S&P Retail Index | 100.00 | 105.55 | [Reserved] This item is reserved - This item is reserved[241] Management's Discussion and Analysis of Financial Condition and Results of Operations The company achieved strong revenue and profit growth in fiscal 2021, driven by its business transformation and favorable industry trends Overview - Petco has transformed into a disruptive, fully integrated omnichannel provider of pet health and wellness products, services, and veterinary care[244] - The company operates over 1,500 Petco locations, including nearly 200 in-store veterinary hospitals, and online resources to meet pet parent needs[244][245] - Customer engagement is deepened through the Vital Care and Pals Rewards programs, with Pals members accounting for over 80% of transactions in fiscal 2021[247] How We Assess the Performance of Our Business - The company evaluates its ecosystem performance through comparable sales, which include both retail and digital sales, aiming to increase customer retention, frequency, and basket size[250][251] - Management uses non-GAAP financial measures such as Adjusted EBITDA, Free Cash Flow, and Net Debt to assess operational performance and make capital allocation decisions[252] Factors Affecting Our Business - The U.S. pet care industry reached $119 billion in 2021, driven by increased pet ownership and humanization trends accelerated by the COVID-19 pandemic[255] - Performance is influenced by the ability to attract new customers, build loyalty, and expand their spending across multiple channels and categories[257] - The company has made significant investments in its innovation and business transformation strategies[258] Key Investments in Fiscal 2020-2021 | Investment Category | Amount ($ millions) | | :----------------------- | :-------------- | | New and existing pet care centers (incl. vet hospitals) | ~221.5 | | Digital and information technology | ~125.6 | | Supply chain enhancements and expansion | ~51.6 | | Increased advertising spend (FY2021 vs. FY2020) | 59.5 | - Gross margin and expense management are focused on balancing investments for sales growth with improving profitability[260] - Talent and culture are central to performance, especially in expanding areas like e-commerce, veterinary care, grooming, and training services[261] Impact of the COVID-19 Pandemic on Our Business - As an essential retailer, all pet care centers remained open during the COVID-19 pandemic, though some services were occasionally limited or suspended[263] - The pandemic favorably impacted business results by increasing pet ownership and spending, but future economic uncertainty remains[263][264] Significant Components of Results of Operations - Net sales include total sales of products and services, net of sales taxes and promotional discounts[266] - Cost of sales includes direct product costs, freight, inventory shrink, and operating costs for grooming, training, veterinary services, and distribution centers[268] - Gross margins for digital sales and services are typically lower than for in-store sales[268] - Selling, general and administrative (SG&A) expenses include employee wages, occupancy costs, depreciation, advertising, and credit card fees[270][271] - Interest expense is primarily related to the term loan and revolving credit facility[273] - Net loss from non-controlling interests represents 50% of the net loss from veterinary joint ventures (variable interest entities)[276] Executive Summary - The company's business transformation and increased pet ownership drove strong revenue and profit growth in fiscal 2021[278] 2021 vs. 2020 Key Financial Performance Comparison | Metric | Fiscal 2021 | Fiscal 2020 | Change ($) | Change (%) | | :------------------------------------------------ | :--------- | :--------- | :------- | :------- | | Net Sales | $5,807.1 million | $4,920.2 million | $886.9 million | 18.0% | | Comparable Sales Growth | 18.9% | - | - | - | | Operating Income | $266.1 million | $194.4 million | $71.7 million | 36.9% | | Net Income (Loss) Attributable to Class A and B-1 Stockholders | $164.4 million | $(26.5) million | $190.9 million | N/A | | Net Cash Provided by Operating Activities | $358.2 million | $268.6 million | $89.6 million | 33.4% | Results of Operations Net Sales Composition for Fiscal 2021 vs. 2020 | Category | 52 Weeks Ended Jan 29, 2022 | 52 Weeks Ended Jan 30, 2021 | Change ($) | Change (%) | | :----------------------- | :-------------------- | :-------------------- | :------- | :------- | | Consumables | $2,533,755 | $2,123,499 | $410,256 | 19.3% | | Supplies and Companion Animals | $2,603,104 | $2,328,663 | $274,441 | 11.8% | | Services and Other | $670,290 | $468,040 | $202,250 | 43.2% | | Net Sales | $5,807,149 | $4,920,202 | $886,947 | 18.0% | - Fiscal 2021 comparable sales grew by 18.9%, driven by increased pet ownership and a differentiated product mix[283] - Gross profit for fiscal 2021 increased 15.2% to $2.43 billion, but gross margin decreased to 41.8% from 42.8% in fiscal 2020, primarily due to strong consumables sales and growth in digital, services, and veterinary businesses[286] - Fiscal 2021 SG&A expenses increased 13.0% to $2.16 billion, but decreased as a percentage of net sales to 37.2% from 38.9% in fiscal 2020, reflecting operating leverage from sales growth[287] - Interest expense for fiscal 2021 decreased significantly by 64.7% to $77.4 million, mainly due to debt reduction and refinancing following the IPO and related recapitalization[289] - Net income attributable to Class A and B-1 stockholders was $164.4 million in fiscal 2021, compared to a net loss of $26.5 million in fiscal 2020, driven by higher gross profit and lower interest expense[293][294] Reconciliation of Non-GAAP Financial Measures to GAAP Measures - The company provides non-GAAP financial measures, including Adjusted EBITDA, Free Cash Flow, and Net Debt, to enhance investor understanding of its financial and operational performance[299] Adjusted EBITDA and Adjusted EBITDA Margin | Metric | 52 Weeks Ended Jan 29, 2022 | 52 Weeks Ended Jan 30, 2021 | 52 Weeks Ended Feb 1, 2020 | | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Adjusted EBITDA | $591,478 | $484,348 | $424,547 | | Adjusted EBITDA Margin | 10.2% | 9.8% | 9.6% | Free Cash Flow | Metric | 52 Weeks Ended Jan 29, 2022 | 52 Weeks Ended Jan 30, 2021 | 52 Weeks Ended Feb 1, 2020 | | :----------------------- | :-------------------- | :-------------------- | :-------------------- | | Net cash provided by operating activities | $358,215 | $268,615 | $110,337 | | Cash paid for fixed assets | $(239,110) | $(159,560) | $(156,906) | | Free Cash Flow | $119,105 | $109,055 | $(46,569) | Net Debt | Metric | Jan 29, 2022 | Jan 30, 2021 | | :------------------------------------------------ | :-------------- | :-------------- | | Senior Secured Credit Facilities, net (incl. current portion) | $1,657,390 | $1,646,281 | | Finance leases (incl. current portion) | $29,816 | $13,639 | | Total Debt | $1,687,206 | $1,659,920 | | Less: Cash and cash equivalents | $(211,602) | $(111,402) | | Net Debt | $1,475,604 | $1,548,518 | Liquidity and Capital Resources - The company's primary liquidity sources are cash generated from operations and availability under its $500 million ABL Revolving Credit Facility[312] - As of January 29, 2022, the company had $649.8 million in liquidity, consisting of $211.6 million in cash and $438.2 million available under the ABL facility[312] - Net cash provided by operating activities was $358.2 million in fiscal 2021, up from $268.6 million in fiscal 2020, due to strong operating performance and reduced debt[318] - Net cash used in investing activities was $237.1 million in fiscal 2021, primarily for capital expenditures including veterinary hospital build-outs, innovation, and supply chain enhancements[320][321] Capital Expenditures by Category | Category | 52 Weeks Ended Jan 29, 2022 | 52 Weeks Ended Jan 30, 2021 | 52 Weeks Ended Feb 1, 2020 | | :----------------------- | :-------------------- | :-------------------- | :-------------------- | | New and existing pet care centers | $140,721 | $80,776 | $100,394 | | Digital and information technology | $57,319 | $68,232 | $51,358 | | Supply chain and other | $41,070 | $10,552 | $5,154 | | Total Capital Expenditures | $239,110 | $159,560 | $156,906 | - Capital expenditures for fiscal 2022 are expected to be between $275 million and $325 million[321] - On March 4, 2021, the company completed a refinancing transaction with a $1.7 billion First Lien Term Loan and ABL facility, reducing net debt from $1.5485 billion on January 30, 2021, to $1.4756 billion on January 29, 2022[328] Segment - The company operates as a single reportable operating segment, supporting pets and their parents through an integrated ecosystem of pet care centers, services, and e-commerce[331] Seasonality - The company's financial performance is not significantly affected by seasonality, as most sales are driven by year-round pet care needs[333] Critical Accounting Policies and Estimates - Critical accounting policies and estimates include inventory reserves, vendor allowances, long-lived assets, goodwill and indefinite-lived intangible assets, and self-insurance reserves[337][341][344][347][351][354] - Inventory is valued at the lower of cost or net realizable value, with reserves for valuation and shrink calculated based on assumptions about inventory aging, consumer demand, and promotions[337] - Vendor allowances are primarily recognized as a reduction to the cost of inventory sold or as a reduction of SG&A expenses[341] - Goodwill and indefinite-lived trademark assets are tested for impairment annually using qualitative or quantitative assessments, including discounted cash flow and comparable company analyses[347][349][351][352] - Self-insurance reserves for workers' compensation, employee health benefits, and general/auto liability are estimated based on historical claims experience and actuarial assumptions[354] Recent Accounting Pronouncements - The company is evaluating the impact of ASU No. 2020-04 (Reference Rate Reform) on its financial statements but does not expect a material impact[357] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate volatility from its variable-rate term loan, while credit and foreign currency risks are not considered material Interest Rate Risk - The company is exposed to interest rate risk from its variable-rate First Lien Term Loan and ABL Revolving Credit Facility[359] - As of January 29, 2022, the outstanding balance on the First Lien Term Loan was $1.6873 billion; a 100 basis point increase in variable rates would increase annual cash interest by approximately $17.1 million[359] Credit Risk - The company's cash is held at major U.S. financial institutions, and while deposits may exceed insured limits, credit risk is considered low due to the institutions' perceived financial strength[361] Foreign Currency Risk - The vast majority of the company's business is conducted in U.S. dollars, and a 10% change in exchange rates is not expected to materially impact operating results[362] Financial Statements and Supplementary Data This section contains the audited consolidated financial statements as of January 29, 2022, reflecting significant financial improvements in fiscal 2021 Audited Consolidated Financial Statements - This section lists the audited consolidated financial statements, including the independent auditor's report, balance sheets, statements of operations, comprehensive income, equity, cash flows, and notes[365] Report of Independent Registered Public Accounting Firm - Ernst & Young LLP issued an unqualified opinion on Petco's consolidated financial statements as of January 29, 2022[368] - Ernst & Young LLP also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of January 29, 2022[369] - The critical audit matter identified was vendor allowances, due to the complexity arising from the large number of agreements with varying terms[374] Consolidated Balance Sheets Consolidated Balance Sheets Summary (as of Jan 29, 2022 and Jan 30, 2021) | Item | Jan 29, 2022 ($ thousands) | Jan 30, 2021 ($ thousands) | | :------------------------------------ | :-------------------- | :-------------------- | | Cash and cash equivalents | 211,602 | 111,402 | | Inventories, net | 675,111 | 538,675 | | Total current assets | 1,070,777 | 777,549 | | Fixed assets, net | 726,922 | 627,547 | | Goodwill | 2,183,991 | 2,179,310 | | Total assets | 6,497,941 | 6,075,702 | | Accounts payable and bank overdrafts | 403,976 | 339,485 | | Total current liabilities | 1,053,139 | 875,307 | | Senior Secured Credit Facilities, net (less current portion) | 1,640,390 | 1,646,281 | | Deferred taxes, net | 318,355 | 280,920 | | Total liabilities | 4,242,122 | 4,020,437 | | Retained earnings (accumulated deficit) | 142,166 | (22,251) | | Total stockholders' equity | 2,274,014 | 2,068,848 | | Total liabilities and equity | 6,497,941 | 6,075,702 | Consolidated Statements of Operations Consolidated Statements of Operations Summary (for fiscal years ended Jan 29, 2022, Jan 30, 2021, and Feb 1, 2020) | Item | 52 Weeks Ended Jan 29, 2022 | 52 Weeks Ended Jan 30, 2021 | 52 Weeks Ended Feb 1, 2020 | | :------------------------------------------------ | :-------------------- | :-------------------- | :-------------------- | | Net sales | $5,807,149 | $4,920,202 | $4,434,514 | | Cost of sales | $3,380,539 | $2,813,464 | $2,527,995 | | Gross profit | $2,426,610 | $2,106,738 | $1,906,519 | | Selling, general and administrative expenses | $2,160,539 | $1,912,314 | $1,776,919 | | Operating income | $266,071 | $194,424 | $110,600 | | Interest expense | $77,397 | $219,083 | $253,018 | | Net income (loss) attributable to Class A and B-1 stockholders | $164,417 | $(26,483) | $(95,873) | | Net income (loss) per Class A and B-1 common share - basic | $0.62 | $(0.13) | $(0.46) | | Net income (loss) per Class A and B-1 common share - diluted | $0.62 | $(0.13) | $(0.46) | Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Comprehensive Income (Loss) Summary (for fiscal years ended Jan 29, 2022, Jan 30, 2021, and Feb 1, 2020) | Item | 52 Weeks Ended Jan 29, 2022 | 52 Weeks Ended Jan 30, 2021 | 52 Weeks Ended Feb 1, 2020 | | :------------------------------------------------ | :-------------------- | :-------------------- | :-------------------- | | Net income (loss) | $159,805 | $(31,736) | $(103,984) | | Net income (loss) attributable to Class A and B-1 stockholders | $164,417 | $(26,483) | $(95,873) | | Foreign currency translation adjustments | $(963) | $(905) | $952 | | Comprehensive income (loss) | $158,842 | $(24,738) | $(110,062) | | Comprehensive income (loss) attributable to Class A and B-1 stockholders | $163,454 | $(19,485) | $(101,951) | Consolidated Statements of Equity Consolidated Statements of Equity Summary (as of Jan 29, 2022 and Jan 30, 2021) | Item | Jan 29, 2022 ($ thousands) | Jan 30, 2021 ($ thousands) | | :------------------------------------------------ | :-------------------- | :-------------------- | | Class A common stock | 265 | 264 | | Additional paid-in capital | 2,133,821 | 2,092,110 | | Retained earnings (accumulated deficit) | 142,166 | (22,251) | | Accumulated other comprehensive loss | (2,238) | (1,275) | | Total stockholders' equity | 2,274,014 | 2,068,848 | | Non-controlling interests | (18,195) | (13,583) | | Total equity | 2,255,819 | 2,055,265 | - In fiscal 2021, net income attributable to Class A and B-1 stockholders was $164.4 million, and stock-based compensation expense was $45.6 million[397] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Summary (for fiscal years ended Jan 29, 2022, Jan 30, 2021, and Feb 1, 2020) | Item | 52 Weeks Ended Jan 29, 2022 | 52 Weeks Ended Jan 30, 2021 | 52 Weeks Ended Feb 1, 2020 | | :------------------------------------------------ | :-------------------- | :-------------------- | :-------------------- | | Net cash provided by operating activities | $358,215 | $268,615 | $110,337 | | Net cash used in investing activities | $(237,083) | $(157,185) | $(139,041) | | Net cash used in financing activities | $(18,782) | $(146,608) | $(3,071) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $102,350 | $(35,178) | $(31,775) | | Cash, cash equivalents, and restricted cash at end of year | $221,890 | $119,540 | $154,718 | Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies - The company completed a corporate conversion in January 2021, becoming a Delaware corporation and converting all member units into classes of common stock[405][406] - An IPO was completed on January 19, 2021, issuing 55.2 million shares of Class A common stock and raising approximately $936 million in net proceeds to repay debt[408] - The company operates as a single reportable operating segment[413] - Inventory is valued at the lower of cost or net realizable value, with reserves for valuation and shrink[418] - Goodwill and indefinite-lived trademark assets are tested for impairment annually using qualitative or quantitative assessments[424][426] - The company uses the equity method for its Mexico joint venture and consolidates its veterinary joint ventures (variable interest entities)[427][430] - Self-insurance reserves for workers' compensation, employee health benefits, and general/auto liability are estimated based on historical claims and actuarial assumptions[435] - Advertising expense, net of co-op reimbursements, was $227.9 million in fiscal 2021, $168.4 million in fiscal 2020, and $97.7 million in fiscal 2019[441] - Most of the company's leases are operating leases, with assets and liabilities recognized at the present value of future payments[442][443] - An interest rate cap agreement entered into in March 2016 expired and was settled on January 29, 2021[454][506] 2. Revenue Recognition - Revenue is recognized when control of goods or services is transferred to the customer[457] Net Sales by Product Type and Service | Category | 52 Weeks Ended Jan 29, 2022 | 52 Weeks Ended Jan 30, 2021 | 52 Weeks Ended Feb 1, 2020 | | :----------------------- | :-------------------- | :-------------------- | :-------------------- | | Consumables | $2,533,755 | $2,123,499 | $2,054,280 | | Supplies and Companion Animals | $2,603,104 | $2,328,663 | $1,938,904 | | Services and Other | $670,290 | $468,040 | $441,330 | | Net Sales | $5,807,149 | $4,920,202 | $4,434,514 | - Product revenue is typically recognized at the point of sale for in-store transactions and upon delivery or pickup for online orders[462][463] - Service revenue is recognized upon completion (e.g., grooming, veterinary care) or ratably over the contract period (e.g., dog training)[464][465] - Gift card revenue is recognized upon redemption or estimated breakage based on historical patterns[466] - Customer loyalty program points are deferred as a performance obligation and recognized as revenue upon redemption[467] 3. Sale-Leaseback Transaction - In January 2020, the company sold and leased back its San Antonio corporate support center for $19.0 million, resulting in net cash proceeds of $18.5 million[469] - The transaction was accounted for as a sale-leaseback, recognizing an initial gain of $3.1 million as a reduction of SG&A expenses[470] - The lease is classified as an operating lease with an initial 10-year term and renewal options[470] 4. Other Acquisitions - The company completed acquisitions of small, regional veterinary businesses for approximately $5.5 million in fiscal 2021 and $3.0 million in fiscal 2019[471] - These acquisitions resulted in the recognition of $4.7 million (FY 2021) and $3.0 million (FY 2019) in goodwill, respectively[471] 5. Composition of Balance Sheet Accounts Fixed Assets, Net (as of Jan 29, 2022 and Jan 30, 2021) | Item | Jan 29, 2022 ($ thousands) | Jan 30, 2021 ($ thousands) | | :----------------------- | :-------------------- | :-------------------- | | Equipment | 772,454 | 648,072 | | Leasehold improvements | 623,201 | 538,841 | | Furniture and fixtures | 329,823 | 280,948 | | Buildings and related improvements | 16,959 | 16,872 | | Land | 3,254 | 3,254 | | Accumulated depreciation | (1,018,769) | (860,440) | | Fixed assets, net | 726,922 | 627,547 | - Depreciation and amortization expense for fixed assets was $171.1 million in fiscal 2021[473] Accrued Salaries and Employee Benefits (as of Jan 29, 2022 and Jan 30, 2021) | Item | Jan 29, 2022 ($ thousands) | Jan 30, 2021 ($ thousands) | | :----------------------- | :-------------------- | :-------------------- | | Accrued payroll and related taxes | 110,347 | 83,176 | | Self-insurance reserves | 23,699 | 21,834 | | Accrued paid time off | 16,584 | 24,474 | | Total | 150,630 | 129,484 | Accrued Expenses and Other Liabilities (as of Jan 29, 2022 and Jan 30, 2021) | Item | Jan 29, 2022 ($ thousands) | Jan 30, 2021 ($ thousands) | | :----------------------- | :-------------------- | :-------------------- | | Accrued capital expenditures | 36,935 | 19,723 | | Accrued real estate taxes | 26,662 | 26,921 | | Sales tax payable | 19,950 | 19,449 | | Deferred revenue | 18,003 | 15,526 | | Accrued advertising | 15,192 | 13,326 | | Other accrued expenses and liabilities | 94,130 | 50,901 | | Total | 210,872 | 145,846 | Other Long-Term Liabilities (as of Jan 29, 2022 and Jan 30, 2021) | Item | Jan 29, 2022 ($ thousands) | Jan 30, 2021 ($ thousands) | | :----------------------- | :-------------------- | :-------------------- | | Self-insurance reserves | 56,486 | 57,925 | | Finance leases | 25,052 | 11,436 | | Other liabilities | 52,567 | 64,993 | | Total | 134,105 | 134,354 | 6. Leases Lease Assets and Liabilities (as of Jan 29, 2022 and Jan 30, 2021) | Item | Jan 29, 2022 ($ thousands) | Jan 30, 2021 ($ thousands) | | :----------------------- | :-------------------- | :-------------------- | | Operating lease right-of-use assets | 1,338,465 | 1,328,108 | | Finance lease assets, included in fixed assets, net | 24,500 | 9,350 | | Total lease assets | 1,362,965 | 1,337,458 | | Operating lease liabilities, current | 265,897 | 258,289 | | Finance lease liabilities, current | 4,764 | 2,203 | | Operating lease liabilities, non-current | 1,096,133 | 1,083,575 | | Finance lease liabilities, non-current | 25,052 | 11,436 | | Total lease liabilities | 1,391,846 | 1,355,503 | Lease Cost Components (for fiscal years ended Jan 29, 2022, Jan 30, 2021, and Feb 1, 2020) | Item | 52 Weeks Ended Jan 29, 2022 | 52 Weeks Ended Jan 30, 2021 | 52 Weeks Ended Feb 1, 2020 | | :----------------------- | :-------------------- | :-------------------- | :-------------------- | | Operating lease cost | $422,465 | $430,359 | $441,981 | | Finance lease amortization | $3,933 | $3,292 | $3,919 | | Finance lease interest | $876 | $908 | $973 | | Variable lease cost | $109,723 | $105,859 | $112,709 | | Sublease income | $(5,091) | $(5,327) | $(5,450) | | Total lease cost | $531,906 | $535,091 | $554,132 | - As of January 29, 2022, the weighted-average remaining lease term for operating leases was 6.0 years, and the weighted-average discount rate was 9.2%[479] 7. Goodwill Changes in the Carrying Amount of Goodwill (as of Jan 29, 2022 and Jan 30, 2021) | Item | Jan 29, 2022 ($ thousands) | Jan 30, 2021 ($ thousands) | | :----------------------- | :-------------------- | :-------------------- | | Beginning Balance: Goodwill, net | $2,179,310 | $2,179,310 | | Additions from acquisitions | $4,681 | $— | | Ending Balance: Goodwill, net | $2,183,991 | $2,179,310 | - No goodwill impairment charges were recorded in fiscal 2021 or 2020[513] 8. Senior Secured Credit Facilities - On March 4, 2021, the company completed a refinancing, entering into a $1.7 billion First Lien Term Loan (due March 4, 2028) and a $500 million ABL Revolving Credit Facility (due March 4, 2026)[481] - As of January 29, 2022, the outstanding principal on the First Lien Term Loan was $1.6873 billion with a weighted-average interest rate of 4.1%[488] - As of January 29, 2022, there were no outstanding borrowings under the ABL facility, with $438.2 million of availability[491] - The company was in compliance with all credit facility covenants as of January 29, 2022[482] 9. Senior Notes - In January 2021, $450 million of the Floating Rate Senior Notes were contributed by principal stockholders, and the remaining $300 million was repaid with IPO proceeds[498][499] - In January 2021, $127.7 million of the 3.00% Senior Notes principal and $3.6 million of accrued interest were contributed to the company, and $4.0 million of principal was repaid[504] - The company recognized a $4.9 million loss on debt extinguishment in fiscal 2020, primarily related to the repayment of the Floating Rate Senior Notes[499] 10. Derivative Instruments - The company's five interest rate cap agreements, with a total notional value of $1.95 billion, expired and were settled on January 29, 2021[505][506] - As of January 29, 2022, and January 30, 2021, there were no remaining amounts in Accumulated Other Comprehensive Income (AOCI) related to the interest rate caps[507] 11. Fair Value Measurements Assets and Liabilities Measured at Fair Value on a Recurring Basis (as of Jan 29, 2022) | Item | Fair Value ($ thousands) | Level | | :----------------------- | :---------------- | :--- | | Money market mutual funds | $167,277 | 1 | | Executive life insurance investments | $14,575 | 2 | | Non-qualified deferred compensation plan | $(17,453) | 2 | | Investment in Rover Group, Inc. | $32,819 | 1 | - No impairment charges for goodwill or trademarks were recorded in fiscal 2021 or 2020[513] - Impairment charges for fixed assets and right-of-use assets were $10.4 million in fiscal 2021[515] 12. Employee Benefit Plans - The company offers a 401(k) plan and a non-qualified deferred compensation plan, with company matching contributions[516][517][518] - Total company contributions to the plans were $9.2 million in fiscal 2021 and $6.6 million in fiscal 2020[519] 13. Stockholders' Equity - The company established a 2021 Equity Incentive Plan (including RSUs, RSAs, and non-qualified stock options) and an Employee Stock Purchase Plan (ESPP)[520] Stock-Based Compensation Expense by Award Type | Award Type | 52 Weeks Ended Jan 29, 2022 ($ thousands) | 52 Weeks Ended Jan 30, 2021 ($ thousands) | 52 Weeks Ended Feb 1, 2020 ($ thousands) | | :----------------------- | :-------------------- | :-------------------- | :-------------------- | | RSUs and RSAs | $25,459 | $1,991 | $— | | Options | $8,002 | $391 | $— | | Employee Stock Purchase Plan | $1,034 | $— | $— | | Other awards | $14,770 | $10,533 | $9,489 | | Total stock-based compensation expense | $49,265 | $12,915 | $9,489 | - As of January 29, 2022, unrecognized compensation cost for unvested RSUs was $37.4 million, expected to be recognized over a weighted-average period of approximately 2.0 years[525] - As of January 29, 2022, unrecognized compensation cost for unvested options was $15.0 million, expected to be recognized over a weighted-average period of approximately 2.0 years[529] - As of January 29, 2022, unrecognized compensation cost for unvested Series C units of Scooby LP was $17.8 million, expected to be recognized over a weighted-average period of 2.2 years[534] - Basic and diluted net income per share for Class A and B-1 common stock were both $0.62 for fiscal 2021[390][535] 14. Income Taxes Components of Income Tax Expense (Benefit) | Item | 52 Weeks Ended Jan 29, 2022 ($ thousands) | 52 Weeks Ended Jan 30, 2021 ($ thousands) | 52 Weeks Ended Feb 1, 2020 ($ thousands) | | :----------------------- | :-------------------- | :-------------------- | :-------------------- | | Current: Federal | $4,550 | $(29,869) | $4,273 | | Current: State | $11,182 | $984 | $5,156 | | Deferred: Federal | $39,087 | $19,604 | $(34,814) | | Deferred: State | $(1,346) | $5,944 | $(10,273) | | Income tax expense (benefit) | $53,473 | $(3,337) | $(35,658) | - The effective tax rate was 24.5% in fiscal 2021 and 11.2% (benefit) in fiscal 2020[542] - In fiscal 2022, transaction costs related to the IPO generated a tax benefit of $5.2 million[544] Primary Components of Deferred Tax Assets and Liabilities (as of Jan 29, 2022 and Jan 30, 2021) | Item | Jan 29, 2022 ($ thousands) | Jan 30, 2021 ($ thousands) | | :----------------------- | :-------------------- | :-------------------- | | Gross deferred tax assets | $451,748 | $451,821 | | Valuation allowance | $(5,863) | $(6,149) | | Gross deferred tax liabilities | $(764,240) | $(726,592) | | Deferred taxes, net | $(318,355) | $(280,920) | - As of January 29, 2022, the company had a valuation allowance of $5.9 million, primarily against certain state net operating loss carryforwards and state tax credits[546][547] - Unrecognized tax benefits were approximately $16.4 million as of January 29, 2022[548] 15. Accumulated Other Comprehensive Income (Loss) Changes in Accumulated Other Comprehensive Income (Loss) (net of tax, in thousands) | Item | Jan 29, 2022 | Jan 30, 2021 | Feb 1, 2020 | | :----------------------- | :-------------- | :-------------- | :-------------- | | Beginning Balance | $(1,275) | $(8,273) | $(2,195) | | Other comprehensive loss | $(963) | $(991) | $(6,078) | | Ending Balance | $(2,238) | $(1,275) | $(8,273) | - Accumulated other comprehensive loss was $2.238 million as of January 29, 2022, primarily due to foreign currency translation adjustments[551] - As of January 30, 2021, all derivative-related items in accumulated other comprehensive income had been fully reclassified[551] 16. Commitments and Contingencies - The company has a naming rights agreement for Petco Park with the San Diego baseball park, with an annual contractual payment of $4.1 million in fiscal 2021[553] - The company is involved in legal proceedings arising in the ordinary course of business and has accrued reserves where appropriate, with no expected material adverse impact on the consolidated financial statements[554] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with the company's accountants - None[555] Controls and Procedures Management concluded that the company's disclosure controls and procedures, as well as internal control over financial reporting, were effective Management's Evaluation of Disclosure Controls and Procedures - Management concluded that, as of January 29, 2022, the company's disclosure controls and procedures were effective at a reasonable assurance level[558] Limitations on the Effectiveness of Controls - Disclosure controls and internal controls are designed to provide reasonable, not absolute, assurance and may not prevent or detect all errors and fraud[560] Management's Annual Report on Internal Control Over Financial Reporting - Management assessed that the company maintained effective internal control over financial reporting as of January 29, 2022[562] - Ernst & Young LLP audited the effectiveness of the company's internal control over financial reporting and issued an unqualified opinion[563] Changes in Internal Control over Financial Reporting - There were no material changes to the company's internal control over financial reporting during the fourth quarter of fiscal 2021[565] Other Information This report contains no other information - None[566] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[567] PART III Directors, Executive Officers and Corporate Governance Information required by this item is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders - Information is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders[569] Executive Compensation Information required by this item is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders - Information is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders[570] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this item is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders - Information is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders[571] Certain Relationships and Related Transactions, and Director Independence Information required by this item is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders - Information is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders[572] Principal Accounting Fees and Services Information required by this item is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders - Information is incorporated by reference from the company's definitive proxy statement for its 2022 Annual Meeting of Stockholders[573] PART IV Exhibits, Financial Statement Schedules This section lists the exhibits filed as part of or incorporated by reference into the annual report 1. Financial Statements - The consolidated financial statements are listed in the Index to Financial Statements on page 60 of this Annual Report[575] 2. Financial Statement Schedules - Not applicable[576] 3. Exhibit Index - This section provides a list of exhibits filed or incorporated by reference, including the company's articles of incorporation, registration rights agreements, equity incentive plans, and credit agreements[577][579] Form 10-K Summary This report does not include a Form 10-K summary - None[580] Signatures Signatures The report has been signed by executive officers and directors in compliance with the Securities Exchange Act of 1934 - This report has been signed by CEO Ronald Coughlin, Jr., CFO Brian LaRose, and other directors[585][586] - The signatures certify that the report complies with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934[583]