Petco Health and Wellness pany(WOOF) - 2025 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents the company's unaudited consolidated financial statements for the thirteen weeks ended May 4, 2024 Consolidated Balance Sheets | Metric | May 4, 2024 (in thousands) | February 3, 2024 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :--------------------------- | :-------------------- | | Total assets | $5,259,042 | $5,363,152 | $(104,110) | | Total liabilities | $4,096,733 | $4,178,723 | $(81,990) | | Total stockholders' equity | $1,162,309 | $1,184,429 | $(22,120) | | Cash and cash equivalents | $89,717 | $125,428 | $(35,711) | | Merchandise inventories, net | $681,020 | $684,502 | $(3,482) | Consolidated Statements of Operations | Metric | Thirteen weeks ended May 4, 2024 (in thousands) | Thirteen weeks ended April 29, 2023 (in thousands) | Change (in thousands) | % Change | | :------------------------------------------ | :--------------------------------------- | :---------------------------------------- | :-------------------- | :------- | | Total net sales | $1,529,140 | $1,555,908 | $(26,768) | -1.7% | | Products net sales | $1,279,731 | $1,316,596 | $(36,865) | -2.8% | | Services and other net sales | $249,409 | $239,312 | $10,097 | 4.2% | | Gross profit | $578,660 | $604,482 | $(25,822) | -4.3% | | Operating (loss) income | $(16,782) | $27,617 | $(44,399) | -160.8% | | Net loss attributable to Class A and B-1 common stockholders | $(46,483) | $(1,892) | $(44,591) | -2356.8% | | Basic net loss per share | $(0.17) | $(0.01) | $(0.16) | -1600.0% | | Diluted net loss per share | $(0.17) | $(0.01) | $(0.16) | -1600.0% | Consolidated Statements of Comprehensive Loss | Metric | Thirteen weeks ended May 4, 2024 (in thousands) | Thirteen weeks ended April 29, 2023 (in thousands) | | :------------------------------------------------ | :--------------------------------------- | :---------------------------------------- | | Net loss attributable to Class A and B-1 common stockholders | $(46,483) | $(1,892) | | Total other comprehensive income, net of tax | $7,187 | $506 | | Comprehensive loss attributable to Class A and B-1 common stockholders | $(39,296) | $(1,386) | Consolidated Statements of Equity | Metric | February 3, 2024 (in thousands) | May 4, 2024 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Total stockholders' equity | $1,184,429 | $1,162,309 | | Equity-based compensation expense | N/A | $17,451 | | Net loss | N/A | $(46,483) | | Accumulated other comprehensive income | $1,821 | $9,008 | Consolidated Statements of Cash Flows | Cash Flow Activity | Thirteen weeks ended May 4, 2024 (in thousands) | Thirteen weeks ended April 29, 2023 (in thousands) | Change (in thousands) | | :------------------------------------ | :--------------------------------------- | :---------------------------------------- | :-------------------- | | Net cash (used in) provided by operating activities | $(8,414) | $37,651 | $(46,065) | | Net cash used in investing activities | $(31,743) | $(62,775) | $31,032 | | Net cash used in financing activities | $(5,628) | $(37,082) | $31,454 | | Net decrease in cash, cash equivalents and restricted cash | $(45,785) | $(62,206) | $16,421 | Notes to Unaudited Consolidated Financial Statements 1. Summary of Significant Accounting Policies - Petco operates as a single reportable operating segment focused on pet health and wellness[31] - No significant changes to accounting policies from the prior fiscal year's 10-K[33] - The company uses interest rate cap and collar agreements as cash flow hedges to limit exposure to variable interest rates on debt, with agreements effective through December 2026[36][37][38][39][40] 2. Revenue Recognition | Category | Thirteen weeks ended May 4, 2024 (in thousands) | Thirteen weeks ended April 29, 2023 (in thousands) | % Change | | :-------------------------- | :--------------------------------------- | :---------------------------------------- | :------- | | Consumables | $763,974 | $763,051 | 0.1% | | Supplies and companion animals | $515,757 | $553,545 | -6.8% | | Services and other | $249,409 | $239,312 | 4.2% | | Net sales | $1,529,140 | $1,555,908 | -1.7% | 3. Goodwill - Performed an interim goodwill impairment test in Q1 fiscal 2024 due to declines in share price[43] - Concluded that the estimated fair value of the reporting unit exceeded its carrying value, resulting in no goodwill impairment charge[43] - Fair value determination used income and market approaches, with a 13.2% discount rate and 3% terminal growth rate[43][44] 4. Senior Secured Credit Facilities - ABL Revolving Credit Facility amended in March 2024, increasing total availability from $500.0 million to $581.0 million and extending maturity for a portion[46][51] - The company was in compliance with all covenants under its First Lien Term Loan and ABL Revolving Credit Facility as of May 4, 2024[47] | Debt Facility | May 4, 2024 (in thousands) | February 3, 2024 (in thousands) | | :-------------------------- | :-------------------------- | :--------------------------- | | First Lien Term Loan (outstanding principal) | $1,595,300 | $1,595,300 | | Weighted average interest rate (First Lien Term Loan) | 8.9% | 9.0% | | ABL Revolving Credit Facility availability | $527,600 | N/A | 5. Derivative Instruments - Interest rate caps and collars are accounted for as cash flow hedges to manage variable interest rate risk[56] | Metric | May 4, 2024 (in thousands) | February 3, 2024 (in thousands) | | :-------------------------------- | :-------------------------- | :--------------------------- | | Unrealized gains (losses) in AOCI (pre-tax) | $5,100 | $(2,200) | | Unrealized gains (losses) in AOCI (net of tax) | $3,900 | $(1,700) | | Estimated pre-tax losses to be reclassified to interest expense in next 12 months | $2,300 | N/A | 6. Fair Value Measurements - No goodwill or trade name impairment charges were recorded in Q1 fiscal 2024, as fair values exceeded carrying values[64][65] - Fixed asset and right-of-use asset impairment charges of $3.5 million were recorded for the thirteen weeks ended May 4, 2024[66] | Asset/Liability (Recurring) | May 4, 2024 (in thousands) | February 3, 2024 (in thousands) | | :-------------------------------- | :-------------------------- | :--------------------------- | | Money market mutual funds | $33,888 | $80,186 | | Investments of officers' life insurance | $15,493 | $14,945 | | Non-qualified deferred compensation plan | $(21,095) | $(20,355) | 7. Stockholders' Equity - All outstanding equity awards were excluded from diluted loss per share calculation due to their antidilutive effect in a net loss period[74] | Award Type | Thirteen weeks ended May 4, 2024 (in thousands) | Thirteen weeks ended April 29, 2023 (in thousands) | | :-------------------------- | :--------------------------------------- | :---------------------------------------- | | RSUs and RSAs | $10,722 | $14,496 | | Options | $5,553 | $5,085 | | ESPP | $320 | $432 | | Other awards | $839 | $2,116 | | Total equity-based compensation expense | $17,434 | $22,129 | | Metric (as of May 4, 2024) | RSUs and RSAs (in thousands) | Options (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------- | | Nonvested/outstanding | 16,061 | 13,425 | | Unrecognized compensation expense | $60,199 | $7,548 | | Weighted average remaining expense period | 1.9 years | 0.8 years | 8. Commitments and Contingencies - The company is involved in legal proceedings and claims arising in the ordinary course of business[75] - Accruals have been made for certain matters, but management does not expect a material adverse effect on consolidated financial statements[75] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on financial condition and results of operations for Q1 fiscal 2024 Overview - Petco is a pet health and wellness company operating through an omnichannel ecosystem with over 1,500 pet care centers in the U.S., Mexico, and Puerto Rico[79] - The Vital Care membership program (Core and Premier tiers) integrates merchandising and services, aiming to enhance value and loyalty for pet parents[80] - Macroeconomic factors like rising interest rates, inflation, and supply chain constraints have negatively impacted sales of discretionary items[82] How We Assess the Performance of Our Business - Comparable sales, including both retail and digital sales, are a key measure to evaluate ecosystem performance and are driven by customer retention, visit frequency, and basket size[85][86] - Management uses non-GAAP financial measures like Adjusted EBITDA and Free Cash Flow to evaluate operating performance, generate plans, and make strategic capital allocation decisions[87][104][108] Executive Summary | Metric | Thirteen weeks ended May 4, 2024 | Thirteen weeks ended April 29, 2023 | % Change | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :------- | | Net sales | $1.53 billion | $1.56 billion | -1.7% | | Operating (loss) income | $(16.8) million | $27.6 million | -160.9% | | Net loss attributable to Class A and B-1 common stockholders | $(46.5) million | $(1.9) million | -2347.4% | | Adjusted EBITDA | $75.6 million | $111.0 million | -31.9% | Results of Operations Net Sales and Comparable Sales - The decrease in supplies and companion animals sales was driven by softening discretionary spend due to the current inflationary macroeconomic environment[93][94] - The increase in services and other sales was primarily driven by a 10.5% increase in service-related sales, reflecting veterinary hospital expansion and growth in veterinary and grooming businesses[95] | Metric | May 4, 2024 | April 29, 2023 | Change | % Change | | :-------------------------------- | :---------- | :----------- | :----- | :------- | | Net sales | $1,529,140 | $1,555,908 | $(26,768) | (1.7%) | | Consumables sales | $763,974 | $763,051 | $923 | 0.1% | | Supplies and companion animals sales | $515,757 | $553,545 | $(37,788) | (6.8%) | | Services and other sales | $249,409 | $239,312 | $10,097 | 4.2% | | Comparable sales change | -1.2% | 5.1% | -6.3 pp | N/A | Gross Profit - The decrease in gross profit rate was primarily due to the mix impact of higher consumables and services sales and softer supplies sales, along with sales channel impacts from the services business[96] | Metric | May 4, 2024 | April 29, 2023 | Change | % Change | | :---------------- | :---------- | :----------- | :----- | :------- | | Gross profit | $578,660 | $604,482 | $(25,822) | (4.3%) | | Gross profit rate | 37.8% | 38.9% | -1.1 pp | N/A | Selling, General and Administrative ("SG&A") Expenses - The increase in SG&A expenses was driven by higher payroll and fringe benefits, severance-related charges, store occupancy costs, and depreciation expense[97] | Metric | May 4, 2024 | April 29, 2023 | Change | % Change | | :---------------- | :---------- | :----------- | :----- | :------- | | SG&A expenses | $595,442 | $576,865 | $18,577 | 3.2% | | SG&A as % of net sales | 38.9% | 37.1% | 1.8 pp | N/A | Interest Expense - The decrease in interest expense was primarily driven by pre-tax gains recognized from the company's cash flow hedges[98] | Metric | May 4, 2024 | April 29, 2023 | | :---------------- | :---------- | :----------- | | Interest expense | $36,817 | $37,202 | Loss on Partial Extinguishment of Debt | Metric | May 4, 2024 | April 29, 2023 | | :-------------------------------- | :---------- | :----------- | | Loss on partial extinguishment of debt | $0 | $441 | Other Non-Operating Loss (Income) | Metric | May 4, 2024 | April 29, 2023 | | :-------------------------------- | :---------- | :----------- | | Other non-operating loss (income) | $2,665 | $(2,819) | Income Tax Benefit - The decrease in effective tax rate was primarily driven by a shortfall in tax deductions from equity-based compensation and a change in pre-tax earnings[101] | Metric | May 4, 2024 | April 29, 2023 | | :---------------- | :---------- | :----------- | | Income tax benefit | $(4,477) | $(1,008) | | Effective tax rate | 9.1% | 34.8% | Reconciliation of Non-GAAP Financial Measures to GAAP Measures Adjusted EBITDA - Adjusted EBITDA is used by management and the board to evaluate operating performance, generate future plans, and make strategic capital allocation decisions[104] | Metric | Thirteen weeks ended May 4, 2024 (in thousands) | Thirteen weeks ended April 29, 2023 (in thousands) | Change (in thousands) | % Change | | :---------------- | :--------------------------------------- | :---------------------------------------- | :-------------------- | :------- | | Adjusted EBITDA | $75,644 | $111,026 | $(35,382) | -31.9% | | Adjusted EBITDA Margin | 4.9% | 7.1% | -2.2 pp | N/A | Free Cash Flow - Free Cash Flow is calculated as net cash provided by operating activities less cash paid for fixed assets and is used to evaluate the company's ability to generate additional cash from operations[108] | Metric | Thirteen weeks ended May 4, 2024 (in thousands) | Thirteen weeks ended April 29, 2023 (in thousands) | Change (in thousands) | | :---------------- | :--------------------------------------- | :---------------------------------------- | :-------------------- | | Free Cash Flow | $(41,055) | $(24,399) | $(16,656) | Liquidity and Capital Resources Overview - Primary liquidity sources are operating activities and the $581 million ABL Revolving Credit Facility[111] - Current resources and anticipated cash flows are expected to be sufficient to finance operations and capital investments for at least the next 12 months[112] | Metric (as of May 4, 2024) | Amount (in millions) | | :-------------------------------- | :------------------ | | Total liquidity | $617.3 | | Cash and cash equivalents | $89.7 | | ABL Revolving Credit Facility availability | $527.6 | Cash Flows | Cash Flow Activity | Thirteen weeks ended May 4, 2024 (in thousands) | Thirteen weeks ended April 29, 2023 (in thousands) | | :------------------------------------ | :--------------------------------------- | :---------------------------------------- | | Operating activities | $(8,414) | $37,651 | | Investing activities | $(31,743) | $(62,775) | | Financing activities | $(5,628) | $(37,082) | | Net decrease in cash, cash equivalents and restricted cash | $(45,785) | $(62,206) | Operating Activities - Net cash used in operating activities was $8.4 million, a decrease from $37.7 million provided in the prior year[115] - The decrease was driven by lower sales, increased cash paid for inventory, and higher payroll and fringe benefits, partially offset by lower operating lease costs and effective accounts payable management[115][116] Investing Activities - Net cash used in investing activities decreased to $31.7 million from $62.8 million, primarily due to reduced capital expenditures[117] - Capital expenditures supported the continued build-out of veterinary hospitals[117] Financing Activities - Net cash used in financing activities decreased to $5.6 million from $37.1 million in the prior year[118] - Current period financing cash flows primarily involved borrowings and repayments on the ABL Revolving Credit Facility, while the prior year included a $35.0 million principal repayment on the term loan[118] Sources of Liquidity Senior Secured Credit Facilities - The ABL Revolving Credit Facility was amended in March 2024, increasing total availability to $581.0 million and extending maturity for a portion[120] - The First Lien Term Loan has an outstanding principal balance of $1,595.3 million and bears interest at variable rates[121] Derivative Instruments - The company uses interest rate cap and collar agreements to limit maximum interest on variable-rate debt and decrease exposure to interest rate variability[123][124][125][126][127] Critical Accounting Policies and Estimates Goodwill - Goodwill is evaluated annually in the fourth quarter or more frequently if circumstances indicate impairment[131] - Impairment testing involves qualitative and/or quantitative assessments, comparing fair value (based on cash flow projections, market approach, discount rates) to carrying value[131][132] Indefinite-lived trade name - The Petco trade name is considered an indefinite-lived intangible asset and is tested for impairment annually in the fourth quarter or when circumstances warrant[134] - Fair value is estimated using the relief from royalty valuation method, considering revenue projections, growth rates, and discount rates[135] Recent Accounting Pronouncements - Information regarding recently issued accounting pronouncements is provided in Note 1, "Summary of Significant Accounting Policies"[138] Item 3. Quantitative and Qualitative Disclosures About Market Risk Discusses the company's exposure to market risks, primarily interest rate, credit, and foreign currency risk Interest Rate Risk - The company is exposed to interest rate risk from its variable-rate First Lien Term Loan ($1,595.3 million outstanding) and ABL Revolving Credit Facility[140] - A 100 basis point increase in variable rates would increase gross annual cash interest by approximately $16.2 million[140] - Cash flow hedges are used to limit exposure to interest rate variability[140] Credit Risk - Cash and cash equivalents are held at major financial institutions in the United States, with deposits potentially exceeding insured limits[142] - The company believes these institutions have sufficient assets and liquidity, posing little to no credit risk[142] Foreign Currency Risk - Substantially all business is conducted in U.S. dollars, resulting in minimal foreign currency risk[144] - An immediate 10% increase or decrease in the U.S. dollar's value is not expected to materially affect operating results[144] Item 4. Controls and Procedures Details management's evaluation of disclosure controls and procedures, confirming their effectiveness Management's Evaluation of Disclosure Controls and Procedures - Management, with the participation of the principal executive and financial officers, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of May 4, 2024[146] Changes in Internal Control over Financial Reporting - There were no changes in internal control over financial reporting during the quarter ended May 4, 2024, that materially affected or are reasonably likely to materially affect internal control over financial reporting[147] Limitations on the Effectiveness of Controls - Disclosure controls and procedures are designed to provide reasonable, not absolute, assurance and may not prevent or detect all error and fraud[148] PART II. OTHER INFORMATION Item 1. Legal Proceedings Refers to financial statement notes for details on legal proceedings, with no material adverse effect expected - Refer to Note 8, "Commitments and Contingencies," in Part I, Item 1 for a description of legal proceedings[151] Item 1A. Risk Factors Updates risk factors, highlighting new risks related to online payments and the Petco Pay financing program - Updates to risk factors include those related to online payment methods and the Petco Pay promotional financing program[153] - Risks include compliance with PCI DSS, potential fraud, and the possibility of fines or restrictions if payment standards are not met[153][154][155][156] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds States there were no unregistered sales of equity securities or use of proceeds during the period - None to report[157] Item 3. Defaults Upon Senior Securities Reports no defaults upon senior securities during the period - None to report[158] Item 4. Mine Safety Disclosures States that mine safety disclosures are not applicable - Not applicable[159] Item 5. Other Information Confirms no directors or officers adopted or terminated 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[160] Item 6. Exhibits Lists all exhibits filed as part of the quarterly report, including agreements and certifications - The report includes various exhibits such as retention bonus agreements, performance and restricted stock unit grant notices, separation agreements, and certifications (e.g., SOX 302 and 906 certifications)[161][162]