Petco Health and Wellness Company, Inc. (NASDAQ:WOOF) This autumn 2023 Earnings Call Transcript March 13, 2024

Petco Health and Wellness Company, Inc. beats earnings expectations. Reported EPS is $0.02, expectations had been $0.019. WOOF is not one of many 30 hottest shares amongst hedge funds on the finish of the third quarter (see the details here).

Operator: Good morning, and welcome to the Petco Fourth Quarter 2023 Earnings Call. All individuals will likely be in listen-only mode. [Operator Instructions] After right now’s presentation, there will likely be a chance to ask questions. [Operator Instructions] Please be aware, this occasion is being recorded. I might now, like to show the convention over to Cathy Yao. Please go forward.

Cathy Yao: Good morning, and thanks for becoming a member of Petco’s fourth quarter and full 12 months 2023 earnings convention name. In addition to the earnings launch, there’s a presentation out there to obtain on our web site at ir.petco.com, summarizing our outcomes. On the decision with me right now are Mike Mohan, Petco’s Interim Chief Executive Officer; and Brian LaRose, Petco’s Chief Financial Officer. Before they start, I wish to remind everybody that on this name we will likely be making sure forward-looking statements, that are topic to quite a few dangers and uncertainties that would trigger precise outcomes, to vary materially from such statements. These dangers and uncertainties, embody these set out in our earnings supplies and SEC filings.

In addition, on right now’s name, we’ll confer with sure non-GAAP monetary measures. Reconciliations of those measures might be present in our earnings launch, presentation, and SEC filings. And lastly, in the course of the Q&A portion of right now’s name, we ask that you just please maintain to at least one query and one follow-up. We will enable for half-hour for Q&A. With that, let me flip it over to Mike.

Mike Mohan: Thank you, Cathy. Good morning everybody, and thanks for becoming a member of us right now. I’m going to spend a while, discussing the management adjustments that we have introduced right now, whereas Brian will take us by way of our monetary outcomes, and preliminary expectations for the 12 months forward. As you’ll have seen from right now’s information, I’ve been appointed by the Board, to function interim CEO, whereas we conduct a complete search, for a brand new CEO. Ron Coughlin has stepped down as CEO and Chairman, and can function an advisor to the Board, in the course of the transition. I’m honored to be right here with you right now, and serve such an unbelievable firm, with a mission that issues to enhance the lives of pets and pet dad and mom. I’ve served as Petco’s Lead Independent Director for the final three years, and I’m proud to be entering into lead our 29,000 devoted Petco companions, who carry our mission to life every single day.

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The Board has spent a while with the chief workforce, over the previous a number of months, to evaluate our working and monetary outcomes. I’m assured that given our place, as a pacesetter in pet well being and wellness, we will enhance efficiency within the years forward. I wish to share my preliminary perspective on the enterprise, and what we’ll do, to drive enchancment. Petco is an iconic model within the pet care class that, is benefiting from the long-term megatrends of humanization and premiumization, supporting constant and resilient class development, in a market that’s anticipated to method, $200 billion in gross sales, by the tip of this decade. Petco has a mix of differentiated merchandise, a dedication to veterinary, and different providers, and an omni-channel mannequin that taken collectively is unmatched in our business.

With the one full service pet well being and wellness ecosystem, Petco sits on the forefront of the business, and is uniquely positioned, to win for the long-term. While we now have made progress in quite a few key areas, over the past a number of years. I acknowledge, we now have not been executing the way in which we have to, in quite a few areas, to ship on our full potential. Most critically, we now have not tailored rapidly sufficient, to current adjustments in shopper preferences. First, we didn’t anticipate, the magnitude of the shift, to worth in each our consumables, and discretionary enterprise. And second, we didn’t anticipate clients, to tug again as rapidly as they’ve, and for this length, when spending on discretionary objects. As a outcome, our in-store and omni-channel providing, was not appropriately aligned, with our clients’ wants.

This has led to 2 basic issues that, we have to tackle with pace. One, an erosion of market share as clients sought out options, and two, a major decline in profitability. Our work right here, has already begun, with the reintroduction of worth manufacturers, in our consumable enterprise, and adjusting our discretionary providing, to offer extra balanced worth factors. But merely reintroducing these merchandise into our assortment will not be sufficient. This extra balanced assortment, should be supported with stronger retail and on-line buyer experiences, and extra disciplined execution. This begins with efficient advertising to each current, and potential clients. It builds with sturdy in-store and on-line merchandising. It is additional supported by the schooling of Petco companions, to make sure they’ll successfully promote our full providing.

And lastly, it must be supported, by efficient provide chain administration that delivers stock profitability with high-end shares throughout our retailer base, and environment friendly supply to omni-channel clients. Going past these important near-term actions, we now have to interact pet dad and mom extra successfully. We are targeted on executing in opposition to high-quality, top-of-funnel buyer acquisition and long-term retention, so extra clients profit, from the complete Petco providing. In doing so, we’ll double down on our efforts, to maximise the chance, to completely leverage the aggressive benefits and alternatives, we now have with our in-store and on-line buyer expertise. And we’ll act purposely, to attach with pet dad and mom, to drive share features, and develop margins by way of improved baskets, and a top quality of gross sales in a significant, and substantial means.

Improving our buyer expertise, retail execution, and total value construction, will assist us drive revenue stabilization within the near-term, and development within the medium and long-term. I plan to have us work in opposition to fewer, and extra clearly acknowledged priorities and outcomes, whereas preserving our groups energized, supported, and geared up to execute in opposition to achievable targets, and making progress, in opposition to guarantees we decide to for ourselves, our clients, and shareholders. Throughout my over 36-year profession in retail, one fact has remained. This journey is rarely linear, however it should be constructed on a world-class retail expertise. If our complete ecosystem, is the engine that drives Petco’s success, then the belief and advocacy of our clients, distributors, and companions, is the gasoline that powers it.

This precept, will sit on the coronary heart of every part we do, starting with our worker expertise. This is an distinctive enterprise that serves thousands and thousands of pets yearly. And I imagine that, by specializing in our mission, whereas addressing the realities of the enterprise’s efficiency with clear, constant, and targeted prioritization, we will unlock Petco’s full potential. Finally, on behalf of the Board and all of us at Petco, I wish to thank Ron for his management over the past six years. Ron has overseen the evolution of Petco as a full service omni-channel retailer, and champion for pet well being and wellness. We are grateful for his management, dedication, and fervour for pet, individuals and our enterprise. Thank you in your time. I’ll now cross it over to Brian to cowl our monetary efficiency.

Brian LaRose: Thanks, Mike. I’d like to begin, by thanking our Petco companions, for his or her relentless efforts in 2023. While we skilled a difficult 12 months, they continued to do every part they’ll, to ship the easiest, for pets and pet dad and mom day in and time out. Turning to numbers, for the quarter, internet income was $1.7 billion, a rise of 6% year-over-year, which incorporates an additional week within the fourth quarter. For the complete 12 months, internet income was $6.3 billion, up 4% year-over-year, inclusive of the additional week, which contributed roughly $120 million in income in This autumn and for the complete 12 months. In This autumn, comparable gross sales on a like-for-like fiscal foundation, had been down 1%, pushed primarily by the absence of discretionary restoration, and lapping a extra inflationary surroundings.

While we noticed early features in income, from the mixture impression of our assortment actions, they had been comparatively small in magnitude for the quarter. For the complete 12 months, comp gross sales had been up 2%. Unless in any other case specified, the outcomes I’ll talk about, are on an as-reported foundation, together with the additional week in This autumn. In the fourth quarter, our providers workforce delivered 17% income development, pushed by ongoing power in our vet hospitals, cellular clinics, and grooming providers. In merchandise, consumables was up 9% year-over-year, reflecting the impression of lapping prior 12 months inflation, coupled with the pricing actions, we took within the third quarter. Our discretionary provides, and companion animals companies, skilled continued softness down 1% year-over-year.

Moving all the way down to P&L, This autumn gross revenue was $606 million, down from $627 million within the prior 12 months. Gross margin for the quarter, was 36.2%, a decline of 350 foundation factors, pushed by our funding in bringing worth manufacturers, into our consumables assortment, and ongoing discretionary headwinds. In This autumn, we additionally took a $21 million stock write-down cost, as a direct one-time response, to our assortment actions that had been taken in reference to our operational reset, with roughly 60% of the cost, associated to decrease velocity provide SKUs, and 40%, associated to consumable SKUs that, will now not be a part of the assortment. This cost, was a obligatory step, to optimize our SKU footprint – and our reset is now accomplished, and we imagine we’re in a superb place, with stock.

Ex-inventory reset gross margins would have been 37.5%. In phrases of the brand new manufacturers, though it’s nonetheless early days, we’re happy to say that we’re seeing constructive momentum, in each transactions and basket, resulting in a small, however constructive internet impression on income, from our assortment and pricing adjustments. This has translated to constructive buyer internet advertisements within the fourth quarter, suggesting early momentum from our reset. In This autumn, SG&A as a proportion of income, elevated from 34.8% to 36.2% year-over-year, because of ongoing investments made in retailer labor, in addition to elevated depreciation. This autumn adjusted EBITDA, was $105.3 million, down 33%, with an adjusted EBITDA margin fee of 6.3%, down 370 foundation factors, year-over-year. This autumn adjusted EPS was $0.02, in comparison with $0.20 per share, within the prior 12 months.

Turning to the stability sheet, our liquidity stays sturdy, with $572 million inclusive of $125 million in money and money equivalents, and $447 million of availability on our revolving credit score facility. As a reminder, we additionally preserve callers, on roughly two-thirds of our debt, which have helped mitigate the impression of rising charges this 12 months. Our This autumn CapEx of $49 million is down 26%, year-over-year. I’ll now flip, to our 2024 outlook. Given the change in management, we’re not offering full 12 months steerage, right now. Instead, we’re offering income, adjusted EBITDA, and adjusted EPS steerage, for fiscal Q1 solely. For the primary quarter, ought to present demand situations persist, we’d anticipate income, of roughly $1.5 billion, adjusted EBITDA of roughly $70 million, and adjusted EPS of roughly adverse $0.06.

For 2024, which as a reminder, will likely be a 52-week 12 months, the surroundings stays unsure, and consequently, we’re taking a prudent method, to our plans for the 12 months. From a full 12 months perspective, we anticipate internet curiosity expense, of roughly $145 million, inclusive of the estimated impacts of our hedges, in opposition to the ahead fee curve, and $272 million weighted common, absolutely diluted shares. Approximately $140 million of capital expenditures, together with the build-out of roughly 5 to 10 vet places. In the meantime, our cellular clinics enterprise, continues to carry out forward of our expectations, and we’re assured that the demand there, will assist assist vet economics. To present some extra colour relating to assumptions for the complete 12 months, we’re at the moment not anticipating a substantive change, to the underlying demand surroundings, together with discretionary.

With respect to profitability, there are a selection of actions that, are being contemplated, as a part of the management transition. We will talk as these plans are finalized. We do anticipate stabilization of profitability, because the 12 months progresses. Although we’re seeing early traction from implementing our assortment and pricing actions, we imagine the scaled income, and revenue advantages, will take time to part in, rising all year long. We stay on monitor to realize $40 million in value advantages, in 12 months one from the associated fee alternatives we recognized, as a part of the deliberate 150 million in run fee financial savings, by 12 months finish 2025. That mentioned, the associated fee advantages will likely be partially offset, by extra investments into retailer labor, to make sure that we ship a differentiated, hands-on buyer expertise in our shops, in addition to mitigation in opposition to gross margin.

On capital allocation, we stay targeted on our stability sheet, as we navigate this surroundings, resulting in a deceleration in our tempo of that construct out, and a balanced method, between investments and money movement. To shut, our focal factors this 12 months, are disciplined execution, working in a extra environment friendly method with a concentrate on bills, stabilizing margins, and money. Thank you in your time. And with that, we’ll be completely happy to take your questions.

Operator: [Operator Instructions] The first query comes from Steven Forbes with Guggenheim. Please go forward.

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