Petco Health and Wellness Company, Inc.

Good day, ladies and gentlemen. Welcome to PECTO's fourth quarter fiscal 2020 earnings conference call. If at any time during today's conference you need assistance from an operator, please press star then zero. After today's presentation, there will be a question and answer session, and further instructions will be given at that time. Please also note today's event is being recorded. I would now like to turn the conference over to Christy Moser, Vice President and Investor Relations Officer. Christy, you may begin.

Thanks very much and welcome everybody to Petco's fourth quarter fiscal 2020 earnings conference call. We are webcasting live over the internet. To access the call on the internet, please log on to Petco's website at Petco.com and follow the links from there. In addition to the earnings release, there is also a presentation available to download summarizing our fourth quarter 2020 results. On the call today with me are Mr. Ron Coghlan, Petco's chairman and chief executive officer, and Mr. Mike Nuzzo, PECA's Chief Operating Officer and Chief Financial Officer. In a moment, Ron and Mike will walk you through PECA's recent financial and operating performance. Before we begin our remarks, I would like to remind you that in this call, we will be making forward-looking statements regarding our current beliefs, plans, and expectations, which are not guarantees of future performance and are subject to a number of risks and uncertainties and other factors that could cause results to differ materially from results and events contemplated by such forward-looking statements. These risks and uncertainties include those set forth in our earnings relief and our filings with the Securities and Exchange Commission. Those forward-looking statements are made only as of the date hereof and accept as required by law. We undertake no obligation to update or revise any of them, whether as a result of new information, future events, or otherwise. In addition, today's presentation contains references to non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release and our filings with the Securities and Exchange Commission. During the question and answer portion of today's call, please limit yourself to one question and one follow-up. Now, let me turn it over to Ron. Ron?

Thanks, Christy, and good morning, everyone. Let me begin by saying that we could not be more pleased to be speaking with you for the first time since our IPO in January. We've been looking forward to sharing progress against our strategic priorities and how that translated to strong fourth quarter and full year results. We exited 2020 with momentum, delivering fourth quarter revenue growth of 16% above our expectations, a 17% comparable store sales or comp sales. 90% plus digital growth, almost a million new customers into the franchise, and 13% adjusted EBITDA growth. This contributed to an impressive 2020 performance overall, where we saw a full-year revenue growth of 11%, translating to 14% growth in adjusted EBITDA. And while the COVID environment has definitely provided a strong industry tailwind, looking forward, the millions of incremental new pets who entered homes in the past 12 months generates a predictable pet spend annuity for years to come. And coupled with premiumization and humanization trends and the stickiness of our multi-channel customer relationships, we see strong growth long into the future. Mike will dive deeper into our financial performance and provide guidance for 2021. But before we do that, I want to ground everyone on why Petco is such a special growth company. For those of you who are new to our story, we are the health and wellness company for pets and pet parents. Building off of a 55-year history of serving pets and the people who love them, over the last three years, Petco has transformed into a disruptive, fully integrated, and digitally-led provider of premium products, services, and veterinary care. Our investment thesis starts with a phenomenal category that is large and growing. And within this category, Petco has an exceptional integrated end-to-end ecosystem with the ability to reach customers when and how they choose. That is absolutely what pet parents want, as industry research suggests. 50% of customers are looking for a one-stop shop for all of their pet's needs and are customer-based over indexes in the highest quality seeking and highest spending pet parents. Our transformation has delivered nine consecutive quarters of growth. In particular, we had momentum going into 2020 with strong top-line performance. Our performance accelerated through the pandemic, and we're on an exciting growth trajectory even as COVID restrictions relax. The Petco multi-channel platform integrates our strong digital assets with our nationwide physical network. For example, we launched approximately 400 more shift-from-store locations and curbside pickup in a matter of weeks. This nimble approach enabled us to adapt to the environment in a way that would have just been impossible two years ago. At Petco, though, great results start first with great people. I could not be more proud of how our knowledgeable, passionate, and caring Petco partners have rallied together to do amazing things for pets, pet parents, and each other. Their health and safety remains our absolute number one priority, along with the customers and animals in our care. We've consistently met or been ahead of CDC safety guidelines. The protocols we've deployed in support, we've provided our partners as a result of an Impeccable Partner COVID infection rates that are around one-third of the national average despite everyday interaction with customers. Importantly, we have provided five COVID-related bonuses and established an employee emergency fund that has already provided support to over 1,300 partners and their families. We believe vaccinations are critical enablers to the fastest possible recovery, so last month we launched a $75 incentive program for each Petco partner, completing a COVID-19 vaccination regimen. For each partner vaccinated, we're also donating $25 to the Partner Assistance Fund. As we think about the road ahead, there are two critical factors that have us all very excited. First, the strength of our category today and forecasted into the future. Second, we are really just getting started monetizing our unique end-to-end pet health and wellness ecosystem. The pet category has proven once again how resilient it is to economic cycles and industry projections forecast accelerated growth for many years to come. That is powered by the seismic 3 million plus incremental new pets in 2020 and heightened adoption activity continuing into 2021. According to recent studies, the pet food and pet supplies categories are up mid-single digits and double digits, respectively, over the first few weeks of 2021. And while our list mirrors other COVID beneficiaries like masks, home improvement, and home goods, what makes us different is that once the garage is remodeled, you're not going to do that again for a decade. Conversely, once a cute puppy becomes part of your home, that will need to be fed. They'll need to be groomed and vaccinated for a decade or more. And importantly, the spend per pet has increased 4% annually for years, as pet owners increasingly embrace their pets as part of their family. Much like my dog, Yummy, who comes to work with me, eats salmon and sweet potatoes, and not only sleeps in bed with us, but is a bed hog at that. This combination of more pets and greater spend per pet has resulted in industry experts freezing their forecasts from historical levels around 4% to 5%, up to 6% to 7%. with higher growth projections in key areas like premium food, services, vet, and digital. The exact area is what we're focused in seeing accelerated growth. All in all, PET has historically been a great high-growth category that accelerated in 2020 from COVID tailwinds, and that creates an annuity for many years to come. We also believe that there is no company better positioned to both provide world-class health and wellness and capture a dominant share of wallets. from these new pet parents. While we compete with peers across each of our channels, from our perspective, no one has the end-to-end integrated multi-channel experience with the ecosystem that Petco provides pet parents, from nutrition to own vets, to vet clinics, to training and grooming, to our differentiated fulfillment options, and more. This results in tremendous stickiness. Our platform provides a singular view of the customer, giving us what we believe is a significant competitive advantage relative to our peers. Let me give you an example to make this more tangible. Only a few weeks ago, I received a reminder on my Petco app that Yummy was due for his vaccinations. I scheduled his appointment online and took him in. While I was there, I picked up a few new treats, picked up a toy, and scheduled a groom. Without an integrated ecosystem that enables one view of the customer, we never would have had all those touch points. A key component of our ecosystem is our best-in-class digital platform. which drove 100% plus digital revenue in 2020 and has steadily gained share. Thanks to strategic investments in recent years, our site speed is now as fast as any other player in the market. We were laggard two years ago. Our user experience is winning over customers, and our assortment and pricing are now competitive, all of which drives substantial improvement in conversion. We're also seeing compelling results from our recurring revenue offerings, repeat delivery, and pop box. which is our monthly subscription box program for puppies. They were up over 40% and 100% respectively for the year. Shifting next to recurring revenue is a strategic priority that is now tangibly impacting our business and we're continuing to make great progress. One of the things I'm most excited about is a structured manage created by our customer fulfillment. Our pet care centers now double as micro distribution centers and our footprint of physical locations have become a huge asset. At the onset of the pandemic, we launched curbside pickup. And over the holiday period, we launched same-day delivery, an offering that our digital pure play competitors just cannot offer. We believe this will further enhance our customer retention, with almost 40% of early adopters saying they prefer same-day delivery. Today, over 80% of our Petco.com orders are fulfilled from our pet care centers. enabling us to get the product to customers faster and at a lower cost on average than pure play online competitors. Also, by the end of the fourth quarter, our mobile app has been downloaded 3 million plus times and is driving merchandise sales and incremental services bookings. Our own brands and exclusive merchandise deepen our competitive moats and power our growth. Our team has demonstrated the ability to build brands and products that resonate with customers. In both Q4 and full year 2020, our own brands drove double-digit growth and are rapidly approaching 30% penetration, further fortifying our differentiation from our competitors. Our food brand, Whole Hearted, which we launched in 2016, is now a top three offering, while our premium and supplies brand, Ready, grew almost 90% with aggressive expansion plans ahead. Complementing our own brand offering, we also have exclusive partnerships for unique products. We're particularly excited about fresh food, which is projected to more than quadruple into a multi-billion dollar category over the next several years, according to industry forecasts. We're focused on becoming a market maker in fresh. In 2021, we're set to more than double our Just Food for Dogs distribution, while our recent launch of premium price human grade Honest Kitchen has broken all our previous initial sales records. Overall, our own brands and brands exclusive to Petco in specific markets represent over half our portfolio, not only enhancing our gross margin, but also creating competitive insulation. Petco's competitive insulation is furthered by services like our veterinary business, where we're creating a new paradigm in the industry, as well as grooming and training. We're rolling out full-service veterinary hospitals across the country, to address the growing need for affordable pet healthcare consistent with our mission to improve the lives of pets and their pet parents. By integrating these veterinary hospitals into existing pet care centers, we benefit from significant structural advantages, including lower cost of acquisition and additional basket opportunities compared to standalone veterinary care providers. This model enhances customer lifetime value and drives retention. Our vet hospital business is shifting into high gear as we open 20 additional hospitals in Q4, despite COVID related construction and permitting delays. This brings our year end total to 125 locations. Our hospital customer count is up strong double digits year over year. This performance comes with consistent nine out of 10 customer satisfaction scores. We are executing what we believe is the fastest vet build-out in history and are seeing a strong performance ramp ahead of our expectations. Long-term, we're targeting up to 900 vet hospitals and our pet care centers. This will have a tangible annual and long-term impact on our financials. In addition to our rapidly scaling vet hospital business, our mobile vaccination clinic business, Vetco, services over 800 pet care centers weekly and is seeing strong customer demand. We continue to expand to new markets like Reno, Anchorage, and Nashville, and have begun to pilot mobile clinic sites with other major retail partners. I visited a pilot location several weeks ago in Phoenix and am excited by the potential there. Needless to say, our vet offering stack is scaling into a major long-term growth engine for Petco. Turning now to grooming and training. COVID has had a tangible negative impact on our business. As we shuttered all group training classes, and implemented capacity restrictions at grooming salons. In spite of those restrictions, grooming began to rebound in the second half as we started to carefully reopen. In grooming and training, we expect to continue to take share in a fragmented market as we compete primarily with single-unit operators, and our digital marketing capabilities provide tangible advantages. Over 25% of grooming appointments are booked online or in our app. Our Spa Club loyalty program has over 200,000 customers. We successfully launched online training, which means my mom's new Maltese here in San Diego was trained virtually by our star trainer, Chloe, in New York City, 3,000 miles away. And lastly, we successfully applied digital media and search at the local level. All capabilities single unit operators typically lack. Due to the 2020 COVID-related closures, Grooming and training will likely have a positive lap dynamic from Q2 to Q4 of 2021 as we annualize stay-at-home restrictions. Bringing all the services business together despite COVID-related headwinds and health and safety requirements, we achieved revenue growth in 2020 and returned double-digit growth in the fourth quarter. And further powering our acceleration, We're leveraging our data analytics engine to drive new customer acquisition, build further momentum, and multi-channel purchase conversion. We have a base of over 20 million active customers, and that grew by nearly 1 million customers in each of the third and fourth quarters. So today, approximately 90% of those customers, well, they're PALS loyalty members, which gives us insight into what they buy, where they buy, and when they buy. One of the most robust databases of pet parents in the industry. We leverage this data across the entire organization from marketing to new products and services to how we operate our pet care centers. Importantly, we are very focused on having pet parents participate in more of our categories and channels. We call these multi-channel customers. And our analytics show that when a customer shops more of our categories and channels, their spend and our share of wallet increase exponentially. We drove double-digit growth in our multi-channel customer base last year. And given the spring, I'll use a baseball analogy. I think we're only in the third inning and see a scale revenue growth opportunity from customer acquisition and this multi-channel conversion effort. In support of these efforts, we're deploying enhanced CRM, digital marketing, analytics, and customer segmentation capabilities, with marketing ROIs double industry benchmarks as a result. These capabilities are driving our game-changing VitalCare membership program. It's the industry's first comprehensive membership program covering checkups, vaccinations, grooming services, and merchandise discounts. In essence, bringing our unique ecosystem to life. We launched in mid-October and already have more than 50,000 participants. VitalCare is providing better care for the pet and increased share of wallet for Petco. I will close by reinforcing both the importance we place on our North Star of purpose-driven performance and the significant progress we've made in the purpose area. We've made bold moves and demonstrated our commitment to improving the lives of pets, pet parents, and the partners that work at Petco. This year, like prior years with the Petco Foundation, we helped save roughly 400,000 animals from euthanasia. And since our inception, have helped find homes for more than 6.5 million animals. Ending pet euthanasia is an absolute mission for Petco. Two years ago, we made the choice to eliminate products with artificial ingredients. The only national retailer to do so, and that choice resonated with pet parents. It was an important step in our journey to differentiate ourselves as a pet health and wellness company. In October, we led the industry once again by removing electric shock collars, which cause stress and pain. from our shelves and increased our advocacy for and provided free introductory positive dog training classes. The response to this announcement was incredible. It generated more than 2.3 billion impressions and further established Petco as the true health and wellness company. Our purpose also includes improving the lives of Petco partners. As I mentioned earlier, we gave five COVID appreciation bonuses, and in 2020, our average wage rate increased by double digits, living up to our commitment that if the company does better, employees will do better. Similarly, we granted IPO shares to an extremely broad swath of employees, reinforcing that when the company wins, our partners win. We're also committed to sustainability and are making strong strides. We'll be laying out details about our sustainability progress, targets, and initiatives in the coming months. Pulling all that together, we've delivered strong results from a Q4 and full year 2020 standpoint, powered by a differentiated customer proposition, customer acquisition and engagement momentum, obsessive execution by the Petco partners, and a strong mission-based culture that drives us into the future with tailwinds from an accelerating industry. The scaling of our industry and power of our model is evident in our Q1 quarter-to-date revenue and customer acquisition momentum, which has given us added confidence for the year. We are beginning to lap the supercharged pantry loading from March 2020 and are pleased with what we're seeing. Petco has also strengthened beyond operational components. Our IPO and oversubscribed refinancing allowed us to lower debt and debt servicing obligations and provides more ability to invest for growth. In the near term, we would expect a lift in the recently passed stimulus as pet parents have increased spend on their beloved pets after receiving prior checks. And from a leadership standpoint, we've added terrific new board members, including Sabrina Simmons, former CFO of Gap, Mike Mohan, President and COO of Best Buy, and Mary Sullivan, Senior Managing Director and Chief Talent Officer of Canada Pension Plan Investment Board. These moves will further enable us to continue to pull away from the competition while doing everything in our power to improve lives. We look forward to keeping you updated on our progress. And with that, let me now turn it over to Mike Nuzzo, who, in addition to being our CFO, has done a terrific job leading our services business and supply chain as COO. Mike will walk you through the financial details on our fourth quarter and fiscal 2020. Thanks, Ron.