Petco Health and Wellness Company, Inc.

Good day, ladies and gentlemen, and welcome to the Petco's first quarter fiscal 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one. Please note that this event is being recorded. I would now like to turn the conference over to Christy Moser, Vice President and Investor Relations Officer. Please go ahead, Christy.

Thanks very much and welcome everybody to PECO's first quarter fiscal 2021 earnings conference call. We are webcasting live over the internet. To access the call on the internet, please go to PECO's website at peco.com and follow the links from there. In addition to the earnings release, there is a presentation available for download summarizing our first quarter 2021 results and reconciling non-GAAP measures as discussed today with the most directly comparable gap measures as well as a financial supplement. On the call today with me are Mr. Ron Coughlin, PECO's Chairman and Chief Executive Officer, Mr. Mike Nuzzo, PECO's Chief Operating Officer and Chief Financial Officer, and Mr. Brian LaRose, PECO's SVP of Finance. In a moment, Ron and Mike will walk you through PECO's recent financial and operating performance for the quarter. Before we begin our remarks, I would like to remind you that in this call we will make 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 actual 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 release and our filings with the Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof and, except 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 session of today's call, please limit yourself to one question and one follow-up. Now, let me turn it over to Ron.

Thanks, Christy, and good morning, everyone. Thank you for joining us today. This quarter was a remarkable one for Petco. Yes, it was an all-time record for quarterly revenue with strong profit flow-through, but what's truly remarkable is the customer dynamics that promote sustained growth. We added almost 1.2 million net new customers in the quarter, the strongest gain in my nearly three years at Petco. Spend per pet was up 5%, and we gained market share. We drove more and more of that spend into recurring revenue programs like repeat delivery and vital care. We launched our co-branded private label credit card this quarter, and the initial response is promising. And from a purpose standpoint, we continue to progress our mission to save pet lives and highlighted this quarter by a partnership with PetDX to launch OncoK9, a true breakthrough in pet cancer diagnostics. Cancer is the number one disease-related cause of pet death and a passion topic for me, as my dog, Yummy, is a cancer survivor. Alert detection will make a massive difference. This combination of purpose with performance is central to who we are as a company and guides us into the future. Double-clicking into performance, our team got off to a great start in 2021, driving record quarterly revenue of $1.4 billion, up 27% from Q1 last year, with comparable sales growth of 28%. This marks the 10th consecutive quarter of comp growth. We delivered across all of our businesses. Pet care centers were a particular highlight, delivering growth of 26%. Make no mistake about it, a sizable number of pet parents and their pets love coming into our pet care centers and now feel safe to do so. At the same time, our digital sales exceeded expectations with 21% growth lapping very strong volume a year ago. Services and vet delivered 63% year-over-year growth. We gained share overall, particularly in the areas where we're focused. our top-line growth translated into a 45% increase in adjusted EBITDA, driven by gross margin expansion and operating leverage, even as we leaned into investments for future sustainable growth. Last quarter, I said we were like a unicorn as a beneficiary of both the COVID stay-at-home dynamics as well as accelerating momentum through the reopening. If I reflect on the last 18 months as chapters in Petco's performance history, Pre-COVID 2020, our strategy was beginning to take off, and we were growing 6%. During the heavily impacted COVID period, our business was largely open and designated as essential. In Q3 and Q4, we grew double digits as adoptions soared, and our e-commerce offers like Curbside and Same Day gained traction. This year, with reopening, our sales growth has accelerated to the 20s with double-digit growth every month. This performance is powered by both a surging category and the accelerated execution of our unique strategy. Dynamics that we expect will generate strong growth in both the mid and long term. That projected growth is enabled by the customer behavior we're driving through the power of our unique end-to-end ecosystem and our marketing engine. Petco is turning into a customer acquisition machine. As I stated earlier, we added approximately 1.2 million net new customers in Q1, on the back of roughly a million in both Q3 and Q4. The net new customers we've gained in the last 12 months alone contribute to incremental and meaningful growth going forward. This new customer growth is driven by the strength of our digital offering, the continued expansion of our veterinary business, expansion capacity in grooming and training, and the return of brick-and-mortar customer traffic, as well as continued industry consolidation and tailwinds from a strong pet category. Taking a closer look at the customer trends, the recovery of retail traffic is tangible, with our brick-and-mortar and services new customers up over 100% and 50%, respectively, year over year. With more vet locations, more vet clinics, and aggressive marketing, we almost doubled our new veterinary customers in the quarter versus prior year. These new vet customers are driving higher baskets and transactions than average. Our digital business continues to fire on all cylinders and is serving as a customer acquisition engine, driving significant active customer growth. We spoke last quarter about multi-channel customers, customers that purchase through multiple channels, like brick and mortar and digital, or multiple categories like food and veterinary services. These customers spend much more with Petco than single-channel customers. And Q1 marked our third consecutive quarter with double-digit growth in multi-channel customers. Our analytics rigor and recently built CRM muscle is a key enabler, and we have tremendous headroom here. Impressively, our game-changing vital care membership program is resonating with customers and driving Share a Wallet with what we believe is the industry's first comprehensive membership program that for $19 a month covers checkups, vaccinations, grooming services, and merchandise discounts. Membership increased almost 70,000 after launching in mid-October. Early cohorts of vital care customers are driving 2.5 times more spend versus average customer profiles, proving that vital care is providing better care for the pet and increased share of wallet for Petco. Strategically, we are driving revenue into our recurring revenue stream businesses, including repeat delivery, vital care, insurance, and Pupbox. Petco's customer base in recurring revenue programs was up over 50% year over year. Our unique model is supported by a phenomenal category that is large and growing. Recent industry forecasts have been ratcheted up, and now predict sales growth of 9% in 2021, following stronger than expected 2020 growth of 9%. Correspondingly, the 2021 to 2025 CAGR is now projected to be over 7%, with higher growth projections in key areas like premium nutrition, services, vet, and digital, where Petco is uniquely positioned. We see four industry dynamics driving sustained outsized growth. First, Pet adoption remains strong. 2020 growth of almost 6% in pet households and about a third of pet households added more pets with continuing strength into 2021. These trends are not slowing. From a mid to long term standpoint, a recent survey indicated 65% of 18 to 34 year olds plan to acquire a pet in the next five years. And once a cute puppy or kitten joins a family, they're going to need to be fed, groomed, and vaccinated for over a decade or more. This is what we call the furry annuity. Second, spend per pet increased from historical levels powered by humanization. It is now known that the majority of the 2020 new pets went to millennials and Gen Zers, who have had higher than average spend levels. As they grow as a percent of pet parents, we expect this will be a tailwind for spend per pet. Third, recent data shows a mixed shift to larger breeds. Larger dogs mean larger bowls filled with more food. Lastly, like human trends, pet parents are increasingly focused on their pet's health and wellness, with two-fifths of pet parents paying closer attention to their pet's health and wellness since the pandemic, and over 15% changing the products they buy to healthier premium options. This is where a network of 27,000 passionate trained partners and a portfolio curated to maximize pet health makes a difference. In fact, we grew our dog and cat sales within Petco's premium focus brands by over 500 basis points in the first quarter versus last year. The pet category has clearly accelerated, and we believe there's no company better positioned to capture that growth than Petco. In the first quarter, we advanced all facets of our strategic areas of focus. In merchandising our own brands and brands exclusive to Petco, not only enhance our gross margin, but also fortify our competitive insulation. Own Brands delivered double-digit growth with great results from the recent launch of Wholehearted's active performance in food and the Uli brand in supplies. We built strong Own Brand capabilities and have significant headroom here. Fresh food is another exciting opportunity with a market that's projected to quadruple into a multibillion-dollar category over the next several years, a real example of health and wellness focus translating to premiumization. Fresh food garners a higher price point with twice the trip frequency versus average. We're achieving high double-digit growth with significant market share gains in fresh and are dedicated to being a market maker in the more human-like fresh, refrigerated, and frozen space. We're planning to double our Just Food for Dogs footprint which means we're adding over 300 incremental locations in the second quarter versus our expectations coming into the year. Another highlight is companion animals, where we've led the market for years with a reputation for the highest quality care, knowledgeable partners, an array of fish, reptiles, birds, and more. Recent industry data indicates that upwards of 19% of current dog and cat owners added a companion animal during 2020. This supports our consistently strong double-digit growth rate. Importantly, the companion animal customer is highly attractive with higher spending and trip frequency. In digital, our strong growth has continued, even as COVID restrictions are lifted, translating into customer acquisition, increased transactions, and larger basket sizes. Our market share in digital is up by more than 50% year-on-year, and more than doubled our digital share on a two-year basis. As we lap the large pandemic-related growth in April of 2020, retention of these large COVID cohorts is roughly in line with previous historic cohorts, demonstrating the stickiness of our model. Our structural advantage of 1,453 microdistribution points through our pet care centers is a strategic differentiator versus pure play online competitors. We can get to the customer faster for a lower cost than shipping from a DC. Our offering of buy online, pick up in store, curbside, and same day delivery are resonating with pet parents, including ship from store. Our pet care centers now fulfill roughly 83% of Petco.com orders, which is just incredible. We're actively shifting customer expectations to same day delivery, something PurePlay online competitors will be challenged to replicate nationally. This is particularly strategic in categories like fresh food that are much more costly to ship from distribution centers. Giving a personal example, when my order of just food for dogs, fish, and sweet potatoes comes from one of our pet care centers two miles from my house, it comes in a simple bag versus a packed box with cardboard, with dry ice, with foam packaging that online pure play competitors use for comparable products. Clearly, we have an advantage here. Equally exciting, Petco's highly rated app has become a hub for pet parents to manage their pets' health and wellness needs, including service reminders and customized suggestions for nutrition, supplies, pet care, and services. Just last week reminded me that I needed to get yummy dental chews. We now have over 3.6 million downloads with strong engagement. Service scheduling on the app is at an all-time high, and the launch of our Nutrition Perks program, a reward program for repeat purchases, led to our single biggest app download week ever. This is important, as app customers are spending 2.1 times more than a typical customer. Vet revenue almost doubled in the first quarter, and we expanded our customer reach, exiting the quarter at almost 1,200 pet care centers on a weekly basis between our veterinary hospitals and vetco clinics. We are extending our full-service veterinary offer, delivering world-class, affordable, compassionate, and comprehensive care, adding 12 vet hospitals in the quarter and projecting 72 total openings in 2021, up from the original guidance of 70. Our vet hospital performance continued to exceed our internal model in both sales and four-wall hospital EBITDA, particularly newer cohorts. Also, ancillary vet offerings like prescription insurance that have a combined TAM of over $11 billion are scaling nicely as we leverage our ecosystem. I had the chance to visit a number of our great vet hospitals in Miami a few weeks ago and saw firsthand the close connection between the hospital and the center store team. Customers appreciate the seamlessness across vet services, grooming, and merchandise. I even met a companion animal specialist who is excitedly applying to our vet tech training programs, another example of our purpose-driven performance culture. By integrating these veterinary hospitals into existing pet care centers, we benefit from structural advantages such as lower cost acquisition and larger baskets that most competitors just don't have. And beyond vet, our grooming and training services have seen a strong return of demand, not only growing over the restricted operations last year, but also over 2019. In fact, dog training delivered their highest sales quarter ever. We've continued to take share in a fragmented market, as we leverage our digital marketing capabilities. And as we annualize operational restrictions in the second quarter and third quarter, we expect grooming and training will have a favorable lap dynamic. These results have been buoyed by the strengths of the Petco brand. Over the last year, we relaunched the brand as the health and wellness company. In the first quarter, we supplemented our focus customer acquisition approach with a brand building campaign to pull away from competition, as a health and wellness company. It's What We Want If We Were Pets is a campaign intended to educate pet parents about what whole health means for their pets and motivate them to take action and start thinking about their pets' health and wellness like they would think about their own. The response and initial impact has been overwhelmingly positive. And last, but certainly not least, we're excited to announce that our joint venture in Mexico with Grupo Gigante has now eclipsed the 100 pet care center mark and expects to add another eight pet care centers before the end of the year. We're really pleased with the performance of our business in Mexico, continuing double-digit comp growth with revenue up strong double digits. In addition to our strong financial results, our unwavering commitment to improving the lives of pets, pet parents, and petco partners is a key ingredient in our purpose-driven performance. In April, the Petco Foundation formally rebranded as Petco Love and rolled out Petco Love Lost, a searchable database that uses facial recognition to help reunite lost pets with their family should they ever go missing. If you've ever lost a pet, you know how nerve-wracking it is and how helpless and desperate you feel. To date, more than 1,000 animal welfare organizations and pet industry partners across the U.S. have said they're going to adopt the platform. And last month, we launched our Pets at Work initiative to make sure all of these pets stay in their loving homes. The good news is, in the early part of the year, rescues and shelters are seeing relinquishments down about 25% and remain down versus 2019. Like last quarter, we increased our average wage rate for our Petco partners in the field by double digits year over year and distributed our sixth and largest appreciation bonus yet. living up to our mantra that as the company does well, so will our partners. We also believe environmental sustainability is fundamental to ensuring health and wellness for pets, pet parents, and Petco partners. In Q1, we made a commitment to increase our assortment of sustainable products to 50% by the end of 2025. The only major pet retailer to make this kind of commitment. Pulling all that together, we have a category that's surging, We're gaining customers, we're growing sales, and we've been building market share. That is made possible by obsessive execution by our team focused on purpose-driven performance. We entered the quarter with momentum and with a tangibly larger and more valuable customer base, delivered strong Q1 results, which we continued into Q2. This gives us added confidence to increase our guidance for the year, including growth in the second half of the year. Mike will elaborate on this in just a moment. And with that, let me turn it over to Mike Nuzzo.