Petco Health and Wellness Company, Inc.

Good morning and welcome to Petco's third quarter fiscal 2021 earnings conference call. All participants will be in 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 on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Christy Moser, Vice President of Investor Relations. Please go ahead.

Thank you very much, and welcome, everybody, to Petco's third quarter 2021 Fiscal Earnings Conference Call. In addition to the earnings release, there is a presentation and infographic available for download on our website at ir.petco.com. summarizing our third quarter 2021 results. On the call with me today are Mr. Ron Coughlin, Petco's Chairman and Chief Executive Officer, and Mr. Brian LaRose, Petco's Chief Financial Officer. In a moment, Ron and Brian will walk us through Petco's recent financial and operating performance for the quarter. Before we begin our remarks, I would like to remind you that on this call, we will make forward-looking statements in regards to our current plans, beliefs, 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 and events to differ materially from our 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 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 the earnings release and our presentation, as well as with 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. With that, let me turn it over to Ron.

Thanks, Christy. Good morning. We appreciate you joining us today. Petco delivered record third-quarter results with our sixth consecutive quarter of double-digit comp growth, generating 32% comp growth on a two-year stack with strong profit flow-through. We continue to execute on our differentiated strategy with robust performance across all areas of our business. Growth in adjusted EBITDA of 17% outpaced our 15% year-over-year revenue growth, reflecting the strength of our model and operating leverage. I am so proud of our team's performance navigating these unprecedented supply chain and inflationary pressures that are impacting every industry. Our focus remains on acquiring and delivering for our customers in an environment where demand is outpacing supply, with millions of new pets and greater spend per pet. I know from my nearly 30-year experience as a vendor to retailers that in times like these, the strong and growing gets stronger. Correspondingly, we are pleased with our supply relative to the industry, particularly in consumables, enabling a more than doubling of our rate of share gain. Additionally, because most of our holiday stock is owned brands, we are well positioned, having over 95% of that stock already in stores and DCs. This is on the heels of a 24% increase in Halloween merchandise sales compared to last year. On inflation, like the broader marketplace, we have seen some price increases on vendor-supplied product that we have been able to pass through. The high end of the pet category, where we focus, is highly inelastic. In an aggregate, we haven't seen an impact on unit volumes. In a tight labor market, the companies with a compelling employee value proposition and strength of mission will do better in the competition for labor. If you love pets and you want to work for a company that cares about you, Petco is the place. And we're seeing that in our Pet Care Center applications, which increased roughly 40% in the third quarter versus the beginning of the year. Now back to business results. Petco's exceptional team has continued to deliver strong, purpose-driven performance, combining stellar business results with tangible improvements in the lives of pets, pet parents, and those working at Petco. We had great business momentum in the first half of the year. And in Q3, we lapped a double-digit comp with a strong 15% growth. And that momentum has continued into the fourth quarter to date, giving us confidence to again raise our 2021 guidance, which Brian will provide details on later. Our focus on long-term sustainable growth is powered by continued execution against our transformation, including one of the fastest veterinary expansion in history, further enhancements of our digital competitive advantages, expansion of our merchandise differentiation through powerful owned and exclusive brands, and maximum leverage of our physical footprint. I firmly believe that we're in a prime position to be a leader in the next evolution of the retail category. Looking back at the industry's history and chapters, Retail 1.0 was the consolidation of business to the brick and mortar stores of mega retailers like Sears and Mass Players. Retail 2.0 is the expectation that nearly all of retail would eventually move to digital. And now we're in a stage I call Retail 3.0. The omnichannel promise that we've all been talking about for years was accelerated by the pandemic and is now blossoming with consumers. Petco has a combination of best-in-class digital assets and a strategic physical footprint that simultaneously delivers value-added customer experiences along with powerful distribution capabilities. PurePlay Online players lack this combination, and it is absolutely a source of competitive advantage. Category growth continues to be very strong. Adoptions of new pets remains elevated relative to historic levels, though slightly moderated from 2020's hypergrowth, with adoptions continuing to outpace supply. We're seeing particular strength in cat, where adoptions were up roughly 20% versus last year through mid-2021. The LTV of cats is just shy of a dog's, though on average is realized over a longer lifespan. And spend per pet continues its upward march on the back of strengthening humanization trends driven by Gen Zers and millennials, where pet goes significantly over indexes. Our customer acquisition engine continues to be a competitive advantage across both new and existing pet households. In the third quarter, we added more than 830,000 net new active customers, bringing our total active customer count to 23.3 million at the end of Q3. And we're driving increased value per customer from that larger base through personalization, enhanced analytics, and CRM. Additionally, for the millions of new pets in households over the past 18 months, we're seeing the life cycle of a pet play out across the category. The new puppies and kittens adopted last year are growing, adding 5, 10, 20, all the way up to 100 pounds in the last year. The larger they become, the more food they consume. Correspondingly, the category does see a reduction in supply sales between year one and year two of a pet's life after the initial stock up when they're first welcomed into their loving homes. The end of year two status quo continues until the pet approaches end of life, where there is significantly higher spend on vet and prescription, similar to the higher demand we are seeing on the healthcare system with the boomer generation. Importantly, as consumables have surged, we have taken more than our fair share of the category growth, which we estimate to have grown in the low teens year-over-year versus Petco's 21%. These share gains benefited from our winning hand in higher growth segments like Fresh, differentiated super premium kibble brands, and our own powerhouse, Wholehearted. We've also benefited from how we develop these brands. From a margin standpoint, while margins are higher in the supplies category, the LTV of an acquired consumables customer is strong double digits more favorable than that of a supplies customer. In Q3, our digital business again posted what we believe is one of the highest two-year revenue growth rates of any retailer with an increase of 159% on the back of the 150% we posted last quarter. enabled by 32% year-over-year revenue growth, excluding our sale of live aquaria. We've developed a digital destination for pet parents that has incredible traction, and we continue to gain digital share. Repeat delivery grew nearly 40% in Q3 versus the prior year. This is such a valuable source of recurring revenue, and our headlights show significant repeat delivery headroom ahead. We generated strong growth in same-day delivery penetration, with 90% of customers choosing either same-day or BOPUS when it's available. We've expanded our assortment and enabled better personalization, which attracts new customers and is driving larger basket sizes. Our highly rated app has been downloaded 5 million times since launch, with app-generated revenue and active users more than doubling from third quarter last year. And the app care reminders we discussed last quarter are now delivering 2x the conversion rate of non-promotional emails. And in the $50 billion pet health category, which includes grooming, training, veterinary care, prescription and insurance, we've been growing rapidly. This is largely driven by great hands-on experiences we offer, as well as our unique capabilities in marketing and technology, a capability stacked at local, smaller brick and mortar and online-only competitors, cannot match. In the almost $11 billion prescription market, we delivered 50% growth with significant headroom for more. In Q1, we said it was a focal point for us. In Q2, we transitioned to a new partner, VetSource, and the momentum began. And in Q3, I'm proud to say the prescription food was up almost 100%, and prescription drug growth has accelerated every month since the transition. This is a business where ecosystem drives significant strategic advantages. For example, in 173 hospitals, we now have Petco doctors writing scripts which are getting filled either in our pet care centers or via Petco.com. The upside here is substantial. In the $45 billion TAM services and vet market, we continue to perform strongly with revenue up 24% versus a year ago or 38% growth on a two-year stack. We have the most groomers and veterinarians in our history, and we're continuing to grow to meet rising demand as many of our groomers and doctors are booked out weeks in advance. While the vet market is one of the tightest labor markets today, our value proposition continues to resonate, and our recruiting time to fill open roles continues to outperform the industry. On this day in 2018, we had 24 hospitals. On this day in 2019, we had 73 hospitals. On November 18, 2020, we had 107 hospitals, and today we have 173 hospitals on our way to 197 expected by the end of the year. Tangible milestones and the fastest that filled out in history. In the quarter, we delivered 17 vet hospitals and had an acquisition of a vet practice in Texas that closed just after the end of the quarter. Our organically built owned hospitals continue to deliver incredible results and will be our primary expansion focus going forward. Importantly, we continue to see mid-single-digit center store lift where we put up that hospital, in addition to the attractive four-wall model of economics within the vet hospital. with 20% adjusted EBITDA margin. Our hospitals are complemented by Vetco clinics that are now in about 1,100 pet care centers, up from 800 at the beginning of the year. Strategically, the clinic business continues to be a great feeder system of doctors for our hospitals. The unique omni-channel platform I spoke of earlier is built on the foundation of a strong brick-and-mortar footprint and capability, which has been optimized over the last three years. Petco's brick-and-mortar merchandise revenue was up 11% year-over-year and 21% on a two-year stack, with growth in all of our major categories, with particular outperformance in the sticky consumables business. Owned and exclusive brands were up double digits. In the quarter, we introduced a ready flagship location in New York's trendy SoHo neighborhood, complemented by stylish shop-and-shops across many of our pet care centers. These are great accelerators for a fashion-forward, high-end ready supplies brand. Second, we're driving a mix shift towards premium and super premium consumer brands, which were up almost 20% versus last year. This also creates competitive insulation, as those brands are not generally distributed in mass or grocery and tend to limit online access. Third, fresh and frozen was up close to 50% year over year with wonderful trip frequency dynamics that benefit the broader enterprise. Today, we remain the number one pet specialty retailer in the fresh and frozen category with a full spectrum of exceptional brands like Just Foods for Dogs, Fresh Pet, and Instinct. Just Food for Dogs is now in 517 pet care centers. We're on track to bring our total to roughly 700 locations by year-end, complementing our nationwide fresh and refrigerated footprint. We've been pleased with Just Food for Dogs' ability to ramp supply in support of our expansion and increased demand from pet parents. Many of you probably saw that one of our fresh and frozen vendors released results last week. while our revenue growth in that brand handily outperformed their total business, exemplifying our leadership and capability in this space. I believe we're reaching an exciting inflection point in our ability to drive value from our customer base as our data analytics infrastructure is maturing and our loyalty and engagement programs scale. This is best exemplified by our progress in driving customers into our recurring revenue and loyalty programs. Recurring customer revenue was up over 60%, and recurring revenue customers grew by almost 45% year over year. Our nutrition and grooming perks loyalty programs, which are driving higher average spend, have reached roughly 1 million members, up about 35% from Q2. VitalCare reached nearly 130,000 subscriptions since launching at the end of last year, and these customers are spending over three times an average customer, with almost 20% being new to Petco. Once again, we grew our multi-channel, multi-category customer base by double digits. As I said earlier, we are committed to purpose-driven performance. Therefore, in addition to delivering business results, we remain committed to improving the lives of pets, pet parents, and our own Petco partners. We continue to progress on our mission to save pet lives, returning 1,600 pets to their loving parents through Petco Love Lost, the first facial recognition software for pets. And through our relationship with Merck, Petco Love has distributed over a quarter million vaccinations to help end life-threatening preventable diseases to pets in under-resourced communities across the nation. We are also investing to improve the lives of those who work at Petco, increasing average hourly wages and investing over $12 million in benefit premiums over the last three years while absorbing certain health care costs. Additionally, Q3 bonus payouts for Pet Care Center staff were roughly 40% higher than target, highlighting that as the company does better, our partners will do better. As a result of these and other investments in our people, application and hiring remain well above 2019 levels. As we continue to progress our ESG agenda and disclosures, we are recognized by the Pet Sustainability Coalition with the 2021 Earth Hero Award for setting the standard in the pet industry on sustainability. We are very proud. This is an incredibly exciting time for Petco. Our entire organization is relentlessly executing against our strategic priorities, and we've built the industry's only comprehensive health and wellness ecosystem for pet parents in a market exhibiting strong, sustained growth. We're operating from a position of strength and see a long runway of growth powered by our digital advantages, our differentiated products and services, and our passionate people. With that, let me turn it over to Brian.