Petco Health and Wellness Company, Inc.

Good morning and welcome to Petco's fourth quarter and fiscal year 2021 earnings conference call. All participants will be in a listener remote. 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 telephone keypad. 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 and Investor Relations Officer. Please go ahead.

Thanks very much, and welcome everybody to PECO's fourth quarter and fiscal year 2021 earnings conference call. In addition to the earnings release, there is a presentation and infographic available for download on our website at ir.peco.com, summarizing our fourth quarter and full year 2021 results. On the call with me today are Mr. Ron Coughlin, PECOS Chairman and Chief Executive Officer, Mr. Brian LaRose, PECOS Chief Financial Officer, and Mr. Mike Nuzzo, PECOS Chief Operating Officer and President of Services. In a moment, Ron and Brian will walk you through our recent financial and operating performance from the quarter and the year. Before we begin our remarks, I'd 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 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, the most directly comparable GAAP financial measures, are included in our earnings release and our presentation, as well as in 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. 2021 was a year of record performance and significant strategic progress for Petco, deepening our competitive moats and evolving into a definitional player in the next phase of retail that we call Retail 3.0. encompassing full leverage of omnichannel advantages plus robust service offerings, all while having a positive impact. We're continuing to strengthen our one-of-a-kind end-to-end health and wellness ecosystem. Our brick-and-mortar experience gets better and better. Our digital assets are more powerful with sharp competitive advantages, and combined with our hands-on pet services, we can meet all of our customers' needs when, how, and where they want. These capabilities combined with our ability to innovate and personalize the pet parent experience sets Petco apart and is delivering incredible results. Full year 2021 revenue growth was 18%, which translated to 22% growth in adjusted EBITDA, reflecting the strength of our model, continued execution, and operating leverage. In the fourth quarter, the Petco team once again executed with the same rigor that drove market share and profitability growth all year. Our differentiated strategy is working. We fundamentally believe that we have the best model in the category. Our team delivered yet another quarter of outperformance with comp growth of 14%. Our seventh consecutive quarter of double digit comp growth, delivering 30% growth on a two year stack. If you look at the top 50 retailers, There are only three, including Petco, who have delivered seven consecutive quarters of double-digit comp. Let me repeat that. Of the top 50 retailers, there are only three who have delivered seven consecutive quarters of double-digit growth, and one is Petco. Consumer demand, outpacing supply remains strong in the quarter. It remained strong in January, where we lapped 20% plus year-ago growth, and we're pleased with what we saw in February. And we deliver those results with purpose to make a difference. To Petco, purpose-driven performance is combining stellar business results with tangible improvements in the lives of pets, pet parents, and those working at Petco. And once again, we had a tangible impact on those lives that I will share later in the call. We gained share overall, gained share in digital, and gained share in brick and mortar. Our team is executing, executing in an environment of supply chain tightness. working closer than ever with our supplier partners and nimbly addressing inflationary and labor pressures. Our focus remains on acquiring and delivering for our customers and guiding them to the best available options for their pets, an advantage of our model versus online-only players. On pricing, given our larger percentage of higher-end pet parents, customer demand remained largely inelastic in the quarter, where we realized favorable impacts in the pricing actions we took in both Q3 and Q4. In aggregate, we did not see a decline on product unit volumes for impacted SKUs. Our drive for long-term above-market growth is powered by continued execution against our strategic growth initiatives. That growth is grounded first in the uniqueness of our ecosystem, offering a distinct competitive advantage that enables us to capture a greater share of wallets and build greater loyalty to fuel growth. In brick and mortar, our proven step and repeat playbook, consisting of the addition of a veterinary hospital, a ready store in store, and a Just Food for Dogs pantry, contributes to our confidence that we can drive above category growth for years to come. Combined with relentless cost discipline, we're able to drive the operating leverage that is evident in our results and guidance. We've consistently driven about 20 to $30 million of annual efficiency, enabling us to both reinvest for growth and drop dollars to the bottom line. And as we continue to grow, we expect to drive even greater leverage off of our cost base. Our customer acquisition engine continues to be a competitive advantage across both new and existing pet households. In the fourth quarter, we added nearly 800,000 net new customers. bringing our total active customer count to 24.1 million at the end of 2021. Importantly, we expect these customers to be a source of sustainable growth, or said another way, a furry annuity, for years to come. Spend per pet continued its upward march on the back of strengthening humanization trends driven by Gen Zers and Millennials, where pet goes significantly over indexes, as well as the impact of our initiatives, like repeat delivery and vital care. We continue to drive strong revenue growth across services and vet with a 22% growth rate in the quarter versus a year ago, or 37% growth on a two-year stack, consistent with the trend throughout the year. As you know, we announced last week a transformational transaction to purchase the remaining stake in the Thrive Hospital joint venture. This is an exciting, important milestone in our veterinary hospital journey. demonstrating our deep commitment to providing pet parents high-quality integrated health and wellness services. This joint venture launched us into the full-service hospital business in 2017, and since that time, we've built tremendous capabilities within Petco to both build and operate hospitals and recruit the best hospital teams in the industry. With this transaction and subsequent rebranding, our entire hospital network will be Vetco Total Care, one operating playbook One team, one culture. Brian will elaborate. This will give us even more opportunity for driving synergies with our pet care centers and optimize our veterinary support costs. Our own Vetco total care hospitals continue to deliver incredible results, and we are very excited for this to be our primary expansion focus going forward as veterinary services continues to be a key element for generating tremendous shareholder value. As of year-end 2021, we've reached 197 full-service veterinary hospitals in addition to over 1,000 VetGo mobile clinics, achieving our goal of 72 hospital openings in the year, continuing one of the fastest vet build-outs in history, a testament to the team's ability to execute. Our ability to track and retain talent from vets to groomers has been a key focus and driver of our success. At 5,600, we've never had more groomers, and with a joint venture acquisition, we now have over 1,000 Petco-badged veterinary professionals. Make no mistake about it. We are now scale in the veterinary professional market, and vets love working at Petco. Our value proposition continues to resonate with vets with a 94% satisfaction rate, well ahead of industry benchmarks. In fact, we had a 40% increase in recommendations to work at Petco from our vets. Moving to digital, where once again, we gained share. In Q4, our two-year digital revenue growth was one of the highest in the industry, delivering an increase of 143%, excluding our sale of live aquaria. And it was 25% on a year-over-year basis. We've developed a digital destination for pet parents that really brings to life our 360-degree health offering, leading to another quarter of share gains as we outpaced the market, as well as scaling digital services bookings, which were up over 75% year over year. In the last two years, we've more than doubled the digital business. This has been driven by first-time repeat delivery nearly doubled in the last two years as we revamped the program to give customers control and and as we leverage some of the richest data in the category to drive precision marketing. Second, we're driving higher AOVs, largely due to personalization of our algorithms, driving larger basket sizes and strategic price increases. Third, we extend our flexible fulfillment options. 91% of customers choose either same day or BOPIS when it is available. And we're driving continuous innovation, enhancing the experience and further improving our cost advantage. which we'll share more about on analyst day on March 23rd. Fourth, our app has been downloaded 5.7 million times since launch, with app-generated revenue and active users almost doubling from the fourth quarter last year. Our app customers have become some of the most valuable customers, with spend from app customers being almost double that of non-app users. And finally, our PAW program, an acronym for Petco AdWorks, It's ramping nicely, driving revenue growth and enabling margin expansion for our digital business. Our integrated digital ecosystem is driving engagement and our most recent cohorts are performing even better than historical levels because we're better serving the needs of pet parents than ever before. Moving now to pharmacy, we're gobbling up shares. Our business grew 66% year over year with strong growth in both Rx food and prescriptions. We have an absolute right to succeed and see significant upside in this $11 billion category. Within our pet care center merchandise, we drove strong revenue of 10% year over year and 20% on a two-year stack. Within both consumables and supplies, we mix shifted towards own brand, further deepening our competitive modes. We had growth across both consumables and supplies, as well as companion animal, while driving margin expansion. Our consumables continue to surge, which is great for the long-term health of the business, as these acquired consumables customers have about a 50% higher LTV than supplies. And I'm proud of how the team more than offset mix-driven margin pressures. We've continued to be strategic about passing through inflation and shifting our mix towards premium, which is up double digits versus last year. both improving margin and expanding our competitive installation. Promotional activity remained rational, down versus both 2020 and 2019, with the exception of Black Friday and Cyber Monday, where given the differentiation of our portfolio, supply dynamics, and low LTV customers, we were selective. In the rapidly expanding frozen fresh category, where we're the number one pet specialty retailer, we continued our leadership and drove strong double-digit growth year over year. A key enabler to these successes is the investments we've made in our PCCs, which have generated significant strategic advantages. In the past two years, we've added 1,406 same-day delivery locations, 493 ship-and-store locations, 1,427 curbside locations, pickup locations. And as a result, we've added millions of net new customers. And we are just getting started. We're disrupting the market with leading partnerships and innovation that positions us to win for the long term. In addition to the Thrive transaction that I discussed previously, in January, in partnership with Lowe's, we announced a pilot store-in-store program that brings trusted products, services, and expertise for both home and pets into one convenient stop at select Lowe's locations. This partnership between two industry leaders is designed to elevate our brand, attract new customers, and create a more complete total home solution at Lowe's. And our partnership with Rover further expanded our ecosystem with the addition of their boarding and walking services, and they in turn will drive vital care signups for Petco. Last week, we expanded our relationship with Just Food for Dogs, committing to add 300 new pet care center distribution points. We'll co-develop a new human grade fresh and frozen own brand product line under Whole Hearted, which I'm very excited about. And we'll receive additional marketing support to build awareness. Additionally, Petco will receive a warrant for Just Food for Dogs equity tied to the successful execution of our 2022 plan with the opportunity to acquire additional equity down the road. Earlier today, we announced the launch of VitalCare 2.0, an enhanced version of the most comprehensive pet wellness program in the category. From the nutrition and supplies pets need every day to the services that keep them at optimal health, VitalCare makes it easier and more affordable for you to care for your pet's whole health, all in one place. Better for pets and better for Petco, driving recurring spend, loyalty, and customer LTV. Vital Care 2.0 features a rich list of enhancements, including omni-channel redemption, repeat delivery integration, and an exciting new affiliate partner program beginning this spring that will launch with several partners who will drive Vital Care sign-up, including Rover.com, Hills, the San Diego Padres, Central Garden and Pet, Companion Protect, multiple rescues, including the Baltimore Animal Rescue Center, Jacksonville Humane Center, and the Friends of Pima Animal Care Center. and more who will be a pipeline for vital care. We also expanded the program to cat parents where the initial reaction has been strong. While early days, since rolling out the enhanced vital care 2.0 program in pet care centers three weeks ago, there has been a tangible increase in signups with a quarter coming from cat parents. That's good for pets and good for Petco. This builds on the nearly 160,000 subscriptions exiting 2021. These customers have been spending three times more than the average customer. Over 20% of these members are new to food, and over 30% are new to services, validating VitalCare's effectiveness in driving share a wallet for Petco. VitalCare is at the center of our go-forward customer value proposition, and today's announcement is very exciting for both pet parents and Petco. Thus far, I have focused on the performance part of purpose-driven performance. Now let me discuss purpose. Make no mistake about it, we get up every single morning committed to improving the lives of pets, pet parents, and our own partners. We saved over 396,000 pet lives this year and have distributed over half a million free vaccines to under-resourced communities in partnership with Merck as part of our one million vaccine commitment. And we reunited another 2,000 pets with their loving parents through Petco Love Loss and Q4 alone. leveraging our database of over 100,000 searchable pets, including nearly 1,900 shelter locations. And we know that our Petco family, including our customers, are all devastated by what we're seeing unfold in the Ukraine. And the love that the Ukrainians have for their pets is seen in photo after photo, whether of people leaving the country with pets in tow or lying in a sleeping bag in a subway station serving as a bomb shelter. Together with our nonprofit Petco Love, we're coordinated with international animal welfare partners to support the ongoing needs of pets and pet parents in Ukraine and neighboring countries offering refuge. Our thoughts are with the people and pets of Ukraine and all those impacted by the violence. We also invest to improve the lives of those who work at Petco. The board and I have committed that as the company does better, our partners will do better. This is why in 2021, the company absorbed all benefits cost increases for employees, and why we conducted over a half million hours of skills and competence training, and why every one of our PCC general managers received stock at the time of our public offering, and why in Q4 our Pet Care Center staff received yet another well above target bonus on average due to their exceptional execution. And as a result of these and other investments in our people, application and hiring in the second half of 2021 was significantly above first half, positioning us well entering into 2022 from a labor standpoint. Our Petco partners did an amazing job serving customers, even as we navigated the Omnicron spike at the end of the year, with a continued focus on health and safety. I'm grateful to each of our team members for how they delivered for pets and the parents that loved them this quarter and throughout the past year. And with today being International Women's Day, I want to call out the incredible women across Petco who are driving our business, leading our teams, and supporting customers across the country every single day. It's truly amazing to see our entire team drive tremendous growth, advance our strategy, and improve the world around us regardless of the environment. After delivering an outstanding year, our team is now relentlessly executing against our 2022 strategic priorities. The promise of the re-engineered Petco that we talked about in the IPO has come to fruition. The company has never been stronger and that's showing up in the momentum we're already seeing in 2022. We participate in a rapidly growing category with scale TAM capture opportunities. We have the industry's only comprehensive health and wellness ecosystem and an advantaged omni-channel offering. We enter the year with more customers than ever who are spending more with us and our investments in sustainable, predictable growth are working, all powered by the most passionate and best team in our space. With that, let me turn it over to one of our great team members, our CFO, Brian LaRose.