Petco Health and Wellness Company, Inc.

Good morning, everyone, and welcome to PECO's first quarter 2022 earnings conference call. All participants are currently in a listen-only mode. Should you need assistance, please see a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To join the question queue, you may press star and then one. To withdraw your questions, you may press star and two. After today's presentation, Please note today's conference call is being recorded. At this time, I'd like to turn the conference call over to Benjamin Thiel-Long, Petco's Director of Executive and Business Communications.

Benjamin, you may begin.

Good morning, everyone, and thank you for joining Petco's first quarter 2022 earnings conference call. In addition to the earnings release, there is a presentation and infographic available to download on our website at ir.petco.com. summarizing our first quarter 2022 results. On the call with me today, Mr. Ron Coughlin, Petco's Chairman and Chief Executive Officer, and Mr. Brian LaRoche, Petco's Chief Financial Officer. In a few moments, I would invite Ron and Brian to provide their perspective on Petco's financial and operating performance for the quarter and their outlook and priorities for the quarters and year ahead. Before they begin, I would like to remind you that on this call, we will make forward-looking statements. regarding 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 out in our earnings release and our filings with the Securities and Exchange Commission. These forward-looking statements are made only as of the date marked 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 presentation, as well as in our filings with the Securities and Exchange Commission. And finally, during the question and answer portion of today's call, and to allow us time for questions from as many participants as possible. We would be grateful if you could keep to one question and one follow-up. With that, let me turn it over to Ron.

Good morning, everyone, and welcome. Given all the noise in the retail space, I will start very simply. Petco's team executed. We overdelivered on top line with a 5% comp. We overdelivered on EBITDA growth with a positive spread between revenue and EBITDA growth. Our guidance remains unchanged. We are comfortable with our inventory position, and it aligns well with near-term projected demand. The mixed shift towards more premium products continues. The pet care and distribution center teams did an excellent job matching staffing costs with sales, and that has continued into Q2. For those of you who joined us at our inaugural Investor Day in March, you heard us outline our strategic vision to boldly redefine the future of pet parenting through a one-of-a-kind, end-to-end pet health and wellness ecosystem that includes differentiated services and merchandise delivered through an advantaged retail 3.0 omnichannel model. We also talked about our confidence as operators to deliver, whether in times of tailwinds or headwinds. Make no mistake about it. Petco has been, is, and will continue to be a growth company. This is our 14th consecutive quarter of growth. Q1 was a quarter that not only reinforced our ability to drive growth, but also exemplified the team's operational prowess. And importantly, once again, we delivered that performance with purpose, improving lives of pets, pet parents, and our Petco partners. For the quarter, a resilient category, our advantage model, and the team's operational excellence translated into comping last year's stimulus-aided 28% comp with the 5% comp I shared earlier. That generates an incredible two-year comp of 33%. First quarter revenue growth was 4%, and growth has continued into Q2. And our ability to generate leverage from our model delivered a positive spread to adjusted EBITDA with 5% EBITDA growth. Gross profit was $608 million, translating to a gross margin rate consistent with historical quarter-to-quarter seasonality of 41.2 for the quarter. The team's performance lapping unprecedented year-ago comps while navigating a stormy macro environment is truly exceptional. It also speaks to the resilience of our core, higher-value customer. Overall, we continue to grow our active customer base with almost 400,000 net new customer ads in the quarter, representing a double-digit growth year-over-year. PetCare centers were a significant customer acquisition engine with another double-digit increase year-over-year, including strong growth in active veterinary and grooming customers. Spend per customer increased sequentially and year-over-year, with recurring revenue sales growing double digits, driven by programs like VitalCare, repeat delivery, and insurance. High-value multi-channel customers also grew double digits year-over-year. These results reflect the continued strength of our model and the resiliency of our customer. They also speak to the commitment of our incredible 28,000 Petco partners. Every day, our partners engage, inform, and guide pet parents to make the right choices for their pets. They bring our health and wellness philosophies to life, introducing pet parents to new products and sticky services while driving repeat visits. In fact, last month, Petco partners from across the country joined us in San Diego for our Epic Elite Achievers Award event, a celebration that honored 200 partners who have driven exceptional performance while also exemplifying Petco's mission and values. It was wonderful to reward and recognize these partners and to see firsthand their passion for delivering the trifecta of amazing pet care, fantastic business results, all while improving the lives of the partners that work for Petco. These are the people that make Petco special, and I'm so thankful to each and every partner across our pet care centers, support centers, and distribution centers for everything that they do. We operate in an incredible and highly resilient category. According to Nielsen in March, April of 2022, pet was the fastest growing category among the 30 categories that they track. Let me repeat that. Pet was the fastest growing category Nielsen tracks. The pet category is positioned to grow even in today's challenging macroeconomic environment. Pet is the embodiment of a defensive growth category. Why? Because for the pet category, consumables are the equivalent of milk, eggs, or bread in human stores. And going to the vet and groomer is far down the list in terms of things that pet parents cut out of their routines. And more and more people continue to love and spoil their pets every single day. Of course, in the near term, we like others will need to navigate rising supply chain, commodity and gas costs and consumer inflationary pressures, particularly in discretionary categories. But two things are equally certain. First, we will continue to leverage our unique integrated ecosystem and value proposition to get pet parents what they want, when they want it, to ensure pets remain happy and healthy and we gain share of wallet. And second, We have a track record and core competence around cost management and generating leverage in our model that we will flex through this cycle while we continue to make strategic investments in areas like VET, fresh frozen, vital care, and our people aimed at driving above market growth and deepening our competitive modes. Turning to the core elements of our business, health and wellness services have extended the strong momentum we saw in 2021 with total services sales including VET growing by 19% in Q1 and 83% on a two-year basis. This speaks to the economic insulation of our services business and the team's ability to execute. Our VET business in particular has experienced dramatic scaling. We are gaining VET share and we remain on track to deliver one of the fastest VET hospital expansions the category has ever seen. In the quarter, we celebrated the opening of our 200th full-service hospital. I remember just 18 months ago being at the ribbon-cutting ceremony for our 100th opening in Encinitas, California. We also averaged almost 1,100 vetco clinics per week, up 10% from a year ago. In March, we reached an agreement to purchase the remaining stake in our Thrive joint venture, adding almost 100 full-service veterinary hospitals into our own Vetco Total Care Network and consolidating all of our PCC veterinary hospitals under the Vetco brand name. The deal successfully closed earlier this month, and I could not be more delighted to welcome the nearly 800 veterinary professionals to the Petco family. And as we stated on the last earnings call, our primary focus for Q1 and Q2 is the successful integration of the Thrive hospitals, and that is going very well. Thus far, we've achieved a 90% retention rate of Thrive Veterinary professionals ahead of our expectations. This validates the compelling nature of our employee value proposition for veterinarians and vet techs. We are now at scale with over 3,800 vet service partners across our network. Additionally, we have a strategic pipeline for talent through our registered vet tech education program that will advantage Petco for years to come. Last, we see hiring tailwinds, as in times of past economic uncertainty, veterinarians have migrated to the larger, more secure industry players. While we're primarily focused on integrating the Thrive practices and professionals, we also open four new owned hospitals during the quarter. That pace will accelerate in Q2, and we expect to return to the roughly 70 per year pace in the back half of the year. Our vet hospital footprint today gives us significant scale and geographical reach. And by the end of fiscal 2022, we are projecting to have locations in 48 states. We also know that our veterinary professionals love working with us. From our recent Voice of the Partner survey, we scored highly among our veterinary professionals, demonstrating not only that our working model is an attractive proposition, but also that Petco is now a destination for veterinary professionals. And for Petco, it's not just about scale and volume, it's also about the quality of care. The quarter saw significant advances in care, including the addition of Staphonta, an innovative canine mass cell cancer treatment, the addition of highly specialized blood product transfusion services, which are not a mainstay of traditional practices. testing of various AI technologies, and the launch of AutoRx fulfillment to Petco pharmacy e-commerce. This is not only life-saving work for pets, but an incredible testament to the leadership of our chief veterinarian, Dr. Whitney Miller, and her team's commitment to advancing veterinary medicine and care. Considering the scale and maturity of our offering in such a short time, the power of Petco's unique step and repeat vet expansion model, and our commitment to advancing quality of care, it's clear we have a long runway in this non-discretionary growth category of veterinary hospitals and clinics. The Las Vegas market is a prime example. It was our pilot market for OwnVet that we launched in early 2019. Today, we have six hospitals in Las Vegas offering the full spectrum of care, including holistic wellness, preventative care, dental, full hospital surgery, lab work, and even highly specialized exotic pet work. We even had a mouse that was recovering from a leg amputation. It does not get more specialized than that. Our foothold in the Las Vegas market is creating tremendous value and enabling share gains, all while providing exceptional care. This is the type of growth that we're relentlessly focused on. Overall customer satisfaction of our services is also at record levels, with average scores over nine out of 10. Grooming had a strong quarter and we've been able to pass along grooming supply price increases without significant impact to guest satisfaction. We are poised for ongoing growth in grooming. We continue to add grooming professionals facilitated by our grooming training flywheel, which is spinning at a rate that is enabling us to help more trainees than ever before become pet stylists. This ensures we have the capacity to keep pace with growing demand. Turning now to merchandise. Consumables continue to outperform with sales growth of 15% year-on-year or 28% on a two-year stack. Clearly, as a non-discretionary category, it continues to exhibit strength. And the shift to more premium foods continued unabated despite the macro environment, and we have not seen a downtrade dynamic. We continue to gain premium, super premium share and mix shifting to premium and super premium food helps us improve pet lives. It also deepens our competitive moats as many of these foods are either exclusive to Petco or have limited channel footprints. Notably, own brands wholehearted, so fresh litter and our premium with power brand ready, all delivered double digit growth year over year. We ended the quarter with 71 ready shop and shops. We liked the results we're seeing and are targeting approximately 100 by the end of the fiscal year. The consumer shift to the ultimate in premium, or should I say super premium food, fresh frozen continued with strong double digit year over year growth. Just Food for Dogs maintained its upward trajectory, complimenting Instinct's double digit growth. It is clear that our differentiated exclusive and artificial ingredient-free brands continue to resonate deeply with the highest value pet parents who over index at Petco and who are resolute in their commitment to feeding their pets the healthiest food they can. In our pet care centers, our teams under Justin Tichy have been navigating evolving customer dynamics and an ever-changing COVID situation without losing sight of our North Star, providing a great customer experience. Earlier this month, we received feedback from a customer in our new model store in San Marcos saying, and I quote, this location has literally everything I need for my new puppy. It's like a one-stop shop for his health, his food, his treats, his toys, his bed. We love it here, end quote. This pet care center with its veterinary hospital, grooming, and unique merchandise offerings is our end-to-end ecosystem in action. And it is our amazing Petco partners in action. These are the difference makers that have helped us drive total brick-and-mortar comp growth for eight consecutive quarters. Correspondingly, on average, our pet care center partners and center stores saw a double-digit percentage increase in average wage versus a year ago, a testament to our principle that as the company does better, employees do better. This past quarter, I visited partners in San Antonio, Dallas, Nashville, Bethlehem, Pittsburgh, and New York. In one of the Pittsburgh Pet Care Centers, a customer came in, and she was looking overwhelmed. Our partner, Nicola, introduced herself, learned the customer was about to get her first puppy, and needed help making the right choices. Not only was Nicola able to help the customer make the right nutrition selections for her new golden doodle, as well as learn how to set up a recurring delivery, but she was also able to advise on treats, teething toys, and a harness for her new puppy. Without a doubt, Nikola created long-term value face-to-face right there in the pet care center. This is not only an example of the care and attention our team brings, but a practical example of our unique ability to build baskets with customers in the aisle. From a talent standpoint, we continue to see an improving environment with an 11% year-over-year increase in our application rate and a robust pipeline to support our growth. And we're working feverishly to open our first small town row location in June with more to follow in FY22 in our scale test. We are excited at this opportunity to extend our physical footprint to address underserved high growth markets and bring more pets into our differentiated health and wellness ecosystem. And of course, our Lowe's partnership is also progressing nicely with promising early results. I visited the Petco Shop and Shop in the Lowe's of Alamo Ranch location, and I left fired up after seeing how great the products look in Lowe's, how the teams are working together, and their shared excitement. Moving to digital, sales driven by repeat delivery, mobile app customers, focus, and ship from store were strong. In Q1, we gained share with total digital sales up 11% or 32%. on a two-year basis. Our digital customer spend is now up over 25% year over year, outpacing our key online competitors' latest results. Our digital channels continue to show meaningful gross profit improvements driven by higher AOV and improved operating efficiencies, including our recently renegotiated contract with DoorDash, driving meaningfully lower fulfillment costs and buoyed by a significant marketing investment from them. We have also enjoyed strong demand for our digital ad platforms, with advertising spending more than doubling year over year. Our ecosystem is winning, and we're confident it will continue to do so. We have the unique ability to meet customer needs wherever and whenever they arise, and we're able to leverage the structural advantages of our physical pet care center footprint to uniquely meet the needs of those who shop in an omni-channel manner. This also enables us to distribute digital orders faster and in most cases, for lower cost. You've heard me say it before, and you'll hear me say it again. Capabilities like this are what makes Petco a leader in the evolution to Retail 3.0. Turning to our customer acquisition engine, we continue to benefit from our world-class marketing capabilities. Customer acquisition costs were down significantly year over year. Additionally, we increased our weekly active users on our app by over 60% year over year, introducing high value app customers to loyalty programs, facilitating efficiencies, and decreasing cost per services appointment booking. We've also launched new marketing campaigns to drive brand awareness. Both Ready and Vital Care received their first dedicated marketing campaigns, leveraging social media to target the highest value pet parents. Investment from our vendor community also remains strong, having grown over 100% over the past two years, with incremental investment expected in full year 2022. In Q1, we saw evidence of this with vendors leaning in with incremental investments behind our industry-leading personalized marketing engine, onsite advertising, and prominent experiences in our pet care centers. And while it's too early to report the full impact of the Ready campaign, the signs are promising. And our high impact economics campaign was a significant driver in the acceleration of vital care signups, bringing our subscription total to over 220,000 ahead of our objectives. Our vital care members visit 1.5 times more. They spend 1.7 times more. And they have 3.1 times higher LTV than average customers. These vital care customers, combined with our repeat delivery, insurance, and Pup Box customers, are driving a 48% year-over-year increase in recurring revenue customer sales dollars. Memberships remain a critical lever for expanding our customer base while providing pet parents with a tailored tool to generate value. We launched VitalCare 2.0 in March, introduced new benefits, and made the membership more accessible. Now including cats, it has also allowed us to capture new customers and build baskets more efficiently. through attachments such as food and cat litter. Offerings like this and our grooming and nutrition perks now at almost 1.4 million members are fundamentally changing the way people care for their pets' health and wellness while also keeping their wallets healthy, which is particularly important in this inflationary environment. Before I hand it over to Brian, I'd like to finish by focusing on purpose, starting with our Petco partners. Q1 was truly the quarter of the Petco partner. In addition to our Epic Achievers event, in Q1 we celebrated Diversity Month with all seven of our partner resource groups coming together to discuss how their unique identities show up in the workplace. The goal of this event was to showcase the inclusive environment we continue to cultivate and allow partners the space to share their experiences over the last two years. The importance of these groups for the well-being and inclusion of our Petco partners cannot be overstated, but they also connect us deeply with local communities in which we operate. A notable example includes Black at Petco, who hosted a drive to acquire books by BIPOC authors or featuring BIPOC characters to diversify the bookshelves of community organizations serving youth. In March, our National Support Center partners joined United by Blue for the Trash Bags and Tail Wags Cleanup Campaign to celebrate Earth Month by volunteering to clean up Dog Beach, where Yummy and I like to go, and the San Diego River mouth. And our partners in San Antonio launch a mentorship program with Big Brothers Big Sisters of South Texas. And to further deliver against our purpose, we continue our quest to set the highest standards in responsible animal care, as well as preserve the health of our planet and help our people thrive. We're excited to share more details regarding our ESG initiatives in our upcoming 2021 sustainability report in June, and are proud of our industry-leading achievements so far, including our standing commitment to increase our assortment of sustainable products to 50% by the end of 2025, strengthening our responsible sourcing management systems to include on-brand suppliers and ESG risk assessments, and requiring all foreign suppliers to conduct SMETA audits annually. And together with Petco Love, we continue our mission to help and save pet lives. We've now delivered over 724,000 free vaccines to date to under-resourced communities towards our 1 million commitment in partnership with Merck. We also saved over 100,000 pet lives in the quarter alone and reunited over 6,000 pets with their loving families through Petco Love Lost. This quarter, together with Petco Love, we donated $1 million in assistance to organizations helping pets and pet families affected by the war in Ukraine. And in March, through a thorough and careful independent third-party evaluation of the welfare, well-being, and overall condition of all companion animals, we became the first pet retailer in history to be awarded the American Humane Certified Seal of Approval, something I am incredibly proud of. As the world's largest certifier of animal welfare, protecting more than 1 billion animals around the globe with the most recognized, credible, and respected humane programs, their review complements Petco's already established stringent animal care policies and procedures designed to ensure animals feel loved, happy, comfortable, and secure every step of the way to their new families. If our Q1 results demonstrate nothing else, They show our ability to execute and deliver without sacrificing progress against our long-term strategic roadmap or our purpose. Make no mistake about it. When we say we're committed to delivering purpose-driven performance, we mean it. And with that, let me hand it over to our CFO, Brian LaRose.

Thanks, Ron. As just mentioned, at our investor day in March, we emphasized our commitment to operational excellence with a relentless focus on cost management while making the appropriate long-term investments in our business. Investments that will deepen Petco's relationship with our customers, driving share of wallet, and providing pet parents with the one-stop shop they want and need. When I think about the first quarter, while we remain focused on driving performance every day, we are equally maintaining our commitment to making investment decisions with a long-term perspective, not limiting our horizon to a month, a season, a quarter, or even a year, but thinking about how to position Petco as the definitive leader in the pet health and wellness category. Looking at the quarter specifically, we delivered yet another strong quarter with comparable sales of 5% or 33% on a two-year stack with particular strength in average basket trends. and net revenue at 1.48 billion, up 4% year-over-year. Services grew 19% year-over-year in the quarter and 83% on a two-year stack across vet, grooming, and training. You'll remember in our last earnings call, we outlined that supplies and companion animal would be lapping a stimulus-driven elevated prior year comparable. Like others, we've seen some softening in discretionary spend but our total merchandising mix remains incredibly strong in aggregate. Momentum and consumables continued up 28% on a two-year stack and 15% year over year. Supplies and companion animal two-year stack was 24%. These figures reflect the dynamic cost and supply environment which have remained pervasive throughout the year. While the macro environment remains unsettled, it's clear our team is executing extremely well. and we were able to leverage our structural advantages versus our competitors, including the ability to offer BOPIS, same-day delivery, and ship from store by leveraging our pet care centers as micro distribution centers. We have been building our executional muscle for years and will continue to do so, remaining agile and attuned to the environments in which we operate. This is why, as far back as the fall of last year, we saw inflationary pressures coming and launched programmatic cost initiatives to allow us to weather these storms and maintain operating leverage while staying ahead of any consumer reaction to these pressures in the immediate and long term. Moving down the P&L, gross profit increased 11 million or 2% to 608 million. Gross margin was 41.2%, down 102 basis points year over year and 80 basis points on a quarter over quarter basis. This reduction was driven by a combination of mix in digital and services, mix in consumables, and supply chain and commodity costs. SG&A as a percentage of revenue improved from 38.8% in Q1 2021 to 37.8% in Q1 2022, improving 103 basis points, demonstrating the leverage across our model. On an absolute basis, SG&A expense was $558 million, up $8 million or 1.5% from prior year, as we remained adept in aligning all of our costs, including labor, and continued to invest in sustained future growth through infrastructure and our people. And while there will always be puts and takes, in aggregate, our network inventory levels remained well managed and in line with our top line growth on a unit basis. Q1 adjusted EBITDA was $133 million, an increase of 5% from prior year, outpacing revenue growth, with an adjusted EBITDA margin of 9.0% against 8.9% in the prior year, improving by 9 basis points. Q1 adjusted EPS remained consistent with the prior year at $0.17, based on 265 million weighted average fully diluted shares, as well as a normalized effective tax rate of 26%. We continue to have strong liquidity, ending the quarter with $630 million, inclusive of $191 million cash and cash equivalents, and $439 million of availability on our revolving credit facility. Looking at cash flow, we generated strong cash from operations of $58 million and had $66 million in capital expenditures, which increased CapEx investment by 39% year over year as we continued to reinvest in future sustainable growth. Beyond CapEx, in early May, we closed on the purchase of our remaining stake in the Thrive joint venture with a price of $35 million. The ROI on the transaction alone is well above our hurdle rates, with further upside over time, and I'm confident in the team's ability to execute as we fully integrate Thrive into our ecosystem. Turning to guidance, we are maintaining our full-year guidance with revenue of $6.15 billion to $6.25 billion. adjusted EBITDA between $630 million and $645 million, and adjusted EPS between $0.97 and $1 per share based on $76 million of net interest expense. While we typically do not guide to the quarter, there are a few things to keep in mind. In light of the current operating environment, we do expect growth and consumables to outpace supplies and companion animals. Concurrent with the closing of our Thrive acquisition, we expect to incur $15 to $20 million of transaction and one-time costs, primarily in the second quarter. We are anticipating impact on gross margin associated with Thrive transaction-related charges in the second quarter to be roughly 40 basis points. And as a reminder, barring the anomalous 2020 year, second quarter sales typically sit between flat to slightly up from the first quarter, in line with expected seasonality, and that in aggregate, we continue to operate in a challenging supply chain environment. That said, because of the strategic advantages we have inherently built into our ecosystem, and because our customers are typically higher spending, we remain confident in our guidance in the mid to long term and remain committed to maintaining our strategic investments to deliver expected results for the full year and beyond, including those set out in our long-term framework. To reiterate, our priority is sustained, profitable growth delivered through strong brands, our differentiated model powered by our one-of-a-kind pet health, wellness, and ecosystem, and our continued drive for operational excellence. Our Q1 results demonstrate our ability to execute as promised and position us well to navigate the current environment. Because of that, I want to take this moment to thank our entire team for delivering a great quarter. The trajectory we're on simply wouldn't be possible if it wasn't for the relentless enthusiasm and attention to detail all of our partners deliver each and every day.

Thank you for your time, and with that, we'll move to questions.

Ladies and gentlemen, at this time, we'll begin the question and answer session. Once again, to ask a question, you may press star and then 1. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Our first question today comes from Peter Benedict from Baird. Please go ahead with your question.

Good morning, guys. Thank you for taking the question. Brian, I just want to ask you about how your focus for the P&L would evolve over the balance of the year if demand ends up coming in softer than you expect? You've talked about, you know, the programmatic expense controls, but just curious if you guys would lean further into kind of pushing customer acquisition and for the top line, would you default to preserving profitability? That's just my first kind of bigger picture question.

Yeah, thanks for the question, Peter. Look, I'll first start with the category, Peter. We've talked about this. This is a resilient category. And if you look back over time, even through recessionary environments, the category has remained relatively resilient through those cycles. So strong category, and we're operating in an environment where we feel like we have a differentiated offering in that environment. And specific to cost, look, we've been building executional muscle for years and will continue to do so. You know, you reference back to what we talked about in analyst day, where we talked about programmatic cost efficiencies that we're driving out of the P&L. Again, we've been doing this for years, typically generate 20 to 30 million. We saw inflation coming back in the fall and we kicked off programmatic initiatives across areas like procurement, spend management, customer service, supply chain. I would say also with our vendors, our chief merchant, Amy College, does a tremendous job engaging with vendors on a variety of both cost and term initiatives to maximize benefits to the company, help us manage the P&L, and also gives us good visibility going into the back half of the year as we saw these things coming.

Okay, that's helpful. And then just a second question is just around the level of inflation. Not sure if you could put Maybe a little bit more numbers to that, what the impact was maybe in the first quarter, kind of how you just see inflation aiding your top line over the balance of the year. Thanks.

Yeah, I won't get into specifics on it, Peter. I will say, obviously, inflation did contribute to the comp for the quarter. But when we think about inflation and impact on pricing and other areas, it's really not kind of a one-size-fits-all answer. You know, as we think about inflation, I mentioned Amy does a good job managing the visibility with vendors so that we see costs coming in. We then take a step back and look at analytics on a skew-by-skew basis as we think about pricing. We monitor the broader market. We balance that, our pricing actions against consumer demand. And I would just say that the situation remains fluid, and we remain focused on just protecting our customers while optimizing margins.

The other thing I'd say, Peter, and thanks for the question, Mr. Braun, is We have a unique dynamic in this industry. It's been for a decade, and quite frankly, it didn't change in Q1, and it's not changing here and now. And that's a shift towards more premium consumables. That shift towards premium and super premium has been here for about a decade. It's benefited us. It continued in Q1, and it's continuing into Q2. And so that is creating some price inflation that is not due to inflation. It's due to customer demand and the humanization trend, Gen Zers and millennials adopting more of the new pets.

Great. Thanks so much, guys. I appreciate it.

Our next question comes from Seth Basham from Wedbush. Please go ahead with your question.

Thanks a lot and good morning. Brian, if we could just follow up on some of the commentary you provided regarding the second quarter. Are you suggesting that comp should be in a 4% to 5% range based on what you're seeing right now? And as a follow-up to that, are you seeing more than expected pressure on the discretionary side of your business?

Yeah, let me answer that two ways, Seth. So if you do the math, what we talked about was sequentially, historically, if you ignore 2020, which was an anomalous year, Revenue Q1 to Q2 is flat to slightly up. So you can do the math on that and what that implies. In terms of the category, yeah, we expect consumables to continue to outpace supplies and companion animal. Consumables, Ron mentioned in his prepared remarks, that's a category that's fundamentally a staple. It's not very different than what milk or eggs are in a human environment. So we expect that category to remain strong. We have seen Some softening in the discretionary categories, you know, as a for instance, you know, if you're going to get a new tennis ball for your pet, you may wait a little bit on that. There are elements in the supplies category that are less discretionary, but that would be the dynamic that I would call out.

Got it. So the confidence in maintaining your full year guidance despite some incremental pressure on the discretionary side is driven by continued strength on the consumable side and the other trends that you spoke to.

This is Ron. The thing I would add is you really have three tiers of product groupings. The first tier is consumables, which is staple, not only a staple, but I think in milk and eggs, you don't have an upgrade dynamic that we have in our business, right? People aren't upgrading to higher end eggs or milk. Maybe they are. I don't know that industry, but we have an upgrade dynamic within a strong staple category in consumables, which helps buoy us. Number two, in terms of services, grooming and vet isn't something that has a lot of discretionary impact. It has slightly more than consumables, but it doesn't really have a discretionary impact. And then you get to the supplies side. That said about supplies, if you look at our Ready brand, the fashion forward brand, it grew double digits in the quarter. But yes, that's the tiering that we would have across our categories.

Understood. Thank you. Thank you.

Our next question comes from Liz Suzuki from Bank of America. Please go ahead with your question.

Great. Thank you. So some of the broadline retailers that have reported this earnings season have talked about trade down in grocery. And I thought I heard this in your prepared remarks, but can you just clarify whether you're seeing any consumer shift in food from or from best to better or from better to good? And have you ever seen that in any period in the company, you know, in prior recessions or economic downturn?

The answer is no. Next question. No, just kidding, Liz. But the answer is no. We're not seeing trade down. It's one of the, you know, best attributes of this category is the continued premiumization. And we've talked about it for a while. It is a category truth. which is why players like us benefit because some of the grocer types don't have those premium brands, number one. Number two, you have this migration to fresh frozen sitting on top of the historic premiumization of kibble. That category is supposed to go from $1.5 to $4 to $5 billion. So that is a gravitational pull upwards. So we are not seeing that. And I think the ready example within supply is is a good one as well. I mean, that is significantly a more expensive line, but people are paying for the fashion and paying for the functionality that that brand has. So no, we're not seeing the down trade in our portfolio.

I just wanted to clarify that and then follow up just on e-commerce. Have you seen customers shifting away from e-commerce at all and going more towards in-store and doing some trip consolidation or just trying to avoid additional shipping costs in this high inflationary environment?

Yeah, it's been a few years of consumers flowing across from e-commerce to brick and mortar and back again. And so the great news is as an omnichannel player, and I think we shared the number before, I think the latest number was 39% of customers shop in an omnichannel fashion. So we don't really look at our customers in a segmented fashion. We look at them across the enterprise. We have seen strength in brick and mortar. We have seen trip consolidation. We have seen strong baskets, super strong baskets. The end result of that is higher efficiency for us, right? If we have customers having higher baskets, then that's a more efficient customer for us. But we are seeing relative strength, brick and mortar versus e-comm. But we're pleased with our e-comm double-digit growth for the quarter. And as we said, we grew share in the quarter on digital as well.

Great. Thanks very much.

Thank you.

Our next question comes from Zach Fadum from Wells Fargo. Please go ahead with your question.

Hey, good morning. So there's been some evidence that the mass channel has begun to take some share back from the specialty channel. So first question is what you think could be driving that? And then to what extent your initiatives like Vital Care, Fresh Frozen, Private Label are sticky enough to keep your share gains building from here?

Yeah, we... We look at the categories what we're focused on, which is premium, super premium, which is vet, which is digital. And we continue to gain share in those spaces. So we're gaining share in the areas where we're focused. And so we're happy with what we're seeing. I would add on grooming, there's a lot of noise in terms of openings and closing. Pre-COVID, we were at 5.5. Today, we're over 7 in terms of share. So we're pleased with what we're seeing in terms of share gains where we're focused. We don't, you know, if you think about mass, I mean, we don't have a product that competes against the old Roy's of the world. We got to add of artificial ingredients, artificial flavors. So we don't have products that compete against those. We're not focused on that. So that's not really subcategories that we're focused on. The categories that we're focused on, where the growth is, where the profit is, we're gaining share.

Got it. And then for Brian- At the gross margin line, can you talk about the extent that pass-through pricing is offsetting some of the mix and supply chain headwinds in your business? And as we look to Q2 and you begin to lap some of the deeper mix-driven headwinds from a year ago, are there reasons to believe we could start to see some relief at this line going forward?

Yeah, let me start with the first question, Zach. We took pricing actions in the back half of last year primarily. And what we said at that time is that in aggregate, we did not see an impact on a unit basis. And also that those pricing actions were largely offsetting those cost increases. Now, I would also say when you think about cost increases, you need to think about it holistically. So I mentioned Amy College, our new chief merchant. She does a great job working with vendors on total cost to serve. So as we see cost coming and she has great relationship with them to get visibility into that, she will look at that total cost to serve. We'll work on terms. vendor funded ways to go to market together. And we look at that total bucket. Sometimes that may mean pricing action. Sometimes that means we look at the total cost bucket a little bit differently. In terms of gross margin, I would say for Q2, what I said on the call was that there are a couple of different dynamics in play. Going into Q2, we would expect consumables to remain strong, which is a good thing. The consumables customer is a high LTV long-term valuable customer. We would expect that to remain strong into the second quarter. There also is a one-time 40 basis point impact to gross margin in Q2 associated with the Thrive transactions. Those are one-time associated costs as part of the 15 to 20 million that we called out, but primarily that will impact Q2.

Will that cost be adjusted out?

That piece of it, yes. Got it. Thanks for the time. Thank you.

Our next question comes from Kate McShane from Goldman Sachs. Please go ahead with your question.

Hi, good morning. Thanks for taking our question. We wanted to ask a little bit more about the renegotiated contract with DoorDash. You mentioned lower fulfillment costs. Is that with regards to the contract or just the DoorDash contract? relationship in general, and can you talk about the composition of fulfillment for your digital business as of Q1, where you're seeing the growth, whether it's focus or same-day delivery, and how the gross margin headwind from digital maybe gets diminished as those fulfillment options grow?

Yes. Hey, Kate, thanks for the question. In terms of the DoorDash contract, it's contractual, lower rate, and not just lower rates, but it also has a marketing component where we get incremental marketing support. So that's very good for us. And it is contractual, so it's structural. All of our go-to markets in terms of digital are growing. If you look at... what we say in terms of pet care center fulfillment, that continues to be around 80%. So we continue to get faster to the customer, lower cost than our digital competitors. And we see that leverage continuing to be a significant competitive advantage. In terms of gross margin on digital, I'll let Brian make comments there.

Yeah, we've seen expansion on gross margin in digital quarter on quarter and year over year, Kate. So if you look at Where we're driving that, it's better baskets, it's better leverage from the fulfillment that we have. So as Ron mentioned earlier, as the customer dynamics change and you have fluidity between shopping online, coming into brick and mortar, trip consolidation, the great news is we're positioned well wherever the customer goes. We have focus, we have same delivery, we have ship from store, and we have traditional digital. So it sets us up nicely. And as Ron mentioned, 80% of our orders continue to be fulfilled through PCCs giving us great leverage.

Thank you. Thanks, Kate.

Our next question comes from Michael Lasser from UBS. Please go ahead with your question.

Good morning. Thanks a lot for taking my question. Given what you experienced in the first quarter and your comments around the second quarter, it looks like you'll have to experience a meaningful acceleration in your same-store sales growth in the back half of the year in order to get to the midpoint of your full-year sales guidance. What would drive that meaningful acceleration?

Yeah, I can take that one, Michael. I mean, you have to look at the lapping dynamic. If you go back to Q1 last year, right, we did a 5% comp this year on top of 28 last year. We know that last year was aided. We called out 700 to 800 basis points of comp in Q1 last year. If you look at the comp, Q1, Q2, Q3, Q4, each quarter last year, that comp was lower than the quarter before that. So you have a lap dynamic that's factoring into the math associated with what to expect for the balance of the year.

The other thing I would say is it's no secret that at the category level, supply has chased demand. And our vendors' investments that they made when they saw the 11 million new pets in 2020 that I call the furry annuity, those investments are coming online. I was in Kansas during the quarter and I saw Honest Kitchen's new factory and, you know, it's great to see this new capacity coming online. So we would anticipate heightened or a narrowing of the gap between supply and demand as we progress through the year.

Thank you very much for that. My follow-up question is as supply and demand comes closer together, and perhaps the macroeconomic backdrop becomes a little weaker, would you expect promotions to increase across the sector, especially as many are looking to grab those high volume, most loyal consumers and that is where a lot of the promotional activity could be concentrated?

Yeah, so let me start and then I'll pass it over to Brian. We are very lucky. Roughly 70% of our products aren't sold at the mass players, aren't sold at the grocers. Many of our products aren't sold at our online competitor. Many of our products aren't even sold at some of our pet specialty competitors. So we have product insulation that helps us on this front. The second thing is there is map in a lot of the product lines that have overlaps with those players. our exposure to irrational promotions is much, much lower than your average retailer. And that helps us insulate things. That said, there continues to be a gap between supply and demand that has brought rationality into the market. And we see that continuing for the next couple of quarters. But I'll pass it on to Brian to make further comments.

Yeah, I would just add, Michael, that overall, we are not seeing the market as overly promotional. It's remained really rational. As we look to the balance of the year, we will continue to be very strategic on how we do employee promotions. We will use them to drive specific outcomes, to drive things like loyalty program adoptions or other areas where we see a large LPP. We'll treat it like CAC.

We're much more interested in getting people into our perks programs and our vital care program than we are doing high-low discounting. And we don't have to because a lot of our product line is insulated from a competitive standpoint.

Thank you very much. Thank you.

Our next question comes from Oliver Wintermantle from Evercore ISI. Please go ahead with your question.

Yeah, good morning. Thank you. So my question is about the active customer growth and the retention rates. If you maybe comment a little bit on the retention rates over the last year, year and a half, and then secondly, where the active customer growth is coming from, from which segment?

Yeah, we're pleased with the active customer growth. As we said, in terms of active customers, we're up double digit for the quarter. And we are roughly double pre-pandemic levels in terms of our ads. And we're about 60% ahead of our key online competitor in terms of the ads that they reported last quarter. So we're pleased with that. You know, 20 and 21 were unique years. because of all the ads that happened in terms of number of pets in 20 and 21. While we continue to see heightened adoptions, 20 and 21 were unique. And so it's natural to come off those numbers. But at 400,000, that's a pretty strong number. And in terms of retention, we're really focused on driving programs like vital care. We're focused on programs like our perks programs, which now have over 1.4 million members. to drive retention in our business.

Got it. And the follow-up would be on the leverage ratio, Brian. Has anything changed there since the analyst day with the current environment, or do you think still the leverage ratio is going further down, and then maybe in 2023 we could see some buybacks?

Yeah, nothing's changed, Holly. That's an easy one. We're committed to our leverage target at 1.9 at exit 23.

Thanks very much and good luck. Thank you.

Our next question comes from Steven Zaccone from Citi. Please go ahead with your question.

Great. Good morning. Thanks for taking my question. I wanted to follow up on the comment about discretionary softening. Maybe how much of your business would you characterize as discretionary versus more staple-like? And then within consumables overall, How much of your assortment would you say is premium versus maybe more mass channel?

So let me start with, hey Steve, thanks for the question. In terms of premium, I would say the majority of our products are premium, and we gravitate towards those, and we've had significant mix shift towards that space. And I would also extend that to supplies, where we are increasingly premiumizing, though we're not as far as we are on the consumable side of the house.

In terms of the second... Yeah, in terms of the overall split, Steve, I mean, if you look in the earnings presentation, we break out consumables, supplies, CA, and services, and VAT. And I would say you take consumables, services, and VAT. you know, those are non-discretionary categories across the board. And if you look at supplies and CA, it's a portion of that. So, you know, largely our, you know, our total assortment across product and services is non-discretionary. There's a component of it that is discretionary, of course.

I would add that we saw, we're seeing improvement as we head into Q2 on the supplies and companion business.

Okay. That's helpful color there. The other question I had is just could you elaborate a little bit more on the VitalCare rollout, maybe how that's progressing thus far? You know, as you think about the customers that are kind of signing up, like where are you seeing them come from?

We are, we couldn't be happier with VitalCare. We're ahead of our projections in terms of members. When we launched VitalCare 2.0, we added CAT and we added enhanced benefits and that the sign-up rate for VitalCare has improved since the launch of VitalCare 2.0. We've accelerated, which is just great to see. As we said earlier, the VitalCare members have 1.5 times higher traffic, 1.7 times higher spend, and generate three times higher LTV. We're sourcing customers both from brick and mortar as well as digitally. I will tell you, I talked about all of the the markets that I visited last quarter and the prior quarter as well. And our partners in the pet care centers love talking about vital care because they want to help the customers that shop. And vital care is a great way to provide value, $200 to $300 of value for an average customer. And so our partners in the pet care centers are signing people up left and right. They love this program. Our groomers love it because it drives frequency. It drives loyalty. So we have a lot of excitement across our enterprise for vital care, and that'll continue. And as we continue to drive enhancements and expansion of the program, we would only see further acceleration in there.

Great. Thanks for the detail. Thank you.

And our next question comes from Anna. Andreeva from Needham, please go ahead with your question.

Great. Thank you so much, and good morning, guys. Two quick ones from us. I guess to Ron, I wanted to follow up on VET. You guys have done a really good job there, but are you seeing labor get tighter at all lately? Are there any less expensive options in the VET popping up in this space? And then secondly to Brian, Really nice expense management during the quarter. And you had talked about 20 to 30 million in annual savings. Looks like you're finding some additional opportunities for expense management. Can you talk about some of the buckets of savings for us? And thank you so much.

Yeah, so let me start broadly on labor and then get into the vet piece. So what we see is we've turned the corner on labor tightness. and we see a labor market that we're able to operate in, we're able to fill our needs and our applications are up double digits. So we firmly believe we've turned the corner in terms of the tight labor market and the labor market dynamics have fundamentally changed to the better. That's number one. In terms of that, let me start with the acquisition. I mean, I am so thrilled at having over 90% of the Thrive partners coming on to Petco. That is just wonderful news. It was a concern in any type of transaction. Are you able to retain the talent? And they've signed on, which is just awesome. And it shows the power of our offering and how we've honed our vet experience inside Petco. And thanks to the team and Dr. Whitney for making sure that we do that. In terms of hiring vets, you know, the vet market is tight. We continue to operate at a faster time to fill than industry benchmarks. And as we've said, right now we're focused on making sure we onboard all those wonderful Thrive vets and vet techs. But we'll get back to our 70 per year pace in Q3, Q4. We'll pick up the pace from Q1 and Q2. And, you know, we'll continue to execute. That's what we do.

Yeah, and on your second part of your question, Anna, I'll pivot off of Ron's comments on labor. You know, one of the largest, you know, line items that we have in terms of cost of labor, and Justin Tisci, who runs our PCCs, just did an exceptional job this quarter at aligning our labor costs with our revenue trajectory. On a broader notion for that 20 to 33 million, it's across those areas that I talked about that the great news about those programs that we have in place, Anna, it's not binary. We drive those initiatives in environments where we're growing double digits and we drive them in environments where we grow 4% like we did in the first quarter. We take those savings, we either reinvest in the business or we use them to offset cost inputs or drop to the bottom line. So I'm proud of the way the team executed once again this quarter.

The only thing I would add, the only thing I missed in my commentary was our Vet Tech EDU program. So we are taking center store partners, 100. We put 100 through already. We have another 100 going through now. And we help them with their education to become Vet Tech. So think about it as I'm a baseball fan of minor leagues, and we develop them, and then they become full Vet Techs within our system. And that is a competitive advantage that we have that others don't have.

Awesome.

Thank you so much, guys. Thank you.

Our next question comes from Chris Battiglieri from BNP Paribas. Please go ahead with your question.

Hey, guys. Thanks for taking the question. First of all, I'd like to ask about SG&A. I think last year was a little bit lumpier, kind of quarter on quarter throughout the year. Given your guidance on sales for Q2 versus Q1 and kind of just normal seasonality, can you give us a sense of how we should think about modeling SG&A throughout 2022?

Yeah, I mean, I'm not going to get into specifics by quarter or anything, Chris, but I would tell you that SG&A has components that are more fixed and some that are more variable. If you look at the investments that we continue to make, we're going to continue to invest in our people. We're going to continue to make sure we're investing in the vet build-out. We're going to continue to keep investing in our infrastructure. There are other areas that are part of our $20 to $30 million of annual efficiencies. We think about overall spend management, procurement, etc., From a variability standpoint, we look at things like marketing where we continue to like the ROI on our marketing investments. There are years like last year where you have a bit heavier upper funnel spend as we relaunched our TV campaign and our brand platform. So we had more upper funnel versus lower funnel spend last year, and that's flipped back a little bit this year. So puts and takes across the board. We're good at this. We continue to execute and manage the overall envelope.

That's okay. Thanks. And then the next question was just on transportation. Some good guys, some bad guys with ocean-free contacts being renegotiated, just fuel costs going up now, and then positively it sounds like the kind of third-party truck spot rate market is kind of softening recently. So can you just help us think through the net of all of that? How do we think about supply chain pressure over the balance of the year relative to what you saw in Q1?

Yeah, I mean, let me start with I think the team did a great job this quarter, Chris, managing through this. You know, we haven't seen, you know, these types of environments in a while. And I thought the team managed through it very, very well. We do expect some of these headwinds to continue. Freight's, you know, freight's one of those areas. I think the good news for us is we have a physical footprint that allows us to distribute digital orders through the PCCs. That gives us enormous leverage versus pure online competitors. particularly in areas like fresh. You know, we've talked about this in the past. As fresh continues to scale, that is a huge advantage for us to deliver fresh product on same-day delivery versus shipping from a DC. I think the team remains focused on reducing the number of packages per online order, and we remain confident in the tools in our arsenal to help offset some of that pressure.

Thank you. Thank you.

Our next question comes from Steph Wissink from Jefferies. Please go ahead with your question.

Thank you for all the information, everyone. I just wanted to go back to a prior question on pricing and make sure we're hearing you correctly. If you could just help us think through how much pricing you've taken and then your inventory balance. I think you quantified as unit growth in line with sales. But does that give us some sense of what level of inflation is kind of yet to come through your pricing matrix? If you could just share with us a little bit about how much more pricing you expect to take, that would be helpful.

Yeah, I won't get into forward looking on pricing, Stephanie, for obvious reasons. But I will tell you that, let me start with the inventory dynamic. You heard us right. If you look at inventory on a balance sheet, inventory dollars were up 19% year on year. We commented that units were roughly in line with revenue. So you can do the math on that and apply what's on the balance sheet in terms of pricing. I wouldn't read into that that that is pricing we have yet to take because a lot of those cost inputs are already in the back. If you look backwards for the last six, nine months, those costs have been coming in. They've been impacting inventory. We've taken pricing actions against that largely. They remain pockets. And we manage this thing individually. But holistically, so most, the majority of those pricing actions have been taken in Q3, Q4. As we look to any further actions, we will weigh that against consumer demand. So we'll work with our vendors. We'll go SKU by SKU. We'll do deep analytics. We'll manage the demand environment, what consumers are looking for, as well as our ability to control overall cost to serve with our vendors.

Okay, that's helpful. My final question is on Thrive. I'm just wondering if it changes your thinking process regarding de novo versus acquisitions, just the success you've seen there with retention and integration, if it reshapes your view of the balance of your growth.

We like our strategy. I think the evolution of our thinking was how much we like our own vet model. And that's why I cited Las Vegas, because that was proving it to ourselves that we could run an own vet network. Not only do we like that, but we like when we have multiple vet hospitals in a city. We see an exponential return when we do that. So we are dedicated to our own vet strategy. We will complement that with one and two Z that acquisitions that have been relatively successful. That is the add on strategy. That is not the core strategy. The core strategy is build out our step and repeat model of bringing hospitals, just food for dogs and ready store and stores in existing facilities. pet care centers where we see not only the vet revenue, but the four to five lift in center store. That strategy works. There's hardly a retailer that has that type of step and repeat model that is inherent in our model, and we like it. We will supplement that with acquisitions opportunistically, but we've talked about one, two, three, four. It's not a mass. We don't like the valuations on the big networks in general.

Very clear. Thank you so much. Thank you.

Our next question comes from Simeon Gutman from Morgan Stanley. Please go ahead with your question.

Hey, Ron. Hey, Brian. The 400,000 net new customers, do you quantify or does it matter what percentage or what contribution it was within the five comp versus – I think you did say spend per pet was up. I don't think you quantify it and how important or how – how, how, and I guess, is that mix changing? And is that something you pay attention to?

Um, we did say that we had 40,000 ads. Um, we, we did say that we, um, our spend per customer was up, um, and we're driving both, you know, in the, I would say in the 2021 window, when you had this explosion of pets, we were primarily focused on ads because that was a, uh, you know, once in an industry opportunity to capture new customers. And we got much more than our fair share. We are now taking a more balanced approach where we're both driving customer ads ahead of our pre-pandemic levels, as well as ahead of our online competitors levels. But we're really driving share wallet and driving spend per customer as well. And I think we said on the earlier commentary, double digit increase there, which is great. We really started focusing heavily on that about three or four quarters ago, and we're seeing the fruit of that. And the best example of that to me is vital care, right? Where, you know, as we add vital care customers, 20% of them weren't buying food from us, 30% weren't buying or weren't having services from us. And so we're capturing that share of wallet and we'll continue to do that. I think complementing that is these perks programs. where we now have 1.4 million members in our grooming and our food perks programs that are generating loyalty. So we are in a much more balanced approach right now, I think, which is fitting with the market dynamics. When pets were exploding, we wanted to get more than our fair share, which we did. Now, to be clear, the latest projection from Euromonitor says that the number of pets is projected to be up 2%.

for the year that's above the historic one percent so the pet industry continues to get good news in terms of um new the new pet dynamics and then maybe one uh quick follow-up the it sounds like your customers as you said still kind of moving up the ladder in terms of premiumization um and it sounds like your customer base in general is more middle maybe even to upper income First, is that fair, and are you seeing a divergence in the basket within different customer cohorts? And I think you made it clear we don't really have a big range of customer cohorts, but are you seeing some difference in different baskets of unique customers?

Yeah, good question, Simeon. Thank you. So we over-index on the higher-value customers, the highest-value customers, which there's been lots of talk about that. You have a stratification system. The mid to high end is relatively inelastic. And that's where the majority of our customers are. And that's why we're seeing continued premiumization. The mid to lower end customers, which is not really our bailiwick, That's where what we see is more cutbacks across the retail industry. The good news is where we're really focused is the higher-end customer, which tends to correlate to the higher-income customer, and we're seeing much less elasticity from that customer. And that's why we have this dynamic of premiumization happening within our portfolio, which is really healthy. And it's not new. It's relatively timeless. I think there was a question of whether in a – extra inflationary environment, would that continue? And the answer is yes.

Thanks, Ron. Good luck.

Thank you, Samir. Great to have you on the call.

And our next question comes from John Heimbachel from Guggenheim. Please go ahead with your question.

Hey, Ron. A question, service utilization picks up. Talk about affordability, right, for different income groups. And then do we now get in a downturn here in an acceleration in vital care and insurance, sort of a permanent acceleration to aid affordability?

Yeah, great question. So we are seeing an acceleration in vital care, and a lot of what we hear is about the affordability, and it helps me take the total care of my pet in a more affordable way. That's great for the customer and it's great for us because that means we're picking up more share wallet. I cited the share wallet component tree earlier. So it is one of our key tools on providing affordability without kind of financially degrading. The other tool we have obviously is Wholehearted, which is a high quality product for a more affordable price, but a strong margin for us, which is another win-win. So the answer is yes, I see that migration continuing. So the current economic environment should be a stimulant for vital care signups, which then drives more recurring revenue, which drives more predictability for us. So I think that that's good. Our insurance business, grew strongly in the quarter, and we're continuing to work on ways to further enhance that. And I would anticipate further news on that front in the coming quarters on insurance. We see that. If you recall what I said, I think, four or five quarters ago about RX, I said it's a big opportunity. We're going to get after it. We got after it, and we're seeing strong growth and scaling. I would say the same thing about insurance. We have a nice business. It is growing robustly. But we have an opportunity to scale much more rapidly, and there'll be news in the next couple quarters on that front.

Okay. Thank you very much.

Thank you, John.

And ladies and gentlemen, with that, we will be concluding today's question and answer session. I'd like to turn the floor back over to Ron Coughlin for a closing.

Thank you, Operator. Once again, thank you for spending time with us today. To our analysts, we appreciate the time and insights that you provide. And to our investors, thank you for showing faith in us every single day. To reiterate, we have been, we are, and we will continue to be a growth company. Why? Because we operate in a category that remains strong and resilient, even in times of economic headwinds. Our world-class team knows how to execute. And our model is differentiated with tangible competitive advantages. These attributes will continue to enable meaningful growth for Petco while concurrently bringing our long-term strategic vision to life and delivering against our purpose.

Thank you for your time. That concludes Petco's first quarter 2022 earnings conference call. The team will be available after the call if you have any follow-up questions. Thank you.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.