Petco Health and Wellness Company, Inc.

Good morning and welcome to Petco's second quarter 2022 earnings conference call. All participants will be in lesson-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 from the question queue, please press star, then two. Please note this event is being recorded. I would now like to turn the conference 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 second 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 second quarter 2022 results. On the call with me today are Mr. Ron Coghlan, Petco's Chief Executive Officer, and Mr. Brian LaRose, Petco's Chief Financial Officer. In a few moments, I will 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 quarter 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. As always, I'd like to begin my remarks clearly and simply. The pet category continues to grow. Petco's business continues to grow. Our customer base continues to grow. And our unique competitive moats continue to deepen. Despite the current economic environment, the pet category is once again proving its unique defensive growth characteristics, and the focused execution of our 29,000 Petco partners both improved the lives of countless pets and pet parents and delivered tangible progress against our strategic priorities, including further expansion of our vet network and capabilities, continued mix shift towards premium products, the addition of over 100 experiential fresh frozen pantries in pet care centers, and double-digit growth in recurring and loyalty customers. Our non-discretionary categories of consumables and services continue their strong upward trajectory. As expected and similar to other consumer categories, inflationary pressures have softened the discretionary areas of our business. This transitory response is consistent behavior during previous recessions and past experience indicates a return to growth with economic improvement and the passing of the stimulus overlap period. Additionally, our team has done a nice job managing supply chain challenges and their impacts while maximizing sustainable customer and business growth. Importantly, in aggregate, we feel comfortable with our inventory position, both in quantity and makeup. Having operated in the current economic environment for several months now, we have greater clarity in terms of consumer and cost dynamics and have adjusted our assumptions for the full year. Brian will share these shortly. Turning to key numbers, comparable sales were up 4%, equating to 23% and 34% on a two- and three-year stack. Net revenues grew by 3%. Our unique model and powerful marketing continued to win new customers. Our active customer base grew by double digits year over year, and we added 325,000 net new customers in the quarter. This is our 14th consecutive quarter of growth in our customer base. Recurring customer revenue grew by 54% year over year, driven by repeat delivery, insurance, pop box, and vital care members. Total active vital care customers reached 282,000 in the quarter, including customers we've converted into vital care with the acquisition of Thrive. Customers joining VitalCare have been increasing their visits and spend by double digits with a lift in spending across all categories and delivering a 3.5 times higher LTV than average customers. This is up 10% from last quarter. The additions we made with VitalCare 2.0 in March have resonated with pet parents who clearly see the value in this program, especially in the current economic climate. The average pet parent can save over $300 annually, and from a Petco standpoint, we capture a far greater share of wallet, with around 30% of VitalCare customers new to food with us and 40% new to services, both up versus VitalCare 1.0. We have a robust roadmap of enhancements to come, allowing us to add many more members and capture further share of wallet. We look forward to sharing more details soon. The value of loyalty and membership is significant, especially when combining vital care with our existing 1.6 million grooming and nutrition perks members, who continue to increase visits and spend by almost 50% and 40%, respectively, year over year. And they have over two times higher LTV than average customers. Demand for services has proved resilient, delivering 13% year over year growth, translating to a robust, 62% growth on a two-year basis, driven by strength in both grooming and our veterinary business. Services are such a differentiator versus online and mass competitors of pet parents who see the value in our training, veterinary services, and grooming. They also act as a feeder for Petco into our broader health and wellness ecosystem, including OTC solutions, RX food, RX medicines, and insurance. Specifically on veterinary services, a strategic long-term growth drive and competitive moat for Petco, this has been a quarter with exceptional progress. We closed the Thrive acquisition in May, and integration is going ahead of our plans. We've now added over 600 veterinarians to our network in the last six months alone. We opened 11 new vet hospitals in the quarter and remain on track for a target of 50 new hospitals for the full year. We also made significant enhancements to our online booking systems, allowing customers to seamlessly view appointment availability across multiple locations and driving a 30% increase in online hospital bookings. Every day, it becomes more obvious that our vet model positions Petco to limit customers. Not only does our full-service hospital mix of preventative, diagnostic, and treatment give pets the best possible care, But our ecosystem with mobile in-store clinics provides the cost and convenience to fit every pet parent's needs. And we are rapidly becoming a disruptive innovator in the vet space, evidenced by our collaboration with Butterfly IQ Plus Vet Technology, bringing their cutting-edge handheld ultrasound system to all of our vet hospitals by the end of the third quarter. This not only allows us to provide pet parents peace of mind with on-site diagnostics, It also removes the need for referrals out of our hospitals and enables us to capture that high-margin revenue. It's also a talent magnet, being one of the most sought-after technologies veterinary professionals ask for before choosing which hospital to join. In merchandise, as in Q1, consumables continue to surge, demonstrating their recession-proof nature. Sales grew 12% year-over-year and 37% on a two-year stack. This strength is great for the long-term health of our business, as consumables customers have a higher retention rate and bring a 30% higher LTV than customers who don't buy consumables from us. Our over-index to the pet parents that take the best care of their pets and who are the highest spending customers continues to power our multi-year shift to healthier premium foods, even in this hyperinflationary environment. These include high-end kibble brands like Origin, Royal Canin, Hills, Taste of the Wild and Honest Kitchen that can't be found in the mask or grocery channel. And pet parents are continuing to migrate to more premium fresh frozen brands like Just Food for Dogs, Instinct, and Fresh Pet. We opened our second Just Food for Dogs kitchen where we actually make the food in our sports arena pet care center in San Diego. These kitchens really bring the fresh food experience to life, creating unique brand building experience that halos an entire market to drive awareness, and trial. To summarize, make no mistake about it, we continue to drive a positive mix shift towards more premium and super premium foods. We're also mix shifting towards own brand consumables. Our wholehearted brand took more share from lower quality, more broadly distributed brands with over 30% growth year over year. When you combine the growing strengths of our wholehearted brand With the macro trends of premiumization and fresh frozen, the future is clear to us. That's why today we're delighted to announce the launch of wholehearted fresh recipes as a bold next step in our nutrition leadership. In collaboration with Just Food for Dogs, we're launching an exclusive new human-grade fresh and frozen on-brand pet food as part of their wholehearted line, available in pet care centers and online beginning this month. I was thrilled to see a brand-new, wholehearted cooler in our Carmel Valley location near the office two weeks ago. Overall, our owned and exclusive brands continue to distinguish our business from competitors. Our supplies remain a cornerstone of Petco's offering, including our owned and exclusive Ready brand, which even now offers cooling beds and clothing to help us keep cool in these record-setting temperatures. Structurally, our supplies are highly profitable, extremely well positioned, and at scale, providing significant financial advantage versus online-only competitors. The lapping of year-ago stimulus and the current inflationary environment does create transitory pressure on the supply's business growth, but it's a pressure which history has shown dissipates as lapping dynamics and inflation moderates. Importantly, Our customer insight grounded innovation engine continues to be a core competence. In the quarter, we launched an exclusive partnership with Cliff with plant-based jerky, a smart crossover from human food. If you're grabbing a Cliff bar on a hike, why can't Betsy the Border Collie have one too? We also exclusively launched backcountry recreational gear, meeting pet parents' desire to spend more time outdoors with their pets with fun floaties, stay dry rain gear, and even a doggy tent. The brand is off to a super strong start. Our Pet Care Center has delivered their ninth consecutive quarter of positive comp sales, fueled by growth in basket via continued mix shift towards premium merchandise and our ability to pass through pricing, a result of both the uniqueness of our offering and the incredible capabilities of our Petco partners to connect on a highly personalized level. This past quarter, I visited Pet Care Centers in Arizona, Idaho, Washington State, Texas, California, and New York. In each case, I met passionate Petco partners focused on improving the health and wellness of pets, keeping each other safe during a protracted pandemic environment, and building a stronger Petco business. I am in awe of the spirit of Petco partners across our network. In a labor market that remains competitive, Petco stands out as a caring, fun, purpose-driven environment for our partners. helping pets and pet parents on a daily basis. Correspondingly, in the last quarter, we saw applications to work at Petco increase 16% over the prior year. Our Mexico business continued its upward trajectory with sales up double digits year to date. I'm very excited to share that our neighborhood farm and pet supply strategy is now live and resonating with the local community. Early indications from our first location in Floresville, Texas, which opened in June, are exceptional. Financial performance and customers are exceeding our expectations, with particular strength in supplies of pending animals meeting an unmet need in this market. During the grand opening, multiple customers came up to me and said, thank you, thank you, thank you. We needed a pet-focused retailer here, and I no longer need to drive to San Antonio all the time. It was also the first opening we remember having horses in attendance. We're excited at what we're learning in the now addressable multi-billion dollar farm and feed market across segments like equine, chicks, and bovine. We're looking forward to the multiple planned additional openings for Q3 and Q4. Our digital business continued to drive powerful profitable growth through innovations including in-app repeat delivery sign-ups and multi-location fulfillment for same-day delivery. In Q2, total digital sales were up 10%. or 143% on a three-year stack. We've more than doubled our digital business over the last three years. Our digital customer spend is now up over 20% year-over-year, continuing to outpace our key online competitors' recent trends. We also expanded digital margins year-over-year through distribution efficiencies, including our renewed DoorDash contract and rapid acceleration in our ad network revenues. but it's a role that a digital plus brick and mortar plan or ecosystem that is more significant. The deployment of our pet care centers as micro distribution centers creates an unmatched competitive advantage and agility. We continue to not only fulfill nearly 80% of the digital orders through our pet care centers, but delivered a record number of same day delivery orders in the quarter, a 60% increase year over year. Needless to say, same day delivery provides a competitive moat versus our key online competitor. Not stopping there, we added 75 new brands to our online assortment so far this year, including much-loved brands like Dandy Pet, a digitally native and science-backed multivitamin supplement, and tech-focused offerings like Ring webcams and iRobot vacuums. Finally, on digital, our advertising network is now firmly a jewel in Petco's crown. With over 200% growth year-over-year, our platform and bespoke data capabilities provide a compelling offering for vendors to connect with pet parents, and convert them down the marketing funnel. We're confident our pipeline of in-flight enhancements will support projected triple-digit growth year-over-year for full year 2022. Before I hand it over to Brian, I'd like to take a moment to focus on our North Star, our purpose, and it starts with our partners. We've been focused on improving wages for the last four years, And as a result, our average total hourly compensation is currently over $17 per hour. This month, we announced we're lifting the floor, where every non-trainee at Petco, either brand new or tenured, will make $15 base wage per hour or more by the end of the year. We believe this is the right thing to do, particularly given cost of living increases, and it recognizes the extraordinary contributions our Petco partners make every single day. It will enhance retention and make us an even more attractive destination for talent. Petco partners also celebrated our community at Pride events across the country, joining virtual events from happy hours panel discussions on LGBTQIA plus communities in the veterinary field, joining the annual Pride parade in our hometown of San Diego, and even joining a Pride themed spin class led and DJed by our very own Brian LaRose. In June, we published our Environmental, Social, and Governance Report for fiscal year 2021, giving an in-depth look at our sustainability progress. In it, we outlined the proactive steps we're taking as a leader in our category for finding sustainable solutions that positively impact the well-being of pets, people, and the planet we share. Of particular note, over the last year, we've engaged with over 350 product vendors as part of our efforts to increase our sustainable product mix to 50%, by the year 2025. We eliminated nearly 8 million pounds of cardboard and 66,000 pounds of plastic through digital fulfillment. And we also published our first EPA Scope 3 carbon footprint. And together with PetcoLove, we continue our mission to help and save pet lives. We've now delivered over 917,000 free vaccines to date to under-resourced communities putting us in arm's reach of our 1 million vaccine commitment in partnership with Merck. We also saved over 95,000 pet lives in the quarter alone and have reunited over 10,000 pets with their loving families to date through Petco Love Lost. In closing, our ecosystem and results-driven orientation is enabling growth, and we continue to make a difference in lives every single day. With a recently evolved leadership structure, we're laser-focused on putting customer centricity and operational excellence at the center, meeting the customer need of a one-stop experience for their pet's health and wellness. As always, thank you to all our amazing Petco partners and customers. Despite the environment, this is an exciting time for Petco, and we remain grateful to our partners who are on the journey with us to deliver purpose-driven performance every day. With that, I may hand it over to Brian.