Petco Health and Wellness Company, Inc.

Good morning, and welcome to the Petco's third quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. 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. Please go ahead.

Good morning, everyone, and thank you for joining Petco's third 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 third quarter 2022 results. On the call with me today are Ron Coghlan, Petco's Chief Executive Officer, and Brian LaRose, 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 remainder of the year. 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 deliver materially from results and events contemplated by such forward-looking statements. These risks and uncertainties include those set out in our earnings materials 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 and finish the call on time, we would be grateful if you could keep to one question and one follow-up. With that, let me turn it over to Ron.

Thank you, Benjamin. Good morning, everyone. Our third quarter results demonstrate the resilience of our category, the strength of our unique model, and dedication of our incredible Petco team members. In a challenging macroeconomic environment, we delivered our 16th consecutive quarter of comp sales growth, added customers for the 15th consecutive quarter, accelerated our vital care member sign-up rate, made progress in scaling our growth drivers of vet and digital, continued to see product mix shift towards premium, and launched landmark partnerships at leading brands. all strategic initiatives that secure Petco's ability to deliver sustained future growth while capturing category megatrends. Financially, on EBITDA, we did what we said we would do. And we also made tangible progress on strategic cash flow enhancing initiatives. Our consistent delivery of growth despite macro disruptions exemplifies our nimbleness, our execution capabilities, and the strength of our one-of-a-kind ecosystem in a defensive growth category. Capabilities that have generated revenue growth enable us to navigate mixed pressures and continue to deliver enhanced value to a growing customer base. In the third quarter, comparable sales were up 4%, according to 20% and 36% on a two- and three-year stack. Net revenue grew by 4%. The appeal of our unique model and power of our marketing engine enable us to add over 325,000 net new customers in the quarter, bringing our total active customer base above 25 million. Recurring customer revenue driven by repeat delivery, insurance, and vital care grew by 56% year-over-year. High-value multi-category customers also grew in the quarter. Contextualize, our sales and customer growth is driven by high-value customers returning to shop for premium food and supplies, who, like our value-oriented customers, are also leaning into our loyalty and membership programs. Additionally, the drivers of future category growth remain positive, including adoption levels, which continue to increase year over year, and relinquishments trending below pre-pandemic levels. The category resiliency and uniqueness of our health and wellness ecosystem makes Petco a powerful partner for brands wanting access to these deeply engaged, high-value customers. In the quarter, we announced a new partnership with Nationwide Insurance, which I'll touch on more later, followed by an innovative new collaboration with Marriott to facilitate traveling with pets, all while our rapidly growing advertising network expands. continues to be a draw for well-loved brands like Nestle and Colgate-Palmolive's Hills. Taken together, it's clear that in addition to selling products and services, Petco is driving innovation and becoming a pet platform company. A key component of our platform capabilities is our industry-leading membership offerings. This quarter, our flagship VitalCare saw an acceleration in weekly sign-ups of over 50%. fueled by addition of companion animals and enhancements to in-store registration at point of sale. Now with over 400,000 active VitalCare members, an increase of 42% quarter over quarter, and over 200% year over year, we're even more confident that we've designed the right offering for pet parents sitting at the intersection of value and loyalty. VitalCare members continue to bring a 3.5 times higher LTV, over average customers, with over a third of members new to food and new to services with Petco, driving our share of wallet expansion. Combined with nutrition and grooming perks members, now over 1.7 million, our loyalty programs make it easier and more affordable for pet parents to care for all their pet's needs in one place, especially during these inflationary times. They provide a tool for selling engagement in pet care centers, with perks members increasing their visits by roughly 50% and spend by over 40%. These programs have been so successful that at the end of the quarter, we also launched supplies perks, which is showing early positive signs. Critically, a key contributor of expanding our customer membership base was marketing. with targeted impactful messaging focused on healthier pet, healthier budget, proving powerful in driving upper funnel demand generation. Turning to the core pillars of our business, services continued its double-digit growth driven by accelerated sales momentum in vet and grooming. Across both businesses, the teams continue to make progress on building capacity and streamlining the booking process for customers. On VET, earlier this year, we said we were focused on successfully integrating the Thrive business, after which we've returned to our previous run rate of new hospital openings. This quarter exemplified our execution against both, with a Thrive integration not only complete, but now delivering tangible operational synergies and new vital care members. We also accelerated hospital openings with 17 new hospitals, and from a veterinarian standpoint, We signed on more vets this quarter than any previous quarter. Our vet hospital growth is bucking industry trends, contributing to in-store vet prescribed food sales that are at an all-time high. In addition to our 229 full-service hospitals, our Vetco clinics create a highly appealing offering for customers in these cost-conscious times. A record number of in-store and mobile clinics delivered our highest ever quarterly sales while providing access to vaccinations and healthcare at the right place, time, and cost for pets and their parents. 90% of our pet care centers now offer some form of veterinary care, and we continue to add capacity to meet growing demand. These vet additions continue to be strong center store sales drivers. Between our full-service hospitals and mobile clinics, we added over 350 full-time and contract veterinarians, representing a record number of doctors in the Petco ecosystem for the quarter, with referrals from our own veterinarians being the primary driver of new hires. The technological sophistication, competitive compensation package, and autonomous medicine approach of our full-service hospitals offer an appealing home for veterinary professionals, wanting to focus on the practice of medicine without the stress of managing a business, especially in these uncertain economic times. Treatment advances included the addition of Silencia to our solution suite produced by Zoetis. It is the first and only antibody therapy in the market that treats feline osteoarthritis pain and mobility. We're already receiving testimonials of the life-changing impact this treatment has had for cats, who regain mobility and return to their mischievous and playful selves. We also partner with Petco Love as trailblazers in the AVMA and VMAE Journey for Teams program, a comprehensive national initiative that provides support and training for veterinary professionals to advance diversity, equity, and inclusion in the industry. In grooming, full-service bookings remain strong. Platform optimizations have increased ease of booking, and the introduction of same-day booking supplements sales while negating the impact of last-minute cancellations. From new pets that need vaccinations to older pets that want to look their best for the holidays and need ongoing care through end-of-life, services remain an unequivocal growth driver for us and a highly personalized differentiator from online and mass competitors. And to further our mission of insuring as many pets as possible, get the best care available, this quarter we announced our ability to build on our existing double-digit growth insurance business with a new multi-year partnership with the number one player in pet insurance nationwide. With over 90 million pet families in the U.S., but only 2.5% of them estimated to be insured, compared to 25% in parts of Europe, we're even better positioned to capture share in this high-value $2.6 billion investment and growing addressable market. With the ability to cross-promote and market to each other's customers, we're excited about bringing Nationwide's growing number of pet families into our Petco ecosphere, including our veterinary and grooming services, merchandise, and memberships, with a combined whole health and wellness approach that can give them longer and healthier lives together. Turning to merchandise. Consumables continue to surge, growing 12% year-over-year and 33% over a two-year stack. Consumables customers also continue to deliver an elevated LTV over other customers. The key driver of growth in consumables remains our differentiated assortment. Sales in both RX and fresh frozen grew year-over-year. Specifically, RX, including prescriptions and food, grew almost 50% year-over-year, driven largely by repeat customers. Consuelo's strength continues to offset the transitory pressure on supplies, the combination of which weighs on gross margin. Importantly, supplies remain elevated since pre-pandemic levels, up over 20% on a three-year stack. Our teams continue to do a fantastic job in managing inventory, And we expect discretionary sales to normalize as the economic environment improves, the overlap dynamics pass, and the sales impact of supplies, perks, sign-ups are realized. Premium-owned brands continue to be a unique draw, aligning with the long-term macro trends we're seeing in the category. Our owned exclusive and premium mix grew in the quarter. Sales in our own brands ready and wholehearted both grew year over year. Two things are clear. The premiumization trend continues, and Petco is firmly a retailer of choice for health-focused and premium brands. In September, we launched an exclusive partnership with Yummers, the pet lifestyle brand created by Queer Eye's JVN and Anthony. And earlier today, we announced that we're adding the fantastic premium brand, Stella & Chewy's, becoming the first and only national retailer to offer their raw and natural food products both online and in brick-and-mortar locations. as well as bringing in selling Chewy's customers who are high value health and wellness focused pet parents. Experience shows us that when we bring in highly popular, narrowly distributed brands into our ecosystem, we see an incremental lift in sales. Importantly, although the macro environment remains challenging, we continue to maintain great brand partnerships and are working closely with our vendors to control cost and maintain inventory. While our premium mix differentiates Petco from mass and grocery players, our agility also means we can drive affordability through vital care and our perks programs. And with demand continuing to outstrip supply in many parts of the category, the promotional environment remains rational, where we use promotions surgically not only to remain competitive but to drive specific outcomes such as BOPUS and loyalty program conversions. Our digital channels continued to build on the profitable double-digit growth of the first half of this year, with Q3 total digital sales up 10% year-over-year, 42% over two years. Key drivers of growth included an increase in average basket, growth in repeat delivery, including Rx, and continued innovation. We also saw a strong gross margin improvement with particular efficiencies in cost per order. Specifically, the addition of multiple same-day delivery windows through our partnership with DoorDash have extended the time in which orders can be placed and increased appeal. Innovations like these continue to deepen our competitive moat versus online-only players and reinforce our retail 3.0 strategy. Our advertising network is a growing powerhouse for Petco, delivering double-digit growth quarter-over-quarter and triple-digit growth year-over-year. Household brands continue to be drawn to our digital channels as a platform for awareness, traffic, and revenue generation with our high-value and health-conscious customer base, both online and in-store. We expect continued strong growth for the balance of the year and into 2023. Our pet care centers delivered their 10th consecutive quarter of positive comp sales and 9th consecutive double-digit comp growth quarter on a two-year stack. Baskett remained elevated, driven by strength and consumables, with both new and repeat customers drawn to fresh frozen offerings in store, as well as own brand consumables and supplies. Across the business, we positively lapped Black Friday and Cyber Monday year over year. We're also excited about our fantastic holiday-themed treats, toys, and supplies, including our famous dill pickle and our fabulous Hanukkah range for dogs and cats. Additionally, our number one in the market Mexico business continued its strong growth, now up almost triple digits since 2019, and our Lowe's pilot stores are exciting both sides of the partnership. We've also now opened our third neighborhood farm and pet supply with locations in Texas and North Carolina and putting us on track for our target of six to seven by the end of the fiscal year. Overall, early results are ahead of our expectations, underscoring Petco's ability to serve unmet pet-specific needs in these markets, to quickly scale profitably, and to capture meaningful share of this significant and rapidly growing addressable market. Whenever I spend time with our Pet Care Center partners, like I did two weeks ago in Oregon and Nevada, it brings home the unequivocal truth that we have the most knowledgeable and enthusiastic team in retail. Simply put, Petco is what it is because of our partners. The energy and insights that they bring remains pivotal in shaping Petco into the leading pet health and wellness company that it is. Their passion continue to be a key driver of growth while connecting deeply with our customers. I am so grateful for the work our partners do every single day. Before I close, I'd like to focus on a personal note. As some of you may know, in October, the Coughlin family and Petco as a whole lost our beloved lab, Yummy. Yummy was so much more than just a pet. For almost 15 years, he was a companion that made every aspect of my family's life better. As chief dog officer, he reminded us of the pivotal role pets play in our lives, the impact our health and wellness ecosystem has on pet lives, and the thing that makes Petco so special, our purpose of improving lives. Nowhere is our purpose more evident than the incredible work of the Petco Love team. In the third quarter alone, together with Petco Love, we saved over 98,000 pet lives and have reunited over 13,000 pets to date through Petco Love Lost. And in October, Petco Love hit the 1 million free vaccines goal in partnership with Merck and recommitted to another 1 million vaccines to save pets from preventable deadly diseases in addition to all the other incredible life-saving work that they do. As many of you will know, Yummy was treated successfully for cancer twice, diagnosed and supported by our Petco veterinary teams. But for many pet parents, the cost of this treatment is beyond reach. That is why for years, Petco Love has invested millions in helping pet parents obtain treatment by establishing funds nationwide to subsidize pet cancer care. Now, in his memory, I'm delighted to share that Petco Love intends to establish a Yummy Memorial Pet Cancer Fund to support our own Petco partners who are unable to afford this costly treatment for their pets with cancer. This is just another way that Petco cares for the needs of our partners by caring for those they love and who bring so much joy to their lives. When I think of this and the other landmarks Petco has reached over the last four years, it brings home the value of our purpose-led transformation. It's a transformation that's seen us make bold moves in pet health and wellness, elevate nutrition standards, push the possibilities of innovation, and evolve our ecosystem to meet customer needs in changing environments. Bold moves we will continue to make. To be clear, Petco is a growth business with distinct competitive advantages within a defensive growth category. As we set ourselves up to continue driving profitable growth into 2023, we will be both relentless in driving efficiencies and continue to scale our growth initiatives. We will be agile and align our offering to the needs of our high-value pet parents as they navigate changing economic conditions. With that, let me hand it over to Brian.