Petco Health and Wellness Company, Inc.

Good morning and welcome to Petco's fourth 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 Kathy Yao, Vice President of Investor Relations. Kathy, you may begin.

Good morning, everyone, and thank you for joining Petco's fourth quarter 2022 earnings conference call. In addition to the earnings release, there is a presentation, infographic, and earnings supplement available to download on our website at ir.petco.com, summarizing our fourth quarter and full year 2022 results. On the call with me today are Ron Coghlan, Petco's Chief Executive Officer, and Brian LaRose, Petco's Chief Financial Officer. Before they begin, I would like to remind you that on this call we will make certain forward-looking statements which are subject to a number of risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. These risks and uncertainties include those set out in our earnings materials and SEC filings. In addition, on today's call we will refer to our non-GAAP financial measures. Reconciliations of these measures can be found in our earnings release and our presentation. as well as in our SEC filings. And finally, during the Q&A portion of today's call, we ask that you please keep to one question and one follow-up. With that, let me turn it over to Ron.

Thank you, Cathy, and good morning, all. Before we begin, I want to take a moment to formally welcome Cathy Yao, who joins Petco as our new Vice President of Investor Relations. Cathy has an impressive and diverse background. spanning both buy and sell side in telecommunications and healthcare. Many on this call will know her. She has already become a great addition to the team and is a proud pet parent of two Pomeranians, Loki and Freya. We're delighted to have her and her pets at Petco. Turning to results, I want to start by thanking our incredible Petco partners for their excellent work in delivering record quarterly sales in Q4. We achieved our 17th consecutive quarter of comp growth, 16th consecutive quarter of customer growth, and delivered cash flow performance significantly higher than expectations, all through an uncertain macro environment. Our partners continue to embody the mission of purpose-driven performance, combining strong operating performance with tangible improvements to the lives of pets, pet parents, and the partners who work at Petco. Petco's performance was bolstered by a pet category that once again delivered solid growth, proving its resilience regardless of the economic environment. Pet adoptions in 2022 remained elevated above prior year. Gen Z and millennials continued to be the largest cohort of adopting new pets in 2022 and the highest spending, bringing elevated and accretive spend per pet. Comp sales growth was 5% for the quarter, as well as the full year. Net revenue growth was 4% for both the quarter and full year, momentum that continues into Q1, demonstrating the enduring appeal of our one-of-a-kind ecosystem. Importantly, our performance for the full year has strengthened our balance sheet and brought strong operating cash flow performance. This, combined with the benefits from our cash management initiatives, meant that earlier this month we paid down an additional $35 million of principal on our debt, as well as taking further actions to manage our floating rate exposure. And we're committed to pay down additional debt while continuing to invest to enable our long-term growth strategy. Brian will elaborate shortly. At our inaugural Investor Day last year, we laid out three core growth pillars. First, the rapid scaling of services, Second, furthering the differentiation of our merchandise. And last, leveraging data and membership to build loyalty and share a wallet. Let me share our progress and results across those pillars. Services delivered a strong 14% comp growth in the quarter, up 36% on a two-year basis. In veterinary services, we are now at scale with a veterinary presence in 90% of our pet care centers. Petco's hospitals and clinics saw nearly 1.9 million pets in 2022, positioning us as one of the leading providers of veterinary services in the United States. Record veterinarian hires, improvements in ease of online booking, and innovation in medical technology significantly boosted transaction volume, bucking industry trends with double-digit sales growth for the full year. We added over 1,100 veterinarians to our ecosystem in 2022, representing a 40% increase compared to a year ago. We also added 50 new full-service vet hospitals this year, in line with expectations. We now have a total of 247 hospitals across the country, a significant milestone having come from just 10 at the beginning of 2018, and cementing our position today in the top 10 from a hospital unit standpoint. Petco continues to provide a single, trusted ecosystem for pet wellness that remains unique in the industry. Pet care centers with vet hospitals continue to see a mid-single-digit center store lift, are growing faster, and have higher profit dollars compared to locations without hospitals. Vet customers are also demonstrating a 2.3 times higher lifetime value than non-vet customers. Last year, we ran over 58,000 Vetco clinics across 46 states, up strong double digits, providing convenient, affordable, and critical preventative medicine. With great care at a great price, our vet clinic business is the right offering at the right time for many of today's pet parents. Clearly, Petco has built a unique and profitable services offering with veterinary services at its heart. But it's more than that. Under the exceptional leadership of our chief veterinarian, Dr. Miller, and her team, we are redefining what a veterinary network looks like through powerful industry partnerships, innovative training programs, and technological advances in medicine, including AI radiology, diagnostics, and multi-species ultrasound. The result? Our vet business is an incredible growth driver, and our model provides a compelling home for veterinary professionals while improving and saving lives of even more pets. Turning to our differentiated merchandise, 2022 was another strong year. The addition of exclusive and formerly independent-only store brands such as Backcountry and Stellan Chewy's have been powerful in driving our premium mix and accessing new customers. Meanwhile, our mix of popular on-brand supplies and consumables, including Ready and Wholehearted, which both grew in revenue and penetration over the year, continue to meet the core humanization trend while also catering to a variety of wallet sizes. Taken as a whole, our differentiated assortment is driving retention with our health-focused customers, offering products unavailable in mass or many online channels, and reducing our competitive promotional exposure. Total merchandise sales were up both in the quarter and for the full year. Highlights include double-digit growth in consumables, driven particularly by our own brand, Wholehearted. continued year-over-year growth in both revenue and customers in fresh frozen, and double-digit growth in RX, making progress in this $12 billion addressable market. And while our more discretionary supplies and companion animal categories saw a decline year-over-year, our fourth quarter saw an over 100 basis point improvement in the year-over-year growth rate versus Q3. In the high-value fresh frozen category, we maintained our structured advantage versus online-only players. With over 90% of e-comm customers choosing same-day delivery or BOPUS when available, we're able to leverage our pet care centers as micro distribution centers, getting product to customers faster, and in many instances, with lower fulfillment costs. And today, we announce an absolute breakthrough. An industry-first and exclusive partnership with Fresh Pet, the number one brand in fresh frozen pet food. This makes Petco the first national, omnichannel pet retailer to offer a customized fresh pet food subscription delivered direct to customers' doors. With the fresh frozen pet category expected to reach $6 billion within the next four years and the direct-to-consumer pet segment growing faster than traditional pet e-commerce, these custom meals further enhance Petco's ability to lead the way in the megatrends of personalization and humanization. The fact that the leader in Fresh Frozen chose to exclusively partner with Petco is a validation of the power and advantages of our unique omnichannel and micro distribution center capabilities. We're delighted to be bringing this industry-first offering to market. But it's not just our merchandise that differentiates us. It's also our omnichannel delivery capabilities. Our digital channels continue to gain momentum. App and website sales deliver double-digit growth both in the quarter and for the full year. translating to 32% growth on a two-year stack and an incredible 138% on a three-year stack for the full year. And this year, we hit a milestone, surpassing $1 billion in recurring customer revenue, driven by repeat delivery, vital care, and insurance, securing revenues that are both predictable and retentive. In our pet care centers, we achieved 11 consecutive quarters of brick-and-mortar comp growth, And as promised, every non-trainee partner at Petco is now paid a base wage of at least $15 an hour. PCC partner application retention rates continue to be strong and are up year over year as we provide an engaging and rewarding environment to work and flourish, strengthening our business in the short and long term. Internationally, our number one Mexico business continued to go from strength to strength, delivering double-digit revenue growth year over year, We added 12 new locations this year, furthering our penetration in this rapidly growing market and bringing us to a total of 120 locations. Our rural pilot continued to scale profitably, making progress in capturing the $7 billion addressable market. As de-urbanization increases and pet spend continues to grow in rural markets, this natural extension of our core offering provides pet products and services that are unique and highly desired by passionate pet parents. As a result, in aggregate, the pilot is performing above model and trending to be cash flow positive within the first year. In addition, our lowest pilot in Canadian Tire Partnership continued to perform extremely well, both with significant runway for growth. Finally, turning to customer loyalty and share our wallet, our insights-driven approach to data, marketing, and customer experience enhancements added 1 million net new customers for the full year. including over 70,000 ads in the quarter, our total active customer base now stands at over 25 million. In January, we unified all memberships under the VitalCare program. Members of our PALS program were transitioned to VitalCare Core. Members of our existing paid VitalCare program were transitioned to VitalCare Premier. Dramatically simplifying loyalty to Petco and enabling a clear trade-up path is already paying dividends with increased upgrades from free to paid. In February, we hit a major milestone, reaching half a million paid active vital care Premier plans. In addition to providing tailored benefits, savings, and advice to pet parents, our vital care program drives loyalty and brings them further into our ecosystem. Premier members have a 3.6 times higher lifetime value than non-members. They visit more, and we see a lift in spend across all categories translating into higher Petco margin dollars versus non-members, with recently acquired members spending more than prior cohorts. Finally, before I close, let me turn to Petco Love. In the fourth quarter alone, together we saved over 97,000 pet lives and have now reunited over 17,000 pets to date through Petco Love Lost. And in partnership with Merck, Petco Love delivered 172,000 free vaccines in the quarter, making great progress against our second million free vaccine commitment, saving pets from preventable, deadly diseases. All incredible examples of how we deliver against our mission of purpose-driven performance. And we're grateful to Blue Buffalo for their financial support to the Yummy Moro Cancer Fund, a program dear to my heart, providing financial assistance to our Petco partners for pet cancer treatment. Personally, I'd also like to thank the teams at Petco Love and Priceless Pets Rescue in Southern California for helping me find the newest member of the Coghlan family, our sweet new chocolate lab, Yogi, which having a father who is a lifelong Mets fan required some research to confirm Yogi Berra spent almost 10 years with the Mets, a few days as a player and the remainder as a coach. Yogi is fitting into his new role as Chief Dog Officer well, honing his skills with dog trainer Zoe at our Del Mar location, and keeping up to date on all his vaccinations with Dr. Rice at our Vetco Hospital in Encinitas. To conclude, I'm energized about the strength of the pet category and our differentiated strategy. To be sure, there is still significant progress to be made, but we're executing well in the current environment, and our strategy for long-term growth is unique and working. The pet category remains vibrant, and we continue to have one of the best teams in retail whose dedication is delivering day-in, and day out. With that, let me hand it over to Brian.