Petco Health and Wellness Company, Inc.

Good morning and welcome to Petco's first quarter 2023 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. Thank you.

Good morning, everyone, and thank you for joining Petco's first quarter 2023 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 2023 results. On the call with me today are Ron Coughlin, 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 statements. These risks and uncertainties include those set out in our earnings materials and our SEC filings. In addition, on today's call, we will refer to certain 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, Cassie. Good morning, everyone. We appreciate you joining us today. In Q1, Petco delivered its 18th consecutive quarter of comp sales growth up 5%, with revenue growth also up 5%. And we achieved our 12th consecutive quarter of brick and mortar growth. These results demonstrate the successful execution of our strategy through the current environment, the ongoing resilience of both the pet category and the secular trends of humanization and premiumization, and Petco's continued delivery of purpose-driven performance. None of this could have been achieved without the hard work of the approximately 29,000 Petco partners across the country, who I want to personally thank for their ongoing dedication and commitment to the health and wellness of pets, pet parents, and each other. In the short and medium term, we are laser focused on executing against our strategic priorities, controlling our controllables, and driving further efficiencies and productivity out of our cost structure. Brian will elaborate on this further. Longer term, we remain confident in the competitive advantages derived from our unique 360-degree care offering delivered through the three core pillars of our business, services, a differentiated and comprehensive merchandise mix, and our omni-channel capabilities, all tied together by our loyalty and membership programs that benefit pets, pet parents, and Petco. Focusing on these core pillars, I'll start with services, where revenue is up double digits in the quarter. By evolving and growing our fully integrated services offering with veterinary grooming and training, we continue to further differentiate our business model through hands-on, Our full-service veterinary business continues to scale. And to be clear, there is not another retailer or online player in our competitive set with a scaled and owned veterinary network, and this is a big differentiator for Petco. Between our clinics that provide convenient and affordable preventative care and our expanding number of vet hospitals that provide a full spectrum of diagnosis and treatment, Petco is well positioned as one of the top 10 veterinary providers in the US. In Q1, we saw 20% more pets for vet appointments year over year, underscoring our momentum and growth trajectory. A key driver of this is our mobile clinics, which provide a powerful growth lever that enables us to bring even more pets into our ecosystem. Averaging over 1,300 clinics a week during Q1, up 22% year over year. These fast, affordable, and convenient clinics that operate and weekend hours allow us to meet the ongoing demand for veterinary services in an agile way while delivering robust economics. In the short term, our high performing clinics are well suited in this environment to address the needs of more cost sensitive pet parents while also providing a pipeline of incredible veterinary talent to our hospitals. We've created a dynamic working environment for veterinarians within our ecosystem that enhances our attractiveness as a flexible employer of choice in a competitive labor market. Similarly, we continue to be extremely pleased with the progress of our full-service vet hospital business. We added a record 375 veterinarians to our ecosystem in Q1, up 60% year over year. and opened 10 new hospitals to reach a total of 257, meaningful progress towards our anticipated 50 to 55 new hospitals this fiscal year. In the medium and long term, maturing vet hospitals will increasingly contribute to top and bottom line growth while further supporting our far wall economics. In aggregate, our pet care centers with hospitals are seeing a mid single digit lift to center store sales after just one year. And as a result, PCCs with hospitals have been growing tangibly faster than those without. Brian will touch more on this later. In short, in addition to providing a world-class veterinary care offering, the operational and financial progress we made in both our clinics and hospitals is securing the runway for long-term profitable growth and strengthening our integrated ecosystem. Grooming also generated record sales in the quarter. We continue to increase capacity and efficiencies in our salons. Demand remained high, with our knowledgeable and skilled grooming teams delivering a retentive experience while further driving traffic and center store uplift. Combined, our fully integrated service model continues to position us well in the market, offering consumers flexibility and choice across all wallet sizes. Turning to our second pillar, our differentiated merchandise continues to provide a competitive edge. Total merchandise sales increase in the quarter on a year-on-year basis, led by double-digit growth in consumables. Importantly, our assortment of health-focused premium brands continues to resonate with pet parents and remains an important driver of demand in our ecosystem. Specifically in Q1, Fresh Frozen delivered both double-digit sales and customer growth year over year. Additionally, our exclusive and exciting custom meals offering with Fresh Pet gives us the opportunity to capture further share of this rapidly scaling market. Similarly, we continue to see momentum with premium brands, including Science Diet, Royal Canin, and Acana, all up double digits this quarter. At the same time, we're also seeing some value-seeking behaviors in our customer base. For those customers, we saw demand shift into our own brand offerings, such as Wholehearted, providing pet parents with a value-oriented, yet health-focused alternative that positions us well competitively. As a result, Whole Hearted continues to grow double digits year over year. We also enhanced our position in quality, more affordable consumables. Trends in consumables continued to help offset the transitory impact of discretionary purchasing in supplies and companion animals, which remained down in Q1. We're addressing this in two ways. First, we're making sure we meet the needs of more price-sensitive consumers by working with vendors on costing and supplementing our own brand portfolio with high-quality value offerings. Second, we're getting more proactive where we know there is demand. For example, over the last few weeks, while it was extremely warm in the Northwest, we heavily marketed flea and tick. As a result, flea and tick supplies have performed strongly. Turning to the third pillar of our business, our omni-channel model and the structural advantages that it provides. Our digital business delivered double-digit sales growth, driven by strength and repeat delivery customers, the continued growth of our rapidly scaling ad network, our digital pharmacy, and dynamic growth in same-day delivery orders, which more than doubled year over year, underscoring the significant competitive moat same-day delivery offers relative to our online-only competitors. Our brick and mortar pet care centers continue to provide an engaging and helpful in-store experience with our Petco partners guiding pet parents in the aisles while also delivering a structural and competitive micro distribution advantage for our digital channels. In terms of our people, I am very proud as we experience stellar Petco partner retention in Q1. In fact, we saw nearly 800 basis point improvement year over year for our full-time partners working in pet care centers, generated through both enhancements to our compensation and benefits and the exciting career opportunities Petco provides for partners working in a passion category like pet. Finally, tying our three growth pillars together is our relentless focus on the customer, with our fully integrated health and wellness ecosystem providing a unified customer experience. Our customer loyalty programs continue to build momentum with our highest valued customers And Q1 marked an over 50% year-over-year increase in recurring customer revenue, building on our milestone of $1 billion reached in 2022. Additionally, in Q1, we delivered year-over-year NESPAC growth as we bring pet parents deeper into our ecosystem. Our Vital Care membership program continues to provide clear value for customers while also driving loyalty, especially after consolidating all of our loyalty programs under the Vital Care umbrella earlier this year. Our paid VitalCare Premier customers grew over 100,000 in Q1, ending the quarter with over 580,000 customers. VitalCare Premier is now on track to generate over $100 million a year in recurring revenue on an annualized basis. Our end of period total active customer count was roughly flat at 25.1 million, driven by some trip consolidation and lapsed discretionary visits. Concurrently, the value of our customer base continues to build via growth in programs such as VitalCare Premier and Repeat Delivery, which is showing up in the positive NESPAC trends we are seeing. Before I close, I want to take a moment to acknowledge how proud I am of the impact Petco continues to have on our communities and Petco partners. This quarter, together with Petco Love, we saved over 100,000 pet lives and delivered over 240,000 free vaccines to underserved communities through the Vaccinated and Loved Initiative. And we've now reunited over 20,000 pets to date through Petco Love Lost. We joined the leadership circle of Open to All, reinforcing our ongoing commitment to fostering safe and discrimination-free retail environments for our customers and partners. And in April, we honored our epic achievers, recognizing a select group of high-performing Petco partners for their incredible work over the last year. To conclude, our results underscore the enduring appeal of our unique model and our focus on operational excellence in the current environment. We're incredibly proud of our fully integrated services business, including a veterinary offering as a growth catalyst, our differentiated assortment, and the structural advantages of an omnichannel retailer at scale. Combined, these pillars will enable us to capture continued growth, capitalizing on the secular megatrends of humanization and premiumization in the resilient pet category. Now, let me pass it over to Brian.