Petco Health and Wellness Company, Inc.

Good morning, everyone, and welcome to PECO's second quarter 2023 earnings conference call. All participants will be in a 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. To ask a question, you may press star and then one on your touchtone telephones. To withdraw your questions, you may press star and two. As you also know, today's event is being recorded. At this time, I'd like to turn the floor over to Cathy Yao, Vice President of Investor Relations. Cathy, you may begin.

Good morning, and thank you for joining Petco's second 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 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 everyone 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 filing. 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, presentation, and our SEC filing. 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 welcome, everyone. Before I begin, I want to thank our 29,000 Petco partners for their enduring commitment to providing the very best for pets and pet parents. I'm proud of the work our teams deliver every single day. This morning I'd like to focus my remarks on three key topics. First, I'll briefly review our Q2 results. Second, I'll discuss actions that will generate approximately $150 million in savings from a combination of run rate cost efficiencies and productivity enhancements by the end of fiscal 2025. These will help drive both gross margin and OPEX with a greater weighting to gross margin. And finally, I'll outline the continued progress we're making on our roadmap for accelerated profitable growth. For the quarter, we delivered solid top line growth. Net revenue was up 3% year over year at 1.5 billion. Comparable sales driven by standout results in services and sustained momentum in average basket trends also grew 3%. This translated to 7% growth on a two-year stack. Our services business once again delivered exceptional performance, growing 17%, and is now over a $700 million run rate business. Our veterinary business continues to scale, and both vet and grooming are capturing more market share. And our consumables business continues its solid growth trajectory. We believe the strength of our differentiated pet health and wellness offering and the value proposition of our unique 360-degree ecosystem and omnichannel delivery model is the right one to capture the long-term megatrends of humanization and premiumization and are fundamental pillars of our long-term strategy. While we demonstrated our ability to grow, we recognize that we're operating in a tougher consumer discretionary environment than we forecasted as we entered the year. And as a result, we're not yet where I want us to be in translating top line growth to the bottom line. Our supplies and companion animal businesses remain more pressured than anticipated. impacting our profitability for the year relative to our expectations. With food, we also continue to see a bifurcation among pet parents, with ongoing migration to more premium foods on the one hand, and an uptick in value-seeking behaviors amongst the second cohort. Due to the broader discretionary environment and its associated impact on our supplies and companion animal businesses, as well as the pricing actions we're undertaking to ensure we're price competitive on key products and SKUs, We are revising our adjusted EBITDA and adjusted EPS guide for the year. Brian will provide more color on our expectations shortly. We remain relentlessly focused on controlling our controllables to optimally navigate today's consumer dynamics. We have a focused plan to deliver our revised targets while we continue to make progress against our long-term strategic priorities. First, we're taking additional actions to protect profitability. We are implementing tight cost controls and programmatic initiatives across the business. Through a comprehensive cost and efficiency program, we've identified and are actively working multiple areas to unlock $150 million in run rate cost savings by the end of fiscal 2025, of which we project $40 million in savings by the end of year one. Specifically, over the last year, including in Q2, we adjusted our workforce, reducing our corporate and field leadership headcount, by a cumulative total of approximately 25%, including the closure of open roles. As a leadership team, we are acutely aware of the impact these actions have on colleagues that we care deeply about. We did not take these decisions lightly. While difficult, they are best for our business, ensures our workforce matches the capability needed to support our long-term strategy. These actions position us as a leaner and more effective organization. Beyond this year, we've identified broader programmatic initiatives to further enhance profitability. These include refinements to our supply chain, including shipping and distribution enhancements, such as automation, meaningful G&A efficiencies, and improvements in merchandise operations. Brian will elaborate further. We're confident these actions will better position us for the short, medium, and long term, while enabling us to prioritize capital allocation, on our key initiatives of vet, digital, and debt reduction. Turning to the second component of our strategic actions, we'll strengthen our positioning with pet parents with the surgical use of assortment, value, in-store experience, and marketing. We are actively evolving our assortment to align with the trends that we're seeing, supplementing our rapidly growing premium offerings with more value-based options. This includes reintroducing the number one selling cat food brand, Fancy Feast, this week. something both our customers and Pet Care Center teams are very excited about, as well as Diamond Naturals. Both will drive incremental customers to the franchise. More to come here. We will complement the product moves with targeted pricing actions to address competitive gaps in key traffic-driving brands and SKUs. We have taken similar actions several times throughout my tenure here, and they have delivered customers, unit, and revenue growth with break-even impact to margin within a year and accretion thereafter. Additionally, once again, we delivered margin expansion within services and digital, and we expect those to continue to help offset mix pressures. As we ensure we have the right products at the right price for the right customer, we'll also lean into seasonal programs like Halloween and holiday. And we recently brought back our popular supplies perks program to stimulate additional supplies purchases. And we'll continue to enhance the customer experience, whether it's online, on the app, or in store. Our investments into labor continue to pay off, with partner retention up nearly 800 basis points year over year. Combined, we believe these actions should meaningfully accelerate our capability to drive profitable growth and deliver for our customers. And we'll do this without compromising on progress, against our differentiating long-term strategic priorities. Now, turning to the results of the quarter across services, our differentiated merchandise mix and omni-channel. In the quarter, our total pet scene and vet increased 26% year-over-year. We ended Q2 with 269 hospitals and are on track to approach 300 hospitals by year-end. As our hospitals mature, our economics become increasingly attractive. Vetco clinics continue to outperform our expectations and remain complimentary to our hospital business. These mobile clinics up 23% year over year to a total of 1400 clinics a week support routine wellness visits in an affordable way. They also remain a source of talent for our full-time vets with 21% of our full-time vet recruits this year coming from our clinic pool. In total, we brought 364 vets into our ecosystem in Q2 up 59% year-over-year, including vets available for our clinic business. In grooming, revenue growth was strong, and we continue to gain market share in a fragmented market, up nearly 100 basis points year-over-year, growing basket, transactions, and center store sales. Grooming's continued momentum has been accelerated by a clean grooming launch earlier this year. With services and products free of parabens, phthalates, and chemical dyes, as well as a nearly 500 basis point year-over-year improvement in groomer retention. In merchandise, our key challenge is in the supplies business, which was down 9% in the quarter. Categories like apparel, crates, and toys remain soft as consumers slowed spending in these products. We are taking targeted actions in this area to drive performance, including improving price competitiveness, screening the offering to more value-oriented initiatives, and expect stabilization over time. We remain nimble in our response to capturing opportunities when they arise. As a result of the extreme heat, we were able to drive our flea and tick business, leading to RX sales up nearly 20% year over year. As we look to the back half of the year, our supplies offerings will benefit from lower input costs and lower freight expense, particularly in Q4. Looking beyond this, consumables remain solid. In the quarter, consumables grew 7% with strength in both premium, up 8% year over year, and non-premium of 4% year over year. Specifically, we continue to see strong fresh frozen growth with 10% revenue growth and 12% customer growth year over year. And these are some of our highest value customers. Our delivery model continues to be a differentiator for Petco, meeting the needs of pet parents who prefer to shop in an omni-channel fashion. Across the business, we saw 2% brick and mortar growth and 9% digital growth, driven by strength in basket trends and nest pack growth. Our repeat delivery and BOPUS revenue continued to grow, as did same-day delivery orders, supporting our value proposition as an integrated omnichannel player. Looking ahead, we will continue to optimize investments across all our marketing channels, in-store and online. Specifically, we will tighten the focus of our marketing dollars on driving traffic to capture share and propel profitable growth. This will include deepening our relationships with our existing 25 million customers so that we are well-positioned for the eventual recovery in discretionary. A key lever here is our valuable Vital Care Premier program, where members grew 75,000 to 660,000 in the quarter. These high-value customers spend more than triple what non-members spend. Lab supplies trips contributed to a modest 60,000 total customer decline. And finally, as we think about increasing customer touchpoints, We were proud to announce the expansion of our Lowe's Shop and Shop partnership this quarter, expanding to 300 locations, including 75 of Petco clinics. This furthers our footprint in rural markets at zero capital outlay from Petco. These locations are already performing ahead of expectations. We expect the partnership to be incrementally positive to our top line, dollar-accretive to our profit, and will enable us to capture new customers. As I close, I'm proud of the progress Petco has made over the last five years, including our vet build-out and the evolution of our 360-degree omnichannel model. That said, I am not satisfied with where we are, and we have an aggressive plan across product, price competitiveness, marketing, and store and digital experience to ensure we deliver. I'm confident that we have the right Blue Chip team to execute this plan, and the actions we outline today will forge an even stronger business. Thank you, and with that, I'll hand it over to Brian.