Q4 2020 Petco Health and Wellness Company Inc Earnings Call
[music].
Good day, ladies and gentlemen, woke up.
Fourth quarter fiscal 2020 earnings conference call.
So at any time during today's call Vince you need assistance from the operator.
Thus far the zero.
After today's presentation there'll be a question and answer session.
Functions will be given at that time.
Please also note today's event is being recorded.
I would now like to turn the conference over to Kristy Mosier, Vice President and Investor Relations Officer, you may begin thanks, very much and welcome everybody to Petco as fourth quarter fiscal 2020 earnings conference call.
Testing live over the Internet to access the call on the Internet. Please log onto Iqos website at Petco Dot com and follow the links from there. In addition to the earnings release. There is also a presentation available to download summarizing our fourth quarter 2020 results.
On the call today with me are Mr. Ron called one, Texas, Chairman and Chief Executive Officer, and Mr. Mike Nuzzo, Petco, Chief operating Officer, and Chief Financial Officer in a moment, Ron and Mike will walk you through Petco, its recent financial and operating performance before we begin our remarks I would like to remind you that in there.
This call, we will be making forward looking statements regarding our current beliefs plans 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 cause results to differ materially from results and events contemplated by such forward looking statements.
These risks and uncertainties include those set forth in our earnings release, and our filings with the Securities and Exchange Commission.
Those forward looking statements are made only as of the date hereof and except as required by law.
Undertakes 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 filings with the Securities and Exchange Commission.
During the question and answer portion of today's call. Please limit yourself to one question and one follow up now let me turn it over to Ron Ron.
Thanks, Christina and good morning, everyone. Let me begin by saying that we could not be more pleased to be speaking with you for the first time since our IPO.
Sure.
We've been looking forward to sharing progress against our strategic priorities and how that translated to strong fourth quarter and full year results. We exited 2020 with momentum delivering fourth quarter revenue growth of 16% above our expectations.
17% comparable store sales, where comp sales, 90% plus digital growth almost a million new customers into the franchise and 13% adjusted EBITDA growth. This contributed to an impressive 2020 performance overall, where we saw full year revenue growth of 11.
Your son translate into 14% growth in adjusted EBITDA.
While the Covid environment is definitely provided a strong industry tailwind looking forward millions of incremental new pets 100 homes in the past 12 months generates a predictable had spend annuity for years to come.
And coupled with premium innovation humanization trends, the stickiness of our multichannel customer relationships.
We see strong growth long into the future.
Mike will dive deeper into our financial performance and provide guidance for 2021.
We do that I want to ground, everyone on why petco, such a special company.
For those of you are new to our story, we are the health and wellness company for pets and pet parents.
If a 55 year history of serving pets, and the people who love them.
Over the last three years Petco has transformed into a disruptive fully integrated and digitally led provider.
Premium products services and veterinary care.
Our investment thesis starts with a phenomenal category that is large growing and within this category that wasn't exceptional integrated into an ecosystem, but the ability to reach customers when and how they choose.
Absolutely what pet parents, one is industry research suggests 50% of customers are looking for a one stop shop for all of their pets' needs.
In our customer base over indexes in the highest quality seeking and highest spending pet parents.
Our transformation has delivered nine consecutive quarters of growth in particular, we had momentum going into 2020 was strong topline performance and performance accelerated through the pandemic.
We're on an exciting growth trajectory, even as COVID-19 restrictions relax.
Petco multichannel platform integrates our strong digital assets with a nationwide physical network. For example, we launched approximately 400 more ship from store locations and curbside pick up in a matter of weeks. This nimble approach enabled us to adapt to the environment in a way that would have just been impossible two years ago.
Ah Petco, though great result, let's start first with great people I could not be more proud of how our knowledgeable passionate caring petco partners have rallied together to do amazing things for pets, and pet parents and each other.
Health and safety remains our absolute number one priority along with the customers and animals in our care.
You've consistently met or been ahead of CDC safety guidelines the protocols, you've deployed and support we provide our partners as a result of the petco partner Covid infection rates are around one third of the national average despite everyday interaction customers.
Importantly, we've provided five COVID-19 related bonuses and established an employee emergency funds has already provided support to over 1300 partners and their families.
We believe vaccinations are critical enablers, the fastest possible recovery. So last month, we launched a $75 incentive program for each petco partner completing a COVID-19 vaccination regimen.
Each part of vaccinated, we're also donating $25 to the partner assistance funds as.
As we think about the road ahead. There are two critical factors that have us very excited.
The strength of our category today and forecasted into the future second we are really just getting started monetizing our unique end to end pet health and wellness ecosystem.
The pet category has proven once again, how resilient today's economic cycles industry projections forecasts ex sort of growth for many years to come.
It is powered by the seismic 3 million plus incremental new tests in 2020, and heightened adoption activity continuing into 2021.
According to recent studies of pet food and pet supplies categories were up mid single digits and double digits, respectively over the first few weeks of 2021.
And while our lifting years other COVID-19 beneficiaries like mass home improvement and home goods, what makes us different is that once the garages remodeled you're not going to do that again for a decade. Conversely, once a cute puppy becomes part of your home they'll need to be fed don't need to be groomed and vaccinated for a decade or more and importantly.
<unk> per pet has increased 4% annually for years as pet owners increasingly embraced their pets as part of their family much like my dog Yummy. It comes to work with me eat salmon and sweet potatoes, not only seem to embed with us but it is a bad hoggatt that is.
This combination of more pets and greater spend per pet has resulted in industry experts raising their forecasts from historical levels of around 45% up to 6% to 7%.
With higher growth projections in key areas like premium food services and.
In digital the.
Zach areas, where we're focused and seeing accelerated growth all in all a pet has historically been a great high growth category to accelerate in 2020 from Covid tailwind and that creates an annuity for many years to come.
We also believe that there is no company better positioned to both provide world class health and wellness and capture a dominant share of wallet from these new pet parents, while we compete with peers across each of our channels from our perspective no. One has the end to end integrated multichannel experience, but the ecosystem. The petco provides pet parents.
From nutrition to own bets vet clinics to training and grooming to our differentiated fulfillment options and more.
This results in tremendous stickiness, our platform provides them with a singular view of the customer giving us what we believe is a significant competitive advantage relative to our peers.
Let me give you an example to make this more tangible only a few weeks ago. I received a reminder of my Petco at Yummy was due for vaccinations I scheduled an appointment online and took them in while I was there I picked up a few treats picked up a toy and scheduled the groom without integrated ecosystem that enables one view of the customer.
Never would have had all of those touch points.
Key component of our ecosystem as our best in class digital platform.
100% plus digital revenue in 2020 and has steadily gained share. Thanks.
Thanks to strategic investments in recent years, our site speed is not as fast as any other player in the market. We were lagging two years ago. Our user experience is winning over customers in our assortment and pricing are now competitive all of which drive substantial improvement in conversion. We're also seeing compelling results.
Our recurring revenue offerings for pizza delivery and put box, which is a monthly subscription box program for puppies, they were up over 40% and 100% respectively for the year.
Shifting mix to recurring revenue as a strategic priority and is now tangibly impacting our business and we're continuing to make great progress.
One of the things I'm. Most excited about is a structured advantage created by our customer fulfillment.
Our pet care centers now double its micro distribution centers and our footprint of physical locations.
Have become a huge asset at the onset of the pandemic, we launched curbside pickup over the holiday period, we launched same day delivery and offering that our digital pure play competitors just cannot offer.
We believe this will further enhance our customer retention, it's almost 40% of early adopter see they prefer same day delivery.
Today over 80% of our Petco Dot com orders are fulfilled from our pet care centers, enabling us to get the product to customers faster and at a lower cost on average and pure play online competitors.
Also by the end of the fourth quarter mobile App has been downloaded 3 million plus times and he's driving merchandise sales and incremental services bookings.
Our own brands and exclusive merchandise deepen our competitive moats and power our growth.
Our team has demonstrated the ability to build brands and products that resonate with customers in both Q4 and full year 2020, our own brands drove double digit growth and are rapidly approaching 30% penetration further fortifying our differentiation from our competitors, our food brand wholehearted, which we launched in 2016.
<unk> is now a top three offering while our premium supplies brand ready crude.
Almost 90% with aggressive expansion plans had.
Complementing our own brand offering loss of exclusive partnerships for unique products were particularly excited about fresh food and it's projected to more than quadrupled to a multibillion dollar category over the next several years according to industry forecasts.
We're focused on becoming a market maker in fresh and in 2021 are set to more than double or just food for dogs distribution, while our recent launch of premium priced human grade honest kitchen has broken all our previous initial sales records.
Overall, our own brands and brands with the Petco and specific markets represent over half of our portfolio not only enhancing our gross margin, but also creating competitive installation.
And of course competitive inflations furthered by services like our veterinary business or creating a new paradigm in the industry as well as grooming and training.
On a full service veterinary hospitals across the country to address the growing need for affordable pet health care consistent with our mission to improve the lives of pets.
And their pet parents by integrating these veterinary hospitals into existing pick your centers, we benefit from significant structural advantages, including lower cost of acquisition and an additional basket opportunities compared to Standalone veterinary care providers.
This model enhances customer lifetime value and drives retention.
Our vet hospital business is shifting into high gear as we opened 20 additional hospitals in Q4.
Spike COVID-19 related construction and permitting delays.
This brings our year end total to 125 locations.
Our hospital customer count is up strong double digits year over year performance comes with consistent nine out of 10 customer satisfaction scores.
We are executing what we believe is the fastest that build out history and are seeing strong performance ramp.
Our expectations.
Long term, we are targeting up to 900 at hospitals and our pet care centers.
It will have a tangible annual and long term impact on our financials.
In addition to our rapidly scaling that hospital business on mobile vaccination clinic business Petco surfaces of over 800 health care centers weekly is seeing strong customer demand.
We continue to expand in new markets like Reno, Anchorage, and Nashville, and have begun to pilot mobile clinic sites with other major retail partners I visit a pilot location several weeks ago in Phoenix.
I'm excited by the potential there needless to say our event offerings stack is scaling into a major long term growth engine for petco.
Turning now to grooming and training Covid has had a tangible negative impact on our business because we shuttered all group training classes and implemented capacity restrictions equipment swaps.
Those restrictions grooming began to rebound in the second half as we started to carefully be open.
And grooming and training, we expect to continue to take share in a fragmented market as we keep teeth, primarily the single unit operators and our digital marketing capabilities provide tangible <unk>.
Advantages.
Over 25% of grooming appointments booked online or in our at our spot club loyalty program has over 200000 customers. We successfully launched online training, which means my mom's New mall piece here in San Diego was trade virtually star trainer, Chloe and New York City 3000 miles away.
And lastly, the successfully apply digital media and search at the local level.
All capabilities single unit operators typically lack.
During the 2020 COVID-19 related closures grooming and training will likely have a positive of lap dynamic from Q2 to Q4 of 2021 as we annualize stay at home restrictions.
Bringing all of the services business together, despite COVID-19 related headwinds and health and safety requirements.
We achieved revenue growth in 2020 and returned to double digit growth in the fourth quarter.
And further acceleration, we're leveraging our data analytics engine to drive new customer acquisition to build further momentum in multichannel purchase conversion.
We have a base over 20 million active customers.
And that grew by nearly 1 million customers in each of the third and fourth quarters. So today approximately 90% of those customers well there are powerful loyalty members, which gives us insight into what they buy where they buy when they buy one of the most robust databases of pet parents in the industry. We leveraged this data across the entire organization.
<unk> marketing to new products and services and how we operate our pet care centers.
Importantly, we are very focused on having pet parents participate in more of our categories and channels. We call. These multichannel customers and our analytics show that when a customer shops more of our categories and channels their spend and our share of wallet increase exponentially, we drove double digit growth in our <unk>.
Multichannel customer base last year and given the spring I use a baseball analogy I think we're only in the third inning and see a scale revenue growth opportunity from customer acquisition and this multichannel conversion effort.
In support of these efforts were deploying enhanced CRM digital marketing analytics and customer segmentation capabilities.
With marketing Rois double industry benchmarks as a result.
These capabilities are driving our game changing vital care membership program.
It's the industry's first comprehensive membership program covering checkups vaccinations grooming services and merchandise discounts in essence, bringing our unique ecosystem to life. We launched in mid October and already have more than 50000 participants.
Cash provided better care for the pet and increase share of wallet for petco.
I will close by reinforcing both the importance we place on our North Star a purpose driven performance and the significant progress we've made and the purpose area.
Made bold moves to demonstrate our commitment to improving the lives of pets pet parents and the partners that work in Petco. This year like prior years with the Petco Foundation, we help save roughly 400000 animals from Eastern Asia and since our inception have helped find homes more than $6 5 million.
Ending that euthanasia absolute mission for Petco.
Two years ago, we made the choice to eliminate products with artificial ingredients only national retailers do so and that choice resonated with pet parents. It was an important step in our journey to differentiate ourselves as a pet health and wellness company in October we led the industry once again by removing electric shock colors, which caused stress and pain.
Our shelves and increase our advocacy for and provided free introductory positive dog training classes. The response to this announcement was incredible it generated more than $2 3 billion impressions and further establish petco as the true health <unk> Wellness company.
Our purpose also includes improving the lives of Petco partners as I mentioned earlier, we gave five Cobra depreciation bonuses in 2020, our average wage rate increased by double digits living up to our commitment that the company does better employees will get better.
Similarly, we granted IPO shares through an extremely broad swaths of employees reinforcing that when the company wins our partners win.
We're also committed to sustainability and are making strong strides we'll be laying out details about our sustainability progress targets and initiatives in the coming months.
Pulling all that together, we've delivered strong results in our Q4 and full year 2020 standpoint powered by a differentiated customer proposition customer acquisition and engagement momentum obsessive execution by the Petco partners in.
And a strong mission based culture that drives us into the future with tailwind from an accelerating industry.
The scaling of our industry and power of our model is evident in our Q1 quarter to date revenue and customer acquisition momentum.
It has given us added confidence for the year.
We are beginning to lap the supercharge pantry loading from March 2020, and are pleased with what we're seeing.
That goes also strengthened beyond operational components, our IPO oversubscribed refinancing allowed us to lower debt and debt servicing obligations and provide more ability to invest for growth.
Near term, we would expect a lift in the recently passed stimulus as pet parents and increased spend on the beloved pets after receiving prior checks.
And from a leadership standpoint, we've added terrific New board members, including Sabrina Simmons, former CFO of gap, Mike Mohan, President and CEO of best buy and Mary Sullivan Senior managing director and Chief Talent Officer of Canada pension plan investment Board.
These moves will further enable us to continue to pull away from the competition.
Everything in our power to improve lives, we look forward to keeping you updated on our progress.
And with that let me now turn it over to Mike Nuzzo, who in addition to being our CFO has done a terrific job, leading our services business and supply chain as COO, Mike will walk you through the financial details on our fourth quarter and fiscal 2020.
Thanks, Ron Good morning, everyone building on the strong business momentum that Ron discussed I am pleased to share with you. How this momentum is translating into strong financial and operational results I'll start with the fiscal year 2020.
Full year 2020 revenue grew 11% from 2019 to $4 9 billion with total comp sales up 11% consisting of digital up over 100% services and vet up modestly despite COVID-19 headwinds and brick and mortar merchandise up mid single digits.
Reflecting robust trends discussed previously.
Both transactions and average basket trends were strongly positive for the year.
As Ron mentioned, our digital business continues to benefit from repeat delivery, which by the end of the year represented almost 45% of total digital revenue.
And from local health care center based fulfillment, including buy online and pickup in store curbside ship from store and same day delivery, which collectively represented approximately 80% of fulfilled digital orders.
Brands delivered a teens growth rate for the year.
Our services and bad businesses continued to benefit from momentum in grooming as well as the scaling of that hospitals in spite of a challenging environment from Covid restrictions in 2020, as we added 44, new full service hospitals within pet care centers, ending the year with 100.
25 hospitals.
From a performance standpoint, our hospitals are expected to reach full revenue and EBITDA maturity at five years after launch, notably our hospitals completing their third year of operation are ahead of model generating over $1 million in revenue and over 200004 wall EBITDA in year three.
While our 2019 and 2020 cohorts are scaling meaningfully faster than model as we gained more vet service share within our target markets.
In addition to these impressive hospital trends the rest of store lift from our pet care Center transformation remains strong with vet locations delivering results that exceeded the rest of chain sales growth rate by mid single digits in 2020.
Full year gross profit increased 200 million or 11% in line with revenue growth to $2 1 billion.
Gross profit as a percentage of revenue was 42, 8% compared to 43% in 2019.
Excluding certain COVID-19 related impacts within our services channel and distribution centers 2020 gross margin rate would have been up modestly from 2019.
SG&A expenses were $1 9 billion up a $135 million or 8% from prior year inclusive of nonrecurring COVID-19 related expenses SG&A as a percentage of sales was 38, 9% an improvement of 120 basis points versus prior year, reflecting expense leverage on sale.
<unk> growth and our cost management efforts adjusted.
Adjusted EBITDA was $484 million, an increase of 14% from prior year outpacing, 11% revenue and gross profit growth.
Adjusted EPS, which also excludes IPO related debt extinguishment costs improved by 33.
228.
Based on $211 million weighted average fully diluted shares for full year 2020, as well as our normalized effective tax rate of 26%, which excludes unusual onetime tax impacts, including the IPO transaction and the 2020 Cares Act.
Turning to the fourth quarter of 2020 revenue grew 16% to $1 3 billion and comparable sales were up 17% and 20% on a two year basis, demonstrating acceleration in the second half of the year.
This revenue performance was driven by 92% growth in digital.
13% growth in services, and Beth and 10% growth in brick and mortar merchandise, reflecting the strength of our multichannel platform.
Fourth quarter gross profit increased $71 million or 14% to $569 million from Q4 2019.
Gross profit as a percentage of revenue was in line with our plan at 42, 6% compared to 43, 3% in Q4 2019 much.
Much of the gross profit rate. This difference was driven by COVID-19 related costs as well as the anniversary of a Q4 2019 actuarial true up.
The balance of the difference was from a modest channel mix impact, partially offset by gross margin rate improvement within key areas of the business.
S. G&A expenses were $502 million up $65 million or 15% from Q4, 2019 inclusive of nonrecurring COVID-19 and IPO related expenses.
SG&A as a percentage of revenue was 37, 5% compared to 38, 1% in Q4 2019, driven by expense leverage and cost management, even as we made incremental strategic investments in the safety of our partners and customers capturing new customers with added digital media.
And performance based bonuses for our team members.
Adjusted EBITDA was $149 million, an increase of 13% from Q4 2019.
Adjusted EPS was <unk> 17.
Based on $216 million weighted average fully diluted shares and applying our 26% normalized effective tax rate among other adjustments outlined in our GAAP EPS to adjusted EPS reconciliation.
Turning to our Pet care Center base. We ended Q4 with 1454 pet care centers down 23 locations from a year ago in.
In the quarter, we added one new location and closed 15. We also added 20 additional vet hospitals within pet care centers and ended 2020 was 125 locations.
We also ended the year with 96 pet care centers in Mexico operated by our successful joint venture with Grupo He's got days, where we had double digit comp growth in 2020.
For 2021, we expect the U S Pet care center count to remain roughly flat to year end 2020.
But we expect to transport 70, pet care centers by adding full service that hospitals and other revenue driving enhancements.
We will also plan to add over 10 pet care centers in Mexico.
Looking at our balance sheet, we continue to have strong liquidity at.
At the end of the year of 499 million inclusive of $111 million cash and cash equivalents and $388 million of availability on our revolving credit facility.
On the cash flow side, we began the fiscal year with $149 million in cash and cash equivalents and generated $269 million in cash from operations.
We invested $160 million in capital allocation focused on it infrastructure and innovation the strategic transformation of our pet care centers with the addition of bed hospital, just food for dogs, pantries, and ready shops, and other corporate and supply chain capabilities.
All that said free cash flow generation for the year was $109 million.
Moving to our leverage position, we recently took action to strengthen our balance sheet first in January we successfully closed our initial public offering which yielded net proceeds of approximately 939 million after deducting underwriting discounts and commission.
We use these proceeds and other funds to pay down debt ending the year with net debt of just under $1 5 billion, a net leverage ratio of three two times.
Second after the fiscal year ended we successfully completed a refinancing of our loan facility with borrowings under our new term loan facility with a principal balance of $1 7 billion maturing in 2028.
Our refinancing enabled us to take advantage of low borrowing costs and actively manage our near and medium term maturity profile when coupled with the deleveraging from our IPO and related recapitalization, we lowered our annual interest expense by over $100 million and our required principal payments.
By over $8 million annually.
Enhancing our ability to invest for growth, while maintaining financial flexibility.
Building on our strong 2020 performance, we are confident in our ability to drive continued growth in 2021, our initial outlook and guidance for 2021 is as follows total revenue in the range of five to 553 5 billion.
Adjusted EBITDA in the range of $520 million to $530 million.
And adjusted EPS in the range of 63 to.
66 <unk>.
Based on approximately $90 million of interest expense and effective tax rate of 26% and a weighted average fully diluted share count of approximately $266 million.
Our 2021 revenue guidance reflects the continued strength of our business similar to other consumer and retail companies, we have a higher sales growth compare in the second half of 2021. However, unlike most businesses that benefited from Covid stay at home dynamics the increase in pet ownership will generate meaningful ongoing.
Industry sales growth tailwind that we are well positioned to capture.
We believe that the recently approved federal stimulus Bill and the anticipated broad based economic recovery should also be beneficial to us.
And finally, as we stressed in our IPO process, we have a substantial multi year growth runway across all parts of our business complemented by exciting emerging capabilities.
As we sit here today, we feel very good about both pet care market trends and the execution of our ecosystem strategy as our momentum has continued into Q1 of 2021.
With that I'll turn the call back over to Ron for some closing comments.
Thanks, Mike My closing point is the same one that I made on our IPO Road show and asked how to think about petco.
I am being a mission based strong growth company with a terrific management team, yes, I encourage you to think about us as a high performing retail company.
But we're also a digital and Omnichannel innovators ecommerce business doubled in the last year.
At the same time.
Veterinary care and services provider is that footprint increased by over 50% in the last year.
We are confident that the continued execution of our strategy will drive momentum across our business as reflected in our 2021 guidance.
To enable us to continue to create long term value for shareholders.
On behalf of our more than 26000 passionate partners I could not be more proud of our incredible formats in 2020, and we are just getting started there.
Cash tag Petco strong is something that organically became a rallying cry this year and I see us becoming petco stronger.
Every single day.
We're excited about the future and appreciate you being a part of our journey with that Mike and I will now take your questions.
Thank you we will now begin the question and answer session.
Ask a question you May press Star then one on the touched on as well.
If you're using a speaker phone we ask that you. Please pickup your handset before pressing the keys.
Your question. Please press Star then two.
Today's first question comes from Kate Mcshane with Goldman Sachs. Please go ahead.
Hi, good morning, Thanks for taking my question.
My question is centered around gross margin.
It was nice to see that you were able to offset some of the pressure from the mix piece, which I know includes digital and services. So I wondered if you could maybe talk through that a little bit more how much that mix impacted have on gross margins in Q4, and how should we think about the gross margins in the context of the guide for 2021.
Thanks, KC I appreciate it.
Let me be clear our FY 'twenty in fourth quarter gross margins were in line with our expectations. We will continue to drive gross margin rate improvement in each area of our business as well as drive into high profit areas like on brands that offset that mix shift to digital so from a longer term standpoint.
Any gross margin rate erosion is going to be modest and moderating over time, I'll, let Mike double click into that though yes. Thanks, Ron Thanks for the question Kate.
Start by emphasizing that our gross margin rate for 2020 would have exceeded 2019 gross margin rate, excluding the COVID-19 related impacts as we mentioned in our prepared remarks in Q4 of the major impact was the lapping of an actuarial true up from 2019, and we also had COVID-19 related impacts.
Channel mix was modest, but what we are seeing.
Is gross margin rate improvement in major areas of our business and the other really positive things that we are seeing substantial opportunity for continued rate improvement we've talked about the delivery optimization that we're doing in e-commerce.
Productivity enhancement in services with the scaling of bets and the increased productivity around our grooming business. For example owned brands is a huge health to our gross margin rate. So we don't guide to gross margin rate.
Embedded within our guidance, we feel very good about our ability to manage this aspect of our business.
Thank you.
Thanks Kate.
And our next question today comes from Steven Zaccone with Citigroup. Please go ahead.
Great. Thanks, Good morning, and congrats on the nice start to being a public company.
Ron when you look back on 2020, how much of the strength in the business was driven by the pandemic lifting demand versus the general transformation in the business that was already underway.
Thanks, Steve and thanks for the well wishes for a quarter number one.
So if you break it down in many ways, we were just perfectly positioned for COVID-19.
The transformation that we engineered we were already accelerating coming into Covid. So we were growing 6% coming into COVID-19 with plans to accelerate from there.
As Covid change behaviors.
We turn then the process of turning our pet care centers into micro distribution centers are ready.
So we immediately tripled the amount of ship from store locations. We launched curbside and then later launched same day delivery all of these positioned us very well to capture the Covid opportunity now I know, there's lots of conversations about.
Stay at home beneficiaries versus companies that are going to surge with the reopening I would tell you that we're a bit of a unicorn between the two yeah, we got a benefit from COVID-19, but that benefit brought with it 3 million incremental new pets in 2020, and we see elevated pet adoptions and we see.
Waiting lines with breeders and we share our live animal cells at an elevated level in the first half of 'twenty one so.
That provides the annuity if you look at our if you look at.
Jim you're only going to do that once every five or 10 years, but once you have that new furry friends in your house are going to be fair, they're going to be growing they're going need to be vaccinated. So that provides an annuity that gives us a bridge from the COVID-19 beneficiary to the.
The reopening beneficiary, so we bridge into both.
We also have parts of our business that were hampered in COVID-19 that are going to have.
<unk> lab dynamics, and grooming and training be perfect example out of abundance of caution we are.
Stopped group training.
We reduced our throughput and foot footfall in our grooming salons and those went negative for the first two quarters are after the Covid, we got back to growth and we got back to double digit growth in Q4, but those are going to have a positive overlap dynamic as we head into the.
The second half and then when you look at <unk>.
Total spend per pet it has for the last seven or eight years, it's been up 4% as humanization of pre musician increases. So we see that continuing into the second half. So we're both a COVID-19 beneficiary, but we're also a reopening beneficiary and all the work we did.
In the leading up to Covid positioned us perfectly thanks for the question Steve.
Yeah, Yeah, that's great. Thank you for the detail just a quick follow up question on the E. Com business. So you had very strong growth this year, but there's still a pretty sizeable sales volume gap versus <unk>.
Industry's largest E comm pure play.
What do you view as your key competitive advantages online to narrow that gap overtime and thanks very much.
Yeah. So let me start by saying we've doubled our ecommerce business in 2020. So obviously, we're very happy with that we've steadily gained share from a digital standpoint. So we're happy about that well it depicts our ecommerce business is into three buckets.
Storage <unk> prior to those three buckets had been overly promotional oriented.
We had a antiquated infrastructure and our promotion orientation. So phase one was getting the basics right getting the fundamentals we rebuilt the it infrastructure underneath our digital business and within 18 months, we launched repeat delivery relaunched our app, we launched buy online pickup in store et cetera. So we <unk>.
Did our it infrastructure then we closed gaps in areas like Skus versus competition, we closed gaps in areas like pricing, where we wanted to we were the slowest site in the industry now where either the fastest or as fast as anybody else. So we got our fundamentals right and guess what happened we did that our conversion grew by double digits.
And then stage three which is really exciting stage is where we generate competitive advantage and that really became clear to us in COVID-19.
As we launched.
Focus as we expanded our curbside as we expanded our ship from stores, but really really when we launched same day delivery same day deliveries now 30% of our orders and the way to think about all of those offers is we get to the customer faster. So you have higher customer satisfaction at lower costs.
Than pure online players who are shipping from Dcs and the Best example of this is a big bag of dog food. So a big bag of dog food from a D. C 40 pound bag is going to get a UBS or Fedex charge based upon the way going across zones to that customer instead that that big bag of dog food gets picked up on one of our pet care.
Centers, formerly known as stores goes in the back of a door dash trunk, which costs us the same as if it was a tennis ball and get to that customer. The same day again lower cost. So we believe we have structural advantages that allow us at minimum to play our game, but and to continue to gain share, but we think it is.
Advantages versus the online players that the dedicated player would have very difficult time competing against.
Thanks very much.
Thank you. Our next question. Our next question today comes from Michael Lasser with UBS. Please go ahead.
Mr. Lasser this as the operators on mute perhaps.
It was I'm sorry, good morning, Thanks, a lot for taking my question. Two two quick questions. First if you look back at 2020, how was the overall promotional environment and how did that contribute to your gross margin dynamics, especially in the fourth quarter and second what is your expectation.
Shouldn't for the contribution from inflation.
In 2021 is in light of the sharp rises in commodity input costs for pet food. Thank you very much.
So all upfront and then Mike will tell this one thanks for the question. The good news is the promotional activity was severely backed off in 2020, which allowed us to.
Do some of the margin offsets.
<unk> is a great example, where expanded margins within our digital business. So.
Promotional activity has been down we don't see.
That.
More promotional pressure as we navigate into 2021.
The other thing I would say is over half of our merchandise portfolio isn't sold at other places. So we have less promotional pressure than just about all of our competitors because we have much stronger mix on brands and much stronger mix and exclusives, we don't have that same.
Motion of the Commoditized pressure on our business, where we really see pricing and promotions going is on the back of the analytics build out that we did in the last year. We've spent time building a data infrastructure you've brought in analytics experts, we created a cross enterprise analytics group with some.
Nominal analytics talent from outside and now we're getting hyper targeted at the individual customer level.
What motivates them and one of the examples right now is customers that we think would be prone to buy online pickup in store.
In that instance, theyre doing the shipping for us. So we'll promote them into buy online pickup in store, we see them turning into almost repeat delivery customers. So the long term value of that customer is high. So we promote them into buy online pick up in store and then we increased our long term value and obviously exponentially expand our March.
And as just one example, but I'll, let Mike expand <unk> been migrating away from a heavily heavily promotional environment in 2019 and 2020. So I can't say that we were meaningfully less promotional in 2020 related to 2019 I.
I believe as Ron was saying that we don't really feel like we would have to be more promotional in 2021 for the very reasons that Ron was talking about as far as input costs, we have not seen a broad based a substantial increase in.
Input related costs historically as you know Michael this has been a business where if there have been increases in input costs.
Been able to to be incorporated into the pricing structure.
For us, but as of right now we feel pretty good about how we're positioned from a pricing standpoint, our position from a.
Manufacturing input.
Pricing structure.
Awesome. Thank you so much and good luck.
Thank you.
Our next question today comes from Seth Sigman with Credit Suisse. Please go ahead.
Everybody. Thanks for taking the question and congrats on all the progress.
You're exiting 2020 with significantly more customers than you started and I'm. Just wondering can you discuss the repeat behavior a little bit more how have you been able to retain these customers to date and I guess, just given the recurring nature of your business, presumably that would support some higher level of baseline growth into 'twenty one.
Curious how do you think about that how does that factor into your outlook. Thank you.
Yeah. Thanks, that's a great question so yes.
We captured nearly a million customers in Q3, we captured nearly a million customers in Q4 in the Q3 number was competitive with the.
Our biggest online competitor.
Who.
It has been historically good at that so we feel really good about those two numbers. So then the question becomes what you just said which is what do we do with these customers. We have been actively shifting more of our customer base and more of our revenue base into recurring revenue customers, which makes it much more predictable.
Quite frankly, much less promotional so whether it is repeat delivery whether it is top box, which is our monthly.
Ox for new puppies, which is an on ramp to our business, whether it's our insurance offerings, whether it is our membership vital care offer we are shifting.
Mix to recurring revenue and recurring revenue had a significant impact on our comp both in Q3 and in Q4 are specific to repeat delivery what we see is.
We see higher satisfaction scores from our repeat delivery, we see significant growth in our repeat delivery.
Concurrent with that though one of the interesting things. That's happening is we have a lot of customers that behave as if they are recurring revenue. These are programs like stock club.
And both.
Opus customers that come every two or three weeks and pick up the same product so more and more of our revenue is becoming recurring type revenue either explicitly or implicitly. The other thing I would say is that.
Our ltvs are going up and our retention is going up on our customer bases of customers that we acquired.
In the <unk>.
During the Covid years.
We're higher retention and more profitable customers than prior years. So we feel really good about these million nearly a million customers pick up in Q3, and Q4 and what we're doing with them.
Okay. That's great very helpful. If I could just follow up on the guidance. So you're guiding sales towards the high end of the long term algorithm that you've talked about I guess, you're guiding to EBITDA growth slightly above that and I realize the long term outlook doesn't really embed a lot of EBITDA margin expansion given some of the puts and takes you've talked about but is there anything.
Pacifically that holds back the margin expansion in FY 'twenty, one maybe an assumption for continued COVID-19 costs or anything else that you would flag.
Seth I wouldn't call it anything in particular, I would emphasize and we feel really good about the fact that 2020, even with Covid expenses, we expanded our EBITDA margin by 20 basis points. So our guidance would imply continued growth in the EBITDA margin.
And as we have.
Shown in the past our ability to manage our cost structure, our ability to do that while smartly investing in the business I think gives us a lot of confidence that we can continue to expand EBITDA margins into 2021.
Thanks very much thanks.
Thanks Seth.
Our next question today comes from the line.
With Bank of America. Please go ahead.
Great. Thank you.
Any meaningful changes in markets that are reopening, particularly on the services side and and do you also expect online penetration to come down as markets reopen or have consumers become so accustomed to buying online that that acceleration in the online shift is now more likely to be permanent.
I'll do the first the second part of that and then I'll pass it over to Mike to do this.
Services reopening.
We definitely have a change of behavior, particularly in older consumers we're seeing.
All of a sudden they are comfortable buying.
Purchasing online.
Online and their digital savvy. This has gone up it forced by the stay at home orders at the same time increasingly.
We're not thinking about our customers either or.
39% of customers. According to our studies are omnichannel customers and those are our sweet spot rate they want to do some activities online, but they also want to come into the pet care center to get room to get trained.
Get advice from our Amazing Pet care Center partners, So, we see more and more omnichannel behavior and acts.