Q2 2021 Petco Health and Wellness Company Inc Earnings Call

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Thanks very much and welcome everybody. To Petco second quarter fiscal 2021 earnings conference call. We are webcasting live over the internet to access the call. On the internet. Please go to Petco's website at Petco.com and follow the links from there. In addition to the earnings release. There's a presentation available for download summarizing our second quarter 2021 results as well as an info.

[music].

On the call today are mr. Ron, Coughlin Petco's chairman and chief executive officer. Mr. Mike news o Petco's, Chief Operating Officer and president of Pekka services. And mr. Brian Larose Petco's, newly appointed Chief Financial Officer in a moment, Ron and Mike will walk you through Pekka's recent financial and operating performance for the quarter. But, before we begin our remarks, I would like to remind you at that. In this call. We will make forward-looking statements in regards to 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 actual results to differ materially from the results and events contemplated by such forward-looking statements. These risks and uncertainties include those set forth in our earnings release as well as, with our filings, with the Securities and Exchange Commission.

These forward-looking statements are made only as of the date hereof, except as required. By law. We undertake no obligation to update or revise, any of them, whether as a result of new information or 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.

Good morning.

And welcome to <unk> second quarter fiscal 2021 earnings conference call.

During The Question Answer of today's call. Please limit yourself to one question and one follow-up. Now, let me turn it over to Ron.

All participants are in listen only mode.

After todays presentation, there will be at all just given me to ask question.

Thanks, Kristi. And good morning, everyone. Thank you for joining us today, are incredible teams delivery against Purpose Driven performance. This quarter has once again, exceeded our expectations in terms of both quarterly numbers as well as acceleration of transformative initiatives. We posted record, quarterly, Revenue, growth and comp growth of 20% and over 30%, on a two-year stack with strong profit flow, through Q, 2 is 1/4, that truly highlighted the strength of our unique.

You're asking the question you asked I suppose in one.

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We have yourself on mute. Please press Star then two.

Please note today's event is being recorded.

Oh I'll like to turn the conference over to Kristy, Mosier, Vice President Investor Relations Officer.

You may begin.

Thanks, very much and welcome everybody to Peck, our second quarter fiscal 2021 earnings conference call.

Crafting live over the Internet to access the call on the Internet. Please go to <unk> website at <unk> Dot com and follow the links from there. In addition to the earnings release, there's a presentation available for download summarizing our second quarter 2021 results as well as an integral.

With world-class digital capabilities, bus services offerings and a nationwide physical Pet Care Center footprint, that provides both a great in-store experience and Logistics competitive advantages. Those capabilities are enabling a growing. Customer base is becoming more and more valuable with significant growth in recurring Revenue, customers, loyalty customers, multi-channel customers and premium product and services customers.

On the call today are Mr. Ron Coughlin pack as chairman and Chief Executive Officer, Mr. Mike Nuzzo Packers, Chief operating officer, and President of Petco services and.

Mr. Brian Lee Rose <unk> newly appointed Chief Financial Officer.

The category continues to thrive and within it, according to Nielsen. We are taking share our transformation continues to accelerate with the fastest Veterinary expansion in history. Furthering our digital competitive advantages, and expansion of our merchandise differentiation against the competition through powerful own and exclusive Brands looking back to a year ago. Pundits question, whether the behavior shifts related to COVID-19 lockdowns would generate abandonment of physical retail shopping.

In a moment, Ron and Mike will walk you through Peco's recent financial and operating performance for the quarter, but before we begin our remarks I would like to remind you that in this call. We will make forward looking statements in regards to our current beliefs.

<unk> 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 to differ materially from the results and events contemplated by such forward looking statements.

These risks and uncertainties include those set forth in our earnings release as well as with our filings with the Securities and Exchange Commission.

Digital-only with reopening at Petco. We now know, the story is a very different.

Pet parents have come back to our pet care centers in droves. They've come back to get advice. And what's the best food for Ivan? The Doberman. They've come back to get Coco. The Maltese room. They've come back to the Tangoed the Tabby can receive high quality Care in one of our vet, hospitals or immunizations, at our vet, go clinics. And they've come back because their pets just love being in our Pet Care Centers. All of this is driven by our incredible knowledgeable and passionate partners.

These forward looking statements are made only as of the date hereof.

Sept 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 filings with the Securities and Exchange Commission.

But they've also come back because we offer an omni-channel experience, like no other in the category. While we have great offerings for all customers. For those 39 percent of customers stating, they want to shop in an omni-channel manner. There is no one that compares to Petco this provides us with a growth runway for years to come.

During the question and answer of todays call. Please limit yourself to one question and one follow up now let me turn it over to Ron.

Thanks, Christy and good morning, everyone. Thank you for joining us today our.

Our incredible teams delivery against purpose driven performance. This quarter has once again exceeded our expectations in terms of both quarterly numbers as well as acceleration of transformative initiatives.

I couldn't be more proud of how our 27,000 plus Partners continue to execute with Excellence rallying together to deliver our 11th. Consecutive quarter of comp growth. Our transformation from a traditional retailer into a disruptive integrated omnichannel, provide. Our veterinary care services and premium products is tangibly driving performance.

We posted record quarterly revenue growth and comp growth of 20% and over 30% on a two year stack with strong profit flow through.

Q2 was a quarter that truly highlighted the strength of our unique model with world class digital capabilities.

Our services offerings and a nationwide physical pet care center footprint that provides both a great in store experience and logistics competitive advantages those capabilities are enabling a growing customer base is becoming more and more valuable with significant growth and recurring revenue customers loyalty customers multi.

Are differentiated model of powerful. Marketing is, enabling customer acquisition and increasing. Spend with strength in both basket and transactions on both the one year. In two years, stack bases powered by growth and recurring revenue and loyalty programs.

Channel customers and premium product and services customers to <unk>.

We actually take you to with momentum even as we're lapping last year, strong double-digit comp growth including last July where the comp was especially strong. And that momentum is carried into Q3 reassuring signals that we can lap the second half of the Year strongly giving us confidence to raise our full-year, guidance beyond the cute to be, which Mike will discuss in a few minutes.

<unk> continues to thrive and within it according to Nielsen we are taking share.

Our transformation continues to accelerate with the fastest veterinary expansion in history.

During our digital competitive advantages and expansion of our merchandise differentiation against the competition two powerful owned and exclusive brands.

Looking back to a year ago pundits question, whether the behavior shifts related to Covid lockdowns would generate abandonment of physical retail shopping towards digital only with reopening at Petco. We now know the story is a very different one pet parents have come back to our pet care centers in drones, they've come back to get advice and what's the best.

Importantly, we have significant runway for continued growth as we execute against our proven multi-year transformation strategy, across Services, Veterinary Care, digital owns, and premium Brands and more. An area of particular focus is Pet Health. It represents a combined total addressable Market of almost 50 billion dollars.

Food for Ivan the Doberman, they've come back to get cocoa, the Maltese groomed they've come back to the tango. The tabby can receive high quality care and one of our vet hospitals are immunizations at our vetco clinics and they've come back because their pets, just love being in our pet care centers.

In the 35 billion dollar Veterinary part of the space. We're attacking the largest bucket of addressable Market executing the fastest National that hospital roll out with a hundred fifty five hospitals. At the end of the quarter rapidly expanding our vet clinics, 800 Pet Care Centers at the beginning of the year to 1100 at the end of the quarter with continued, head room for growth.

All of this is driven by our incredible knowledgeable and passionate partners.

But they've also come back because we offer an omnichannel experience like no other in the category.

The 11 billion dollar prescription drug and food market or we've historically been underdeveloped provides us with tremendous head room for growth and we're getting after it with 50% plus growth momentum scaling Veterinary capability. Coupled with our data on pet parents gives us confidence that we can gain significant share in this market.

While we have great offerings for our customers for those 39% of customers, stating they want to shop in an omnichannel manner. There is no. One that compares to petco. This provides us with a growth runway for years to come.

I couldnt be more proud of how our 27000 plus partners continue to execute with excellence grounding together deliver our 11th consecutive quarter of comp growth.

In prescription food, we're delivering it.

Ashley. Hi, double-digit growth with strong sales online and in every location where we put at that hospital, we can now sell prescription food. This will be a predictable and steady growth driver for years to come.

Our transformation from a traditional retailer into disruptive integrated omnichannel provider veterinary care services and premium products is tangibly driving performance.

In prescription drugs were thrilled to have formed a relationship with a best-in-class. Don't partner in that source, and the early results are promising.

Our differentiated model with powerful marketing is enabling customer acquisition and increasing spend with strength in both basket and transactions on both the one year and two year stack basis.

In the to billion-dollar Insurance Market, where we summerlee have a men said room. It's early Innings, but we've doubled our business off a small base. We've built domain, expertise and developed a compelling offering aimed at both direct to Consumer and through employee health plans. We've more than doubled our policies at the beginning of the year. This includes standing on Salesforce and cognizant bringing us to a total of 22 companies offering Petco insurance through their employee benefit.

Howard by growth in recurring revenue and loyalty programs.

We exited Q2 with momentum even as we're lapping last year's strong double digit comp growth.

Including last July where the comp was especially strong and that momentum has carried into Q3.

Reassuring signals that we can lap the second half of the year strongly giving us confidence to raise our full year guidance beyond Q2 beat which Mike will discuss in a few minutes.

The Pet Health space is large and growing and we're encouraged by the capability of momentum that we've built.

Importantly, we have significant runway for continued growth as we execute against our proven multi year transformation strategy across services veterinary care digital owned and premium brands and more.

Our integrated multi-channel ecosystem, is the only offering able to meet all the pets needs something, fifty percent of customers, say they want as a result pet, parents are voting with their wallets. I'm pleased to report that over the last quarter. We continue to require significant, net, new customers are successful. Customer acquisition efforts over the last 12 months have been driven by the strength of our model. Our marketing muscle, that gets more and more powerful and tell ones from an exceptional characteristic.

An area of particular focus is pet health.

It represents a combined total addressable market of almost $50 billion.

In the $35 billion veterinary part of the space, we're attacking the largest bucket of addressable market executing the fastest national that hospital rollout with 155 hospitals at the end of the quarter rapidly expanding our vetco clinics from 800 pet care centers at the beginning of the year to 1100 at the end of the quarter.

That is large and growing especially as the demand for new pet has continued into 2021.

We have been aggressively driving customers into our recurring revenue and loyalty programs and it's working with revenue from recurring Revenue, customers up 60% and recurring Revenue customers fifty percent year over year.

Continued headroom for growth.

The $11 billion prescription drug and food market, where we've historically been underdeveloped provides us with tremendous headroom for growth and.

Vital care, subscriptions were up to more than a hundred thousand members since launching at the end of last year. And these customers are spending over three times average customer with 25%, of them new to food and 36% new to services with Ted go.

And we're getting after it with 50% plus growth momentum.

Scaling veterinary capability, coupled with our data on pet parents gives us confidence that we can gain significant share in this market.

In prescription food, we are delivering exceptionally high double digit growth with strong sales online and in every location, where we put that hospital, we can now sell a prescription.

And nutrition and grooming perks. Loyalty programs have reached over 700,000 members almost doubling from last quarter. And again, exhibiting significantly higher, spend versus an average customer. Once again, we grew our multi-channel multi category, customer base, double digits. And in the quarter with approximately 4 million multi-channel customers, these customers spend up to seven times as much as single Channel, single category customers.

And the demographics of our customer base are improving as well. Our sales for Millennials and gen Z years, continue to grow and it reach what we believe is the highest proportion of a customer base and the pet specialty industry. This is important, as they are major drivers of the humanization trend and therefore shot more frequently and spend more than older demographics.

Earlier this month. We were excited to announce the launch of

Bishop of Carnot to become the first in the pet industry, to provide buy. Now pay later options for our customers. This new payment option, resonates strongly with Millennials and gen Z. Here's the prefer more flexible payment options versus traditional credit products. Historically, the addition of the klarna payment option has helped raise average order value by 20 to 80 percent and improved conversion by twenty percent. On average. We believe this will open up opportunity and hire a lovely product.

Act like vacuums. We're excited to be a first mover with this payment option for both our customers and the 18.5 million klarna app customers in North America.

Now, looking more closely across the business. We're driving tangible growth, across our services and vet businesses, with Revenue, growth of 49 percent versus the year ago and consistent with q1 and almost 36 percent growth on a two-year stack. And it continues to be a significant differentiator for us. Our goal is straightforward to be the leading services and vet provider across and over 45 billion dollar addressable Market. We are taking share and driving sales.

Momentum across Services by leveraging. Our Pet Care Center assets and unique capabilities and marketing technology and customer engagement in a way that local smaller brick-and-mortar and online. Only competitors. Just cannot match.

We're becoming an employer of choice for vets trainers and groomers. We've built our compelling employer, value, propositions and recruiting core competency that is delivering, impressive, recruiting and retention results. We now have the highest number of groomers that we've ever had with significant room for additional growth across our salons to meet Rising demand. Additionally, we recently launched and funded a scholarship program for high potential partners and our pet care centers.

Become Veterinary technicians with an inaugural class of a hundred Partners, a very proud of this effort.

Services in Ventura Cornerstone of our Pet Care Center transformation, which we believe is the most compelling per unit productivity. Enhancement effort in retail, a proven step-and-repeat formula that represents a strong organic growth runway for years to come. Remember, when we transform a pic Care Center, we achieve a mid-single digit, merchandise, lift is additive to the attractive economics, within the four walls of the vet combined this

Creates a Dramatic Lift and incremental market share.

The return of retail traffic continues Drive strengthen our brick and mortar merchandise with Revenue up 17 percent year-over-year and 21% on a two-year stack with double-digit growth in all of our major categories, including consumables supplies and companion animals. There was particular, over performance in consumables.

We saw strong results across owns an exclusive Brands which were up double digits, as well as premium, and super premium Brands which were up over 20% versus last year, driven by outsize growth of our best premium food and treats brands are customer analytics and exceptional experience in our Pet Care Centers and Tailwinds, from pet humanization.

Fresh and frozen, which was up in fifty percent.

Year over year. And today, we are the number one. Pet specialty retailer in the fresh and frozen category supported by our unique omnichannel fulfillment strategy. Including same day delivery.

We're focused on continuing to be a market maker in the more human like fresh refrigerated and Frozen space with a full spectrum of exceptional Brands, like just food for dogs, brush, pet, and Instinct are just food for dogs, kitchens, and pantries are now in 468 Pet Care Centers, respecting to end the year with roughly seven hundred locations complementing, our Nationwide fresh and refrigerated footprint impressively. We have more than doubled, our Revenue in this category.

Over the last year.

Our digital business just posted. What we believe is, one of the highest two year Revenue, growth rates for any business in the category at a hundred, thirty eight percent or a hundred fifty percent, excluding the sale of our Live Aquaria business. We exited your ago.

We've made significant improvements in customer experience. Expanded our brand, assortment gotten our pricing, where we want it and driven tremendous growth in app, downloads suffice it to say our omnichannel model is working app downloads were up over a hundred percent versus last year to 4.4 million and our care reminders or driving stickiness and spend where the only pet specialty player. Providing 360-degree reminders for all the pets health and wellness needs including grooming flee.

Check back to Nations and merchandise and we believe that will drive meaningful growth and customer engagement over time. Further AB serves as the Hub of our ecosystem, where parents can purchase schedule a groom scheduled vaccinations and receive personalized care reminders. Just last week. A push notification reminded me that I was six week out from my last groom for my lab. Yummy a great reminder for me and a driver of increased frequency for Petco.

Additionally, a growing international business continues to be a bright spot. There are joint venture with group of Yount, a Petco Mexico, the on and offline leader in Mexico, who double digits year-over-year and with Canada's reopening, we're excited to see our business with Canadian Tire resume its growth trajectory.

With the Delta variant driving increased case, counts across the country, the health, and safety of our partners, guests and animals, in our care remains our number one priority. Our business has benefited from both the stay-at-home and reopening environments, but we remain diligent in our health and safety protocols and continue to encourage our partners to get vaccinated, providing incentives and time to get vaccinated overall. We feel confident our ability to manage the current market environment as we have over the last

16 months.

An inventory. Yes, things have been tight. Not one of our vendors could have reasonably plan their capacity for this many more new Pets. The households. We've been wholly focused and successful. Working with our vendors to get available, inventory and converting customers to the products that are in stock, are digital and PCC teams are so trusted and Adept at directing demand that they create a competitive Advantage, enabling us to gain, share and deliver strong comps in this tight environment.

Similarly is vendors of pass-through higher costs. We've seen early success at

Passing through these costs and an aggregate. We have not seen impact on unit volumes, which is great to see. Additionally. The motion environment is remain very rational, the promotional activity down a pointer to versus last year.

As I mentioned earlier, Purpose Driven performance, combines our operational excellence in strong financial results with an unwavering commitment, to improving the lives of pet pet parents, and our own Petco Partners, in terms of purpose were progressing on our mission to save pet lives. Earlier this week, the Petco love Foundation announced a significant partnership with Merck to make over 1 million life-saving vaccinations available as pets.

Pet goal of is working with community-based Animal, Welfare Partners across the country to distribute these much-needed. Vaccinations something we believe gives All Pets the best chance to live long and healthy lives. And as a native New Yorker, we've been partnering with the city of New York to help provide a safe place for pets and pet parents to escape the extreme heat by opening Pet Care Centers as pet friendly cooling stations.

We are also investing to improve the lives of those who work at Petco. And these investments in areas, like pay raises bonuses, enhanced benefits and career development opportunities are paying off in a tight labor market. Delivering on our partner promise that has Petco does better. So will our partners as a result, hiring retention or above 2019? And we saw more than 70 percent increase and Pet Care Center applications in the second quarter versus the beginning of the

Year in line with our commitment to improve racial Equity, diversity inclusion, and belonging year-to-date over..50% of our director, and above new hires and promotions have come from underrepresented populations. This will continue to be a strategic focus and to protect the planet. We are executing against our commitment to increase our assortment of sustainable products to 50 percent by 2025, an area where Petco is leading as part of this.

Initiative, we recently announced our first-ever sustainability. Leonard Summit to be held on September 22nd.

Too close. We are keeping Petco's, terrific, people customers. And the animals in our care, as safe as possible. Our category is growing rapidly and are obsessive execution against. Our unique model is enabling us to gain share.

This in turn is enabling us to deliver outstanding results. Importantly. We are just getting started our transformation towards the only digitally lead services and differentiate of merchandising One-Stop ecosystem will drive strong growth. Not only in the second half but long into the future.

Now before I turn it over to Mike to walk you through the CFO portion of our quarter results. I'm pleased to announce a career progression for Mike and promotion for Brian Larose. Mike has been wearing many hats for us as we navigated. Our turnaround refinancing IPO, Three Hats to be precise CFO CEO, and president of Petco services with our tremendous progress against those Mike wanted to focus on hundred percent of his time. I'm being an operator with are accelerating shift towards services including the scaling of

Major vet Network and expansion at home services, as well as reshaping.

High change to meet the needs of the larger faster growing company that we are today. Mike's Complete focus on these areas will be invaluable. Mike has been and will continue to be an important partner to me the CFO and the business overall.

Correspondingly Brian Larose who is run Petco's finance and I are functions for the last year and who many of you have met will become Chief Financial Officer of Petco reporting to me. We're so fortunate to have a leader of Brian's caliber taking on this role. Ryan brings a wealth of expertise across operations, accounting Ma and investor relations from Deloitte and HP where we work together. Brian is let our financial planning and played an integral role in our refinancing and IPO with end result.

Being a dramatically improved balance sheet and fantastic. Roster of investors. I want to express my deepest gratitude to Mike on behalf of both, the board of directors and the leadership team at Petco, for carrying such a broad portfolio of the last year. We were so fortunate to have both of these leaders on our team and I'm pleased with a smooth and planned transition with that. I will turn it over to Mike.

Thanks, Ron for the kind words. Good morning. Everyone. The first half of 2021, was a great start to the year building on the strong business momentum, and strategic execution that Ron discussed. I am pleased to share with you how these efforts are translating into strong financial and operational result.

Q2 was yet, another quarter of record revenue of 1.43 billion 19 percent year over year with comparable sales of 20% or 30% on a two-year stack reflecting the Strategic competitive advantage and the traction on our transformation that Ron outline.

Diving one level deeper for Q2 services and vet Revenue was up over 49% and 36% on a two-year stack. That was consistent with the q1 to your Revenue, growth trim, our Veterinary, grooming and training businesses continue to show strong momentum. We opened 18 full-service fed hospitals in the quarter including closing on our second acquisition. As we mentioned, on our q1 call and remain on track for 72 total openings this year.

Hospital performance continues to outpace expectation with our Petco fully owned and operated units showing the strongest Revenue productivity consumer demand for grooming and training remains robust. And we continue to see success in recruiting and staff retention across all our services businesses. And even with continued, COVID-19 related, safety, accommodations. We are well positioned to continue out size or services and vets.

Health Trend in 2021, digital Revenue grew 14% on a one-year and a hundred and fifty percent on a two-year basis, excluding the sale of Live Aquaria while digital Revenue increased 11% on a one-year and a hundred and thirty eight percent on a two-year basis and brick-and-mortar. Merchandise. Revenue was up 17% and 21%. On a two-year stack reflecting both the stickiness of the return of retail demand and our strategic.

Logic initiative.

Also on both A1.

To year basis, transactions, an average basket Trend or positive for the quarter.

We continue to deliver these results through a dynamic market and Retail environment as Ron reference, while the number of new pets cause some vendors to struggle to keep up and this has provided challenges. I am proud of our team's agility and tireless work, and we continue to leverage our omnichannel fulfillment. Differentiation importantly, vendor Supply and our overall in stock improved as we navigated Q2 and we expect continued progress in Q3.

Q4 in Q2. We also open to new distribution facility in Dallas and Columbus, that will support our expected Revenue growth into 2020 to our continued, strong financial results. Also enable us to incrementally, invest in distribution partner, recruiting retention and compensation to ensure our supply chain remains healthy.

Like the broader Marketplace, we saw some inflation on vendor product that we passed along in price increases implemented in the latter part of the quarter, historically inflation, has been beneficial for Petco. And so far it looks like outsized demand will accommodate inflation related higher prices. We believe our price moves will more than offset. Both domestic and import based input cost increases for the rest of 2021.

While we believe some of these factors will persist in the second half of the year. We are confident. We are taking the right steps to maximize our performance and ensure our supply chain remains a competitive advantage.

Moving down the p&l, gross profit, increase 70 million or 13 percent to five hundred ninety nine, million gross profit. As a percentage of sales was 41.8% down, 203 basis points from Q2 2020 in line with our expectation and driven by the mix impact of exceptionally, strong consumable product sales, and a modest sales Channel impact driven by The increased relative strength of our Digital Services and vet.

As we forecasted on our first quarter earnings call overtime. We continue to see opportunity to drive gross profit, rate Improvement across our business areas as an octet.

Sgna as a percent of Revenue improved from 38.4% in Q2 2022, 36.7 percent in Q2 2021 demonstrating leverage across our model on an absolute basis. Sg&a expense was five hundred and twenty six million up 61 million or 13% from prior year as we continue to lean into investments in our marketing infrastructure and people to support sustained future growth.

While reducing sgna percentage sgna. Also includes a legal cruel that is excluded from adjusted ebitda, which reflects in part a settlement for class action, which we were able to opt to opportunistically resolved.

Further.

We do not anticipate settlements of this magnitude or scale for similar cases in the near-term, based on regular updates and changes to our practical.

Q2 adjusted ebitda was a hundred and fifty five million. An increase of 19% from prior year in line with Revenue growth. This excludes a 45 million dollar gained from Mark to Market on our investment in Rover, upon Rovers successful, SPAC transaction.

Due to adjusted EPS improved by 14 cents, 427 percent to twenty five cents based on 265 million weighted average fully diluted shares as well as a normalized effective tax rate of 26 percent.

Turning to our Pet Care Center base. We ended queue to with 1451 Pet Care Centers in the United States down to from the first quarter. Our Mexico joint venture ended the quarter with 101, Pet Care. Centers up one from the first quarter.

Shifting the customers in Q2 we added approximately 1 million net new customers in June. We implemented a new POS that improves customer engagement and utilizes more effective data requirements for Palestine UPS. This further enhances our CRM and analytics capabilities. We leverage this POS change to evolve how we Define and Report our active. Customer base. As you know, our active customer based includes recurring Pals, Andy Comcast MERS Where We Are.

Deeper engagement to maximize Outreach impact, we analyzed our active customer base. To ensure we had complete current contact information. In this process. We both added pop box, active customers not previously captured and moved. Roughly 2 million Pals members with incomplete or outdated contact information to transactional status.

These customers represented, only three percent of Revenue. Importantly, these transactional customers continue to drive sales and are a valuable source for continued, conversion under the prior methodology are net. New customer adds in the quarter or roughly in line with the 1 million. Net new customers under this revised methodology.

As a result of these changes are active customer based. At the end of Q2 was twenty two point five million and will be the basis for go forward reporting. These changes do not impact our remarkable sales performance or the overall number of customers shopping with Petco. This will simply enhance the impact of our marketing and CRM efforts over time.

Moving to cash flow. We continue to have strong liquidity, ending the quarter with 645 million. Inclusive of 203 million in cash, and cash, equivalents and 441 million of availability on our revolving. Credit facility looking at cash flow. We generated strong cash from operations of 87 million, and had 53 million in capital expenses. Year-to-date. We generated robust free cash flow of a hundred and three million up.

Forty-two percent versus prior year.

Arnett. Leverage ratio reduced by 16 percent or point five times to 2.7 times in Q2 of 2021. And I want to congratulate Brian Larose on his new role. I am pleased to pass the CFO baton to him. He's been a great partner to me over the last year and I look forward to continuing to partner with him to drive our strategic priorities forward.

I could not be more confident. In Petco's financial management, with Brian, as Chief Financial Officer.

Thank you so much. Mike and Ron. I am truly honored and humbled to be part of Petco and assumed the role of Chief Financial Officer. Working in partnership with Brawn, Mike, the rest of the leadership team and our board. Over the past year. I have seen firsthand the power of our unique multi-channel model and I could not be more excited about our strategic positioning for the future.

Talking about the future, given our strong performance in the first half of the year, in our increased confidence in second-half performance. We are now expecting the following four full year 2021, total revenue of five point six. Two five point seven billion or a 14 to 16 percent increase from 2020 adjusted ebitda between 1140 million for a 17 to 19 percent increase from 2020.

Adjusted EPS between 81 cents and 85 cents, based on 80 million dollars of net interest expense, excluding loss on debt, extinguishment 266 million shares outstanding and an effective tax rate of 26 percent. And we expect Capital expenditures to be near the top end of our original guidance range of between a hundred and eighty-five and 235 million inclusive of incremental investments in digital.

The build-out of our vet hospitals Innovation, and enhance supply chain capacity in response to sales growth.

Our guidance raise reflect strong. Q2 performance initial Revenue Trends in Q3 and mid-20s percent range to year. Compass option for the balance of 2021. Our confidence, in the performance of our business areas results, from the build out of our services and digital businesses. The positive, customer Dynamics are executional excellence and the ongoing strength and resiliency of the pet space. All of these factors point to a strong second half.

And a phenomenal 20-21 for kite. Go with that Ron, Mike and I will now take your questions.

Thank you. We will.

Good morning. Thanks a lot for taking my question, Ronnie your remarks to remember certain that your team benefits of both stay at home and reopening in your financial performance at home, probably a pet parents or at home with their pet and a rewarding, their companionship with more treats. But presumably, that's helping the the consumable business. So a is that right and beware, you seen the benefits of the reopening and do you expect that to accelerate over the next several?

Quarters of the Rio for reopening continues. They were more frequent in terms of Grooms more frequent storms with reopening. What you see is purchases of collars purchases a lead, but you also see,

Orange to our Pet Care Centers, which is good for our business. Because the more, our customers omnichannel, the higher Revenue, we have from them. And frankly, the higher margin we have from them. So both sides have been beneficial to us. And I will tell you, I looked at this a couple days ago. We've seen no correlation between Rising COVID-19 penetration and business. If you look at that big hot spot today, which is Florida are Florida. Business is stronger than overall champine.

Chain, so we're not seeing a negative impact of code penetration.

My follow-up question is on the gross. Margin. You attributed the the degradation to mix and strengthen the control business, was there also a piece because of the offers for auto ships or where you giving 45% off and 5% occurring during orders seems like there's a lot of competitive.

The within that element of the specialty Market where a lot of players are going after customers on this repeat order after them. Let me, let me start on the second Point. Let me Circle back to the first point on the second point. I know actually, we've taken a look at this and promotion revenue from promotional activity for us down year over year. So the revenue associated with promotional activities down.

Let me go back to the first point, then on consumables. We had an exceptional consumables order. It was stronger than we expected and it was exceptional and other. Let me take you back a little bit. We were a little worried about this a couple of years ago. When we did a lot of work on it. We've a lot of work on our customer acquisition retention strategy. Assortment our strategic focus on own Brands premium and super premium. And then we had the launch of the food Perks program recently, which enabled us to pick up more share than we expected. These are sticky sticky.

Stammers that have more frequency in terms of traffic. We feel really good about this Dynamic and, and that did have some impact on gross margin for us.

Her will take that all day long because of the customers that were bringing in. And what I would say is the strength in consumables. This quarter was the result of the execution of our strategy, you know, Anna didn't mean that supplies had a bad quarter supplies, had a really strong quarter. Consumables was just stronger and just as a reminder last quarter, we said that we expected gross margin to have a modest impact quarter on quarter due to some mixed Dynamics, and that's what played out this quarter.

We still see plenty of opportunity to offset mix Dynamics on gross. Margin. We've gotten really, really good at looking at Cost efficiencies across our entire model. So we feel good about where we landed the quarter in line with what we thought and on the back of the super strong consumable quarter.

Thank you. And our next question. Today comes from Stephanie, wissink with Jeffries, please go ahead.

Hey, good morning, Blake on for stuff. I just wanted to follow up on the consumables question, was that due to a comparison at all? And if you to last year and then can you talk about maybe how much that it sustained quartered a date? And maybe, I don't know if you can give any commentary on the size of the margin was that kind of leading driver of the gross margin declined. Your viewer or is it more digital or services?

Just sit say would go back to what I just said the consumables margin impact your be you're the biggest driver was consumables growth on gross. Margin. That was the biggest impact. There was some Channel, mix Dynamic impact year on year. However, the biggest driver was consumables growth. When it comes to cop, the only thing I take you back to incompass, remember and Q2 last year, you had a unique corner with the onset of the pandemic, the beginning of a pet. Boom.

And a higher supplies, mix last quarter, so I wouldn't take you back to a week comp and consumables but rather strengthen mix and supplies. Last year, flip that around this year. You had a question in there about what this means for. Kind of consumables gross. Margin. We reported a date. We don't want to talk about quarter to date. In terms of subcategory. I will tell you that, we'd like what we're seeing so far in the quarter overall and the trends that we had in Q2 have continued. And then for gross margin and consumables are very good gross.

I think Companion Animal happen to have better gross margins. And so when we have a mixed Dynamic, that flips around, either year on your own quarter-on-quarter, it can impact the rate, but we're really happy with the performance. This quarter across the category within brick-and-mortar, an exceptional performance and consumers. I would just build this run. You asked about consumables performance year ago, when Brian talked about what we're concerned about we were concerned about customer leakage on consumer.

Bonus and we have reversed that and I think this quarter really shows just how far we've come on that and that's very good for a business. As he said, it's a very sticky customer and quite frankly. It's the highest frequency part of being a parent. So it's good for our business and it has full Enterprise benefits of keeping those customers bringing consumables, customers into the franchise.

That's encouraging to hear.

Last one would be on the just the pandemic. Do you will the customer cohort over the last year year and a half? Can you talk about that behavior of that specific cohort and the retention and you behaviors? You want to call out in terms of omnichannel, retention things like that? Thank you. Yeah, has been equivalent to pass cohorts. So that that's good. We were worried about it kind of they came in and went to the retention is

Been consistent with past cohorts and they're flowing, Like Pat, like past cohorts. In terms of with three opening. We had a bunch of the new co-op work going back into the Pet Care Centers. And again, the more of our customers are omnichannel customers, the more of our customers that are multi multi-channel customers, the higher value customer. That is they are so we're not seeing significant differentials between in the new Cold War. The one thing I will say, is that the newly

Our customers tend to be more gen Z and Millennials which means they're bigger in dehumanization, which means they spend more than prior prior age. Groupings. Thank you. Our next question, today comes from. Oh, yeah. Good morning. I just had a question also on Gross margins with the flow, through for the rest of the year. So it looks like, you know, this this quarter consumers expect.

Very strong. Do you expect that to continue for the rest of the year? And how should we think about the gross margin performance? Is that magnitude in the second quarter that you expect for the rest of the year? Or should I get better? Yeah. I don't want to get into specific guidance. We said last quarter which we expected modest, Nick's impact on gross margin for the balance of the Year. Mix is the biggest swing Factor on our gross margin in. There are multiple layers in that. There's there's Channel mix we continue to expect digital.

Services to to scale. Those are our two primary Strategic investment areas. And we expect those businesses to continue to scale. The second thing. I would say is there's mixed with in the mix, as we talked about this quarter. So for the balance of the year, you know, we would not give specific items other than the repeat what we said about, you know, modest mix impacts for the balance. I would also tell you that, you know, look at the guidance that we gave on even though so our expectations around grow.

Smart and are baked into our second half, give it a guidance. We feel good about the guys that we just put out there. We, you know, we're a school year by 125 on the top and on the bottom 12% slow through part in our even a reflects our expectations around gross margin.

Got it. Thank you. And and I think Ron you said traffic and and a ticket with balanced for the quarter is that does that mean it was it was about half when the compass was traffic have was ticket, but it because II assume consumables that there's more traffic is a big attractive, traffic driver. So a little bit more detail with would be great. Thank you. All the fundamentals are positive. So traffic basket. It will be. We're pleased with all the fun.

Across the Enterprise.

Thank you very much for our next question, please go ahead. Hi. Good morning. Thanks for taking our question. You had mentioned Ron and you're prepared remarks about being successful. In converting customers to those items that are in stock. I wondered if there was a way to quantify. You know, what, you might be leaving on the table just with the state of the supply chain. The Way It Is, We're your biggest out of stocks are and when you've been able to

Customers has it been two higher price point items. Yeah, we haven't spent a lot of time, looking at what was left on the table, quite frankly. We've been focused on driving driving, our business and driving demand into where we have Supply. And I'll be honest, that's been a moving Target. This is where the power of our Pet Care, Center Partners and the digital platform that we've built, really comes to Bear. It is

Amazing how influential our Pet Care Center Partners are in directing purchase. So if you can't get Royal Canin, there's a great product and Hills. If you can't find Taste of the Wild. Well, origin is is a similar and great product and they're able to direct those. Customers are Pet Care Center Partners in particular, but I think our digital our digital coaches. Well, is we start with the best products that we have and then

We work our way down based upon affordability. So there would be an inherent shift towards higher values, higher quality, higher price products in that process. But again, I think the proof of the pudding is in the fact that we put up a 20% comp and a lot of the shortages was in consumables and, you know, Brian just talked about how strong we were in consumables. So it has been really surprising to me how they can do.

Direct that demand to Warehouse Supply.

Thank you. Thank you.

Next question, today comes from Stevens account. Where it's Citigroup, please go ahead. Okay. Can good morning guys. Thanks for taking my question and congrats to Mike and Bryan on the new roles. I was curious if we could start up. Could you just elaborate a little bit more? What you're seeing thus far in the third quarter. I know it's a small period, but what's really driving the increase confidence in the re second half compound. Look. I know the industry is doing well overall, but when you look at your business, what are some of the main factors? That's giving me increased confidence?

For the back half. I'll start with two comments and then I'll pass it over to Brian first. This category is thriving, right? The call for the category for the year is a 9% growth category and on top of that, we're gaining share. So the category die, not Dynamics and the Furry annuity that I talked about are there and they're showing up in the business. For me. July was a major litmus test. As is the

Lee Q3 in.

Terms of how we were going to last H2. We got many questions for you guys from, you know, from investors and the sell side earlier in the year. Are you guys going to be able to lap the second half? That was the biggest question that was out there. And if you look at July and if you look at early, Q3, the overlap looks pretty similar to to H2 in terms of what we need to lat. And we are very pleased with how we're lapping double-digit with double-digit. So,

I'll stop there. I'll pass it over to Brian. Yeah, I'll just I'll just add on Stephen and reiterate the confidence that we see and updating. Our guidance is based on what we saw in the first half and what we're seeing so far in Q3 and, you know, to some of the points that you raised the, midpoint of the guidance that we gave the midpoint in the second half, reflects a mid-20s percent, two-year stack. And, you know, just a couple of things on quarters to. I don't want to get poorly guidance, but Q4 is typically a little stronger.

On the top line and bottom line raising Q3. And we feel good about our ability to deliver that. So in addition to the Top Line, mid-20s bottom line flow through looks good, the customers that we picked up in the first half, the consumables growth that we saw in Q2. Again, more customers coming in more traffic, the progress of our vet build-outs. So if you look at the vet filled out, is on track, we added 18 hospitals in the second quarter of the performance of those hospitals is

In line, and in fact, ahead of the expectations that we have for the hospital's, the return of the grooming and training business. If you remember last year, that was a business that really got whacked by some of the restrictions throughout the pandemic. And it is bounced back really nicely in the back, half of last year through the first half of this year and we see runway in the second half. And then the last thing I point to you is the progress, we've made in recurring Revenue, Ron talked about recurring Revenue customers and the growth there by

Carat, although it's early days is an important vehicle for us to bring more and more stickiness in terms of recurring. So I would say all those variables add up to what we believe. This is an important raise and confidence in it.

Now that's very helpful detailed. Thank you. Just a follow-up on Kappa, allocation. So with that levels coming down, you know, what do you see as the right level level of Leverage to operate the business. And how do you kind of rank order the priorities for Kappa location going forward? Yeah, I we haven't given a specific Target ski, but I can tell you is, you know, week, we're happy with, you know, where we actually cute to wear down at kind of a27, leverage ratio, and we see room to go beyond that. However, I would put that second behind.

Spence in the business, you know, he's hopefully you caught us that we raised our capex guidance to the top end of the prior range. So we were at 185 to 235. We've moved that to the upper end of that. And that's because we like the ROI that we're seeing on our capex investments Beyond, just that and the build-out and bet investments, in digital, Mike mentioned Investments and into new supply chain, hubs in Dallas and Columbus that we open this quarter. So we are investing in supply chain to

to make sure that we keep up.

Have demand. So I'd say, investments in the business first that paid on second, and we see room to go below to stuff.

Thank you. Thank you so much. Thank you for taking my questions and congratulations on the new rules. Quick, follow up on Justice pain purpose. I mean, I'm just trying to understand how is that it evolved over the last year and if there is any way to go to parse out the various components between digital and services Etc.

Yeah, as I said, you know, our basket is going up or a ob is going up. So we feel good about the trends in that space. You know, when we bring in more Millennials. We bring in more Jen's ears. The humanization trend is there, and they spend more more on their pets. The other thing that's happening is, as we shift folks, to multi-channel. We're over four million customers. Now, we've been double digit on multi-child growth three, quarters in a row. Those

Customer spend up to seven times more. So, in many ways, our whole strategy and our whole model is to drive. Spend prepared is to drive share of wallet and it's working because we get people to use more pieces of our ecosystem, and a great, you know, microcosm of that is our Vital CARE program. As Brian said, we came above a hundred thousand and we've had more vital.

Irr care ads, every quarter and we would anticipate that continuing. So when you, when we get somebody into our Vital CARE program, they have between two point five and three times more spent, because they have roughly 20% of those customers weren't buying food from us before. Now. They are over, thirty percent of those customers weren't weren't getting services from us. Now, they are. So most of the initiatives that we have are all about

IV spend per pet and we're moving that in the right direction.

Got it all one, quick question on guidance. This is for your Bryant. So when I look at the either, the guidance for the backhaul for what's baked in for the marketing, expense side of peace. I know earlier in the year. There was a big focus on driving customer acquisition. So, how do we think about that? Thank you. Yeah, I'm not going to do is continue to lean into marketing Investments. We continue to like the ROI.

We like the customers that were acquiring through those Investments. We've baked in our own marketing plan, in the second half. And as long as we continuously good Roi, which right now is kind of running at 2x plus industry benchmarks will continue to invest. And so we've got Investments baked in. I just don't want to get into the specific line item. Thanks lavesh. Thanks so much.

The question. So hoping you could elaborate on the, the new to the two new supply chain hubs. You referenced are these full distribution centers, like micro fulfillment center. She's kind of like some clarity with those are then holistically. Like, how are you thinking about your overall distribution Network? As you pivot more, the business online. Like, you feel pretty comfortable or you are? And like, how do you think about the message passing over there? Yeah.

And non Khan, which is mainly consumables out of that Distribution Center. In addition to eCommerce ders. The Distribution Center in Columbus is focused on non cannoli, and we talked about the strength of the consumable, consumables business. That's obviously, a good Focus point there. We feel really good about where our distribution center network. Is today. We're investing in some upgraded technology. In our Dallas Center.

Which we think will help with productivity there. And so, it's really, we made some of these decisions back last year. And I think they have really helped us to get ahead of the volume that we're seeing right now. The thing I would build on what Mike said is our micro Distribution. Center strategy is the Pet Care Center stores, right? And so 87 percent or Ecommerce orders are fulfilled through our Pet Care Centers, which means we are faster to the customer. And

Lower costs and our online competitors. And we can do things like same day delivery. They can't do. So in addition to the, the macro Network that use building out is micro Distribution, Center strategy, is a winner for us.

Yeah, so that's really helpful. Then just one quick question. On the Micro Center strategy. You talk about the door - kind of - program. It kind of has to be holding. Is there a way for a what percentage? It's kind of like online sales are shipped on there. And then too, it seems like there's been a lot of wage invested in the kind of ride sharing industry, like, is your, is your Arrangement, them, more like a fixed cost basis. Do you see that kind of cost pressures then each other couple? Yeah, I won't get into specifics about the door - Arrangement, but I will just tell you.

That having door - and same-day delivery gives us yet another important tool to deliver to customers. However, they want it whenever they want their product. So, you combine same day with focus with ship from store. It's a very powerful proposition for, for the customer. And same day will also be a really, really important Dynamic around the fresh and frozen space. So the idea of getting

Senior product not wrapped in all kinds of ice and packets. But actually, freshly delivered to you, is a really, really important Advantage for us when it comes to that same day. Delivery, fulfillment. So, we'll continue to drive that part of the business, our contract with door - is very attractive and has incentives for our growing volume with it. And we feel just really, really good about how we're setting up for customers.

Distribution. Go forward.

Thank you. And our next question. Today comes from Zacks bottom with Wells Fargo. Hey, good morning, guys. Thanks for fitting me in, and congrats to Mike and Brian. So can you talk about the segment of your sales that you qualify as repeater recurring, and how that's been trending, as a percent of your total business? And then given the outside strength in consumables and food you're calling out, is it fair to say there's some softening and more discretionary or bigger.

Ticket items at the impact of stimulus rolled off or does that business remain strong as well. Getting the second piece of it? We've seen quite frankly. We've seen no part of our business that hasn't seen strand. So we haven't seen a fall off, but with the realest with stimulus roll off on any part of our business. In terms of recurring, what's in recurring is repeat delivery vital care, huh?

Box and insurance, as I said, our customer base there was up fifty percent and the revenue from recurring Revenue. Customers was up to 60% in terms of percent of total that the one number we've said is it's 50 more than 50% of our e-commerce. Revenue is from recurring Revenue customers.

Thank you. And our next question, today comes from webush, Securities. Thanks a lot and good morning. And thanks for squeezing me in my questions around the consumable strings at the price of the outside. Did you see that surprise in the stores as well as the online Channel?

Oh, yeah.

Drive some of that. No, you know, the only thing that we mentioned in pricing Seth, is that from some of the cost increases that we saw that we took pricing actions on roughly, 20% of skus and and the impact of that pricing was nominal in the quarter. And I would tell you that it actually was more than offset by some of the year-over-year impact from stimulus. So we had a bigger impact and stimulus last year, then we did by any like benefits this year. So is

It was more than a push across those two, but modest impact from pricing 20%, excuse and it wasn't pricing Griffin. In terms of the elasticity illness.

Thank you. And our final question today comes from Justin Bieber with bears.

Hey.

De Justin flavors. Thanks for a sneaking me in here. Just wanted to ask some kind of a related ball up to the pandemic cohort question, but more so, focusing on new pet parents and any sense for how new parents are comping in here too. As you laughs, you know, some of the initial spend associated with the new pet, are those customers still growing? Or do you see them take a