Q4 2021 Petco Health and Wellness Company Inc Earnings Call
Good morning, and welcome to Pepsico's fourth quarter and fiscal year 2021 earnings Conference call.
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I would now like to turn the conference over to Kristy Moshe Vice President and Investor Relations Officer. Please go ahead, thanks, very much and welcome everybody to pick our fourth quarter and fiscal year 2021 earnings Conference call. In addition to the earnings release, there was a presentation and info graphic available for download on our web.
Site at IR Dot Petco Dot com summarizing our fourth quarter and full year 2021 result.
On the call with me today are Mr. Ron Coughlin, Heico's, Chairman and Chief Executive Officer, Mr. Brian The road.
Chief Financial Officer, Mr. Mike Nuzzo Echo, Chief operating officer, and President of surfaces.
In a moment, Brian and Brian will walk you through our recent financial and operating performance in the quarter and the year.
Before we begin our remarks I'd like to remind you that on this call. We will make forward looking statements in regards to our current plans beliefs 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 and events 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.
These forward looking statements are made only as of the date hereof.
And except 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 most directly comparable GAAP financial measures are included in our earnings release and a presentation as.
As well as in 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 with that let me turn it over to Rob.
Thanks, Christy Good morning, we appreciate you joining us today 2021 was a year of record performance and significant strategic progress for Petco deepening our competitive moats and evolving into a definitional player in the next phase of retail that we call retail <unk> encompassing full leverage.
A omnichannel advantages.
<unk> robust service offerings.
While having a positive impact.
To strengthen our one of a kind and then health and wellness ecosystem.
Brick and mortar experience gets better and better digital assets are more powerful with sharp competitive advantages and combined with our hands on pet services, we can meet all of our customers' needs when and where they want.
These capabilities combined with our ability to innovate and personalize the pet parent experience sets <unk> apart and is delivering incredible results.
Full year 2021 revenue growth was 18%, which translated into 22% growth in adjusted EBITDA.
Reflecting the strength of our model continued execution and operating leverage.
In the fourth quarter, the Petco team once again executed with the same rigor that drove market share and profitability growth all year our.
Our differentiated strategy is working we fundamentally believe that we have the best model in the category our team delivered yet another quarter of outperformance with comp growth of 14%.
Our seventh consecutive quarter of double digit comp growth delivering 30% growth on a two year stack. If you look at the top 50 retailers. There are only three including Petco, who have delivered seven consecutive quarters of double digit comp.
We repeat that of the top 50 retailers. There are only three who have delivered seven consecutive quarters of double digit growth.
One is petco.
Consumer demand outpacing supply remained strong in the quarter. It remains strong in January where we lapped, 20% plus year ago growth and we're pleased with what we saw in February .
And we deliver those results with purpose to make a difference to petco purpose driven performance is combining stellar business results with tangible improvements in the lives of pets pet parents and those working at Petco and once again, we had a tangible impact on those lines and I will share later in the call.
We gained share overall gained share in digital and gained share in brick and mortar. Our team is executing executing in an environment of supply chain tightness working closer than ever with our supplier partners and nimbly addressing inflationary and labor pressures.
Our focus remains on acquiring and delivering for our customers and guiding them to the best available option for their pets.
An advantage of our model versus online only players.
Pricing given our larger percentage of higher end pet parents customer men remained largely inelastic in the quarter, where we realized favorable impacts from the pricing actions. We took in both Q3 and Q4 in aggregate we did not see a decline in product unit volumes for impacted Skus.
Our drive for long term above market growth is powered by continued execution against our strategic growth initiatives.
That growth is grounded first and the uniqueness of our ecosystem offering a distinct competitive advantage that enables us to capture greater share of wallet.
And build greater loyalty to fuel growth in.
In brick and mortar or proven Step-and-repeat playbook, consisting of the addition of the veterinary hospital are ready store in store and it just food for dogs pantry contributes to our confidence that we can drive above category growth for years to come.
And bond with relentless cost discipline, we're able to drive the operating leverage it is evident in our results and guidance, we've consistently driven about $20 million to $30 million of annual efficiency.
Enabling us to both reinvest for growth and drop dollars to the bottom line and as we continue to grow we expect to drive even greater leverage of our cost base.
Our customer acquisition engine continues to be a competitive advantage across both new and existing pet households in the fourth quarter. We added nearly 800000 net new customers.
Our total active customer count to $24 1 million at the end of 2021.
Importantly, we expect these customers to be a source of sustainable growth or said another way our free annuity for years to come.
<unk> per pack continued its upward March on the back of strengthening Humanization trends driven by Gen Z and millennials, where petco significantly over indexes as well as the impact of our initiatives like repeat delivery and vital care.
We continue to drive strong revenue growth across services and that with a 22% growth rate in the quarter versus year ago, or 37% growth on a two year stack.
System with the trend throughout the year.
As you know, we announced last week, a transformational transaction to purchase the remaining stake in the thrive hospital joint venture.
This is an exciting important milestone in our veterinary hospital journey.
Demonstrating our deep commitment to providing pet parents high quality integrated health and wellness services. This joint venture launched us into the full service hospital business in 2017, and since that time, we've built tremendous capabilities within petco.
Build and operate hospitals and recruit the best hospital teams in the industry.
With this transaction and subsequent rebranding our entire hospital network will be vector total care, one operating playbook one team one culture.
Brian will elaborate this will give us even more opportunity for driving synergies with our pet care centers and optimize our veterinary support costs.
<unk> total care hospitals continue to deliver incredible results and we are very excited for this will be our primary expansion focus going forward as veterinary services continues to be a key element for generating tremendous shareholder value.
As of year end 2021, we've reached 197 full service veterinary hospitals. In addition to over 1000 that go mobile clinics, achieving our goal of 72 hospital openings in the year.
<unk> one of the fastest that build out the history, a testament to the team's ability to execute.
Our ability to attract and retain talent. That's the groomers has been a key focus and driver of our success at.
At 5600, we've never had more rumors and with the joint venture acquisition. We now have over 1000 head go badge veterinary professionals, making.
Make no mistake about it.
We are now scale and the veterinary professional market.
Thats love working at Tesco.
Our value proposition continues to resonate with that with the 94% satisfaction rate well ahead of industry benchmarks. In fact, we had a 40% increase in recommendations to work at petco from our beds.
Moving to digital where once again, we gained share in Q4, our two year digital revenue growth was one of the highest in the industry delivering an increase of 143% excluding our sale of light aquaria.
And it was 25% on a year over year basis, we've developed the digital destination for pet parents that really brings to life, our 360 degree.
<unk> offering.
Leading to another quarter of share gains as we outpaced the market as well as scaling digital services bookings, which were up over 75% year over year.
The last two years, we've more than doubled the digital business. This has been driven by first time repeat delivery nearly doubled in the last two years as we revamped the program to give customers control and as we leverage some of the richest data and the category to drive precision marketing.
Second we're driving higher.
Largely due to personalization of our algorithms driving larger basket sizes and strategic price increases.
Third we extended our flexible fulfillment options.
91% of customers choose either same day or bogus when it is available and we're driving continuous innovation enhancing the experience and further improving our cost advantage, which will share more about on analyst day on March 23.
Fourth our App has been downloaded $5 7 million times since launch with App generated revenue and active users almost doubling from the fourth quarter last year.
Our app customers will become some of the most valuable customers, we spend from app customers being almost double that of non app users.
And finally, our par program, an acronym for Petco AD works, it's ramping nicely driving revenue growth and enabling margin expansion for our digital business.
Our integrated digital ecosystem is driving engagement and our most recent cohorts are performing even better than historical levels, because we're better serving the needs of pet parents than ever before.
Moving now to pharmacy, we're gobbling up share as our business grew 66% year over year with strong growth in both Rx food and prescriptions, we have an absolute right to succeed and see significant upside in this $11 billion category.
Within our pet care Center merchandize, we drove strong revenue, 10% year over year and 20% on a two year stack within both consumables and supplies mix shifted towards owned brand.
Further deepening our competitive moats.
Growth across both consumables and supplies as well as companion animal while driving margin expansion.
Our consumables continued to surge, which is great for long term health of the business as these acquired consumables customers have about 50% higher ltvs and supplies and I'm proud of how the team more than offset mix driven margin pressures.
We continue to be strategic about passing through inflation and shifting our mix towards premium which is up double digits versus last year, both improving margin and expanding our competitive installation.
Moshe activity remained rational down versus both 2020 and 2019.
With the exception of Black Friday, and cyber Monday were given the differentiation of our portfolio supply dynamics and low LTV customers we were selected.
And the rapidly expanding frozen fresh category, where we're the number one pet specialty retailer, we continued our leadership and drove strong double digit growth year over year.
A key enabler to these successes is the investments we've made in our Pcs, which have generated significant strategic advantages.
In the past two years, we've added <unk>.
<unk> hundred six same day delivery locations 493 ship from store location.
<unk> hundred 27, curbside pickup locations and as a result, we've added millions of net new customers and we are just getting started we are disrupting the market with leading partnerships and innovation that positions us to win for the long term.
In addition to the thrive transaction that I discussed previously in January in partnership with Lowe's, We announced the pilot store in store program that brings trusted products services and expertise for both home and pets into one convenient stock at select lowes locations.
This partnership between two industry leaders is designed to elevate our brand attract new customers and create a more complete total home solution at Lowe's.
And our partnership with Rover further expanded our ecosystem with the addition of their boarding and Rocky services and they in turn will drive vital care sign ups petco.
Last week, we expanded our relationship with just food for dogs committing to add 300, new pet care center distribution points.
Co develop a new human grade fresh and frozen owned brand product line under wholeheartedly.
I'm very excited about and will receive additional marketing support to build awareness. Additionally.
Additionally, <unk> receive a warrant for just food for dogs equity tied to the successful execution of our 2020 to plan with the opportunity to acquire additional equity down the road.
Earlier today, we announced the launch of vital care to that out an enhanced version of the most comprehensive pet wellness program in.
In the category.
From the nutrition and surprise pets need everyday to the services that keep them at optimal health vital care makes it easier and more affordable for you to care for your pets home health.
All in one place.
Better for pets, and better for picked up driving recurring spend loyalty and customer LTV.
<unk> features a rich list of enhancements, including Omnichannel redemption repeat delivery integration and the exciting new affiliate partner program. Beginning this spring that will launch with several partners will drive vital care sign up including <unk> Dot Com kills the San Diego Padres Central Garden, and pet companion protect.
<unk>, including the Baltimore Animal Rescue Centre, Jacksonville Humane Center.
And the friends of Pima animal care center, and more who will be a pipeline for vital care.
We also expanded the program to Cat parents, where the initial reaction has been strong.
While early days since rolling out the enhanced vital care to Idaho program and pet care centers three weeks ago. There has been a tangible increase in sign ups for the quarter coming from cat parent.
It's good for pets and good for Petco. This builds on the nearly 160000 subscription exiting 2021.
These customers have been spending three times more than the average customer over 20% of these members are new to food and over 30% are new to services validating vital care as effectiveness driving share of wallet for petco.
<unk> is at the center of our go forward customer value proposition and today's announcement is very exciting for both pet parents and pet care.
Thus far our focus on the performance part of purpose driven performance now.
Now let me discuss purpose.
No mistake about it we get up every single morning committed to improving the lives of pets pet parents and our own partners.
We saved over 396000 pet lives this year and have distributed over half million free vaccine under resource communities in partnership with Merck as part of our 1 million vaccine commitment.
We reunited another 2000 pets, but theyre loving parent, who petco love loss in Q4 alone leveraging our database of over 100000 surgical pets, including nearly 1900 charter locations.
And we know that our <unk> family, including our customers are all devastated by what we're seeing unfold in the Ukraine and the love the Ukrainians have their pets as seen in photo after photo whether people, leaving the country with pets and so on.
Lying in a sleeping bag in a subway stations, serving as a bomb shelter.
Together with our nonprofit Petco love with coordinated international animal welfare partners to support the ongoing needs of pets and pet parents in Ukraine and neighboring countries offering refuge our thoughts are with the people and pets of Ukraine, and all of those impacted by the violence.
Also invest to improve the lives of those who work at Petco, The board and I have committed that as the company does better our partners will do better.
This is why in 2021 the company absorbed all benefits cost increases for employees why we conducted over a half million hours it skills and competence training every one of our PCC general managers receive stock at the time of our public offering and why in Q4, our pet care Center staff received yet another well above target.
<unk>.
On average due to their exceptional execution and as a result of these and other investments in our people application hiring in the second half of 2021 with significantly above first half positioning us well entering into 2022 from a labor standpoint.
Our <unk> partners did an amazing job serving customers, even as we navigated the omnicom spike at the end of the year with continued focus on health and safety I'm grateful to each of our team members for how they delivered for pets and the parents that loved them this quarter and throughout the past year and.
With today being international Women's day, I want to call out the incredible women across Petco, who are driving our business, leading our teams and supporting customers across the country. Every single day, it's truly amazing to see our entire team got tremendous growth advanced our strategy and improve the world around us regardless of the environment.
After delivering an outstanding year. Our team is now relentlessly executing against our 2022 strategic priorities. The promise of the re engineered petco that we talked about in the IPO has come to fruition. The company has never been stronger and Thats showing up in the momentum we're already seeing in 2022.
We participate in a rapidly growing category with scale Tam capture opportunities, we have the industry's only comprehensive health and wellness ecosystem and an advantaged omnichannel offering we entered the year with more customers than ever who are spending more with us and our investments in sustainable predictable growth are working.
All powered by the most passionate and best team in our space with that let me turn it over to one of our great team members, our CFO , Brian the Roes.
Thanks, Ron and good morning, everyone as Ron highlighted the fourth quarter was yet another quarter of outperformance demonstrating the competitive boats, we've built through our differentiated integrated ecosystem of premium products and services it.
It was a year of record revenue and profitability and I couldnt be more pleased with how our team has executed where.
We're leaning into owned hands on pet services in a way that no one else in the industry is positioned to do with petco scale and our decision to purchase the remaining stake in our thrive joint venture is the latest example of that.
As part of the transaction, which is expected to close in May we will take full ownership and operational control of <unk> 98 joint venture Hospital location.
Although our linkages with thrive were strong we learned that our owned hospitals create a next level elevated experience with enhanced synergies driven by our technology data connections and membership platforms.
Also as we scaled our own model, we increasingly duplicated hospital support overhead with the joint venture that with this acquisition will give us the chance to optimize.
So factoring in the expected benefit from enhanced hospital operating synergies and overhead savings and excluding the roughly $15 million of one time costs associated with the transaction and integration. We expect that this deal will be roughly breakeven to adjusted EBITDA in year, one and accretive to adjusted EBITDA and year.
Two and beyond.
Importantly, this will serve as the one integrated veterinary platform that we will use to grow our business, enabling us to maximize performance across the entire ecosystem, including our new opening momentum across our vet business is progressing nicely and our value proposition is resonating and our own <unk> continued to outperform the model.
We opened 72 hospitals in 2021 and on our way to 900.
And the early part of this year, our HR and operations teams will be focusing on integrating the 98 joint venture hospitals.
With this near term shift to joint venture integration in late Q1, and early Q2, our new hospital openings are planned to be a more modest 20 to 25 in the first half of the year and for Q3 on we plan to return to a quarterly opening run rate consistent with an annualized 70 per year.
Diving into the results, we delivered yet another quarter of record net revenue at 151 billion up 13% year over year with comparable sales up 14% or 30% on a two year stack with strength in transactions and average basket trends.
Momentum in consumables continued up 29% on a two year stack at 19% year over year <unk>.
Supplies in companion animal two year growth was 28% lapping stimulus driven elevated prior year comparable.
Services and other grew 64% on a two year basis, and 31% year over year in the quarter benefiting from the expansion of our membership and subscription programs.
We continue to deliver these results through a dynamic cost and supply environment during which we have remained steadfast in our inventory management, while the environment is certainly challenging across retail and pet is no exception. Our team is executing extremely well and we continue to leverage our real structural advantages versus our competitors.
That we discussed last quarter.
Inflation contributed to comparable store sales as we continue to be effective in passing through input price increases where possible. We've worked with our merchant partners to offset increases through terms and marketing investment.
As Ron mentioned, we've taken select product pricing actions to help offset cost input increases and in the aggregate we have not seen a material impact on units.
Moving down the P&L gross profit increased $66 million or 12% to 636 million gross margin was 42% down 59 basis points year over year. The year over year decline was driven primarily by mix from strength in consumables digital and services growth and to a lesser degree higher.
Supply chain costs importantly.
Importantly, these impacts were materially offset by improvement in gross margin across our businesses like in consumables digital and core services.
On a quarter over quarter basis gross margin was up 80 basis points driven by gross margin expansion across most of our business.
Benefiting from pricing actions taken in late Q3, and Q4 and responsible cost management, while delivering for our customers.
SG&A as a percent of revenue improved from 37, 6% in Q4 2020 to 36, 5% in Q4, 2021, improving 106 basis points, demonstrating the leverage across our model.
On an absolute basis, SG&A expense was $553 million up $50 million or 10% from prior year as we supported growth and continue to invest in sustained future growth through marketing our infrastructure and our people.
Q4, adjusted EBITDA was $172 million, an increase of 16% from prior year outpacing revenue growth Q.
Q4, adjusted EPS improved by <unk>, 11, or 65% to 28.
Based on 266 million weighted average fully diluted shares as well as our normalized effective tax rate 26%.
Now turning to the full year 2021, net revenue grew 18% or $900 million versus last year to $5 8 billion with total comp sales up 19% with strength across all major parts of our business and positive transactions and basket trends for the year.
Gross profit for full year, 2021 increased by 15% or $320 million from last year to $2 4 billion.
Gross margin in 2021 was 41, 8% down 100 basis points from 2021, driven by the same dynamics that I referenced earlier.
SG&A as a percent of revenue improved from 38, 9% in 2020 to 37, 2% in 2021, improving 166 basis points, demonstrating the leverage across our model.
On an absolute basis, SG&A expense was $2 2 billion up $248 million or 13% from prior year as we supported growth and continued to invest and sustain future growth through marketing our infrastructure and our people.
2021, adjusted EBITDA was $591 million, an increase of 22% from prior year again outpacing revenue growth.
21, adjusted EPS improved by 63 or 225% to 91 stent based.
Based on 265 million weighted average fully diluted shares as well as our normalized effective tax rate of 26%.
Turning to our Pet care Center base, we ended 2021 with 1433 pet care centers in the United States and Puerto Rico down 21 from the prior year, driven by strategic closures and timing of our footprint optimization.
Our Mexico joint venture ended the quarter with 108 pet care centers up 12 from the prior year.
Looking forward in 2022, we expect our footprint to remain roughly flat to where we started 2021 at approximately 1450 pet care centers across the U S and Puerto Rico with further expansion in Mexico, where we continue to be the market leader.
Our Mexico business continues its double digit trajectory extending its number one online and offline position and plan to expand into Chile later this year.
We continue to have strong liquidity, ending the quarter with $650 million inclusive of $212 million cash and cash equivalents and $438 million of availability on our revolving credit facility.
Looking at cash flow, we generated strong cash from operations of $358 million and had $239 million and capital expenses.
In the same period, we generated robust free cash flow of $119 million up 8% versus prior year, while we increased capex by 50% year over year as we continued to reinvest in future sustainable growth.
Our net leverage ratio reduced by 22% to buybacks in 2021 year over year with a significant reduction in our debt over the last 14 months I know many of you are looking for insight into our long term capital allocation plan, which we will provide at our upcoming analyst day.
Looking forward.
Building on our strong performance in 2021 with a track record of execution. We are confident in our ability to drive continued growth and market share gain in 2022.
And full year 2022, we expect to deliver net revenue of 615 to $6, two 5 billion or 6% to 8% increase from 2021.
Adjusted EBITDA between $630 and $645 million or 7% to 9% increase from 2021, and adjusted EPS between <unk> 97, and $1 based on $76 million of net interest expense 267 million shares outstanding and an effective tax rate of 26%.
While we don't provide gross margin specific guidance. It's helpful to note that Q1 typically has lower gross margins in Q4 due to seasonality. Additionally in the first quarter of 2021 gross margin benefited from stimulus driven higher supply sales.
We expect capital expenditures of $275 million to $325 million range inclusive of incremental investments in digital the build out of our vet hospitals innovation and enhanced supply chain capacity in response to sales growth.
We will share more on this in two weeks at our 2022 Investor day.
Our guidance reflects our current expectations around inflationary costs.
The strength of our unique health and wellness ecosystem that continues to step petco, apart and our confidence in our ability to deliver against our strategic priorities like that digital.
Digital owned and exclusive brands as well as the significant cost discipline, Ron mentioned earlier as we continue our cost savings programs and finally relentless execution against our proven strategy and initial revenue trends in 2022 give us confidence looking to the year ahead with that Ron Mike and I will now take your.
Questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Can you. Please ask that you limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
And the first question will be from Steven Zaccone with Citi. Please go ahead.
Great. Good morning, everyone. Thanks for taking my question nice to see that continuing strength in the business first question I had was just on pricing expectations within the full year top line guidance you gave some commentary you've been able to pass on price, but more broadly I was curious how do you think about your positioning within the rest of.
The pet industry, especially at the mass channel, maybe gets a little bit more promotional this year.
Thanks, Thanks, Steve I appreciate the question.
Let me, let me just give a label and then I'll go into.
One of the great things.
Pat is relatively immune to macroeconomic trends.
Utilization has been a multiyear trend.
Even today, we are seeing is a continuation of this environment. Best example of that is fresh frozen, where we have a higher risk higher frequency and where we see outsized growth and by the way better trip frequency.
Up in the higher end customer, where we sit we see.
The pricing is relatively inelastic and the other thing we've talked about before is 70% of our product is either owned or exclusive recovered by match, so our exposure to pricing.
Is less than most other businesses.
And as Brian said on the call we haven't seen a decline in unit volumes.
That said if there was more pricing that came we feel pretty confident that that can be passed through but we want to make sure. We have offers for our customers. So we have the fresh frozen to tap we have heightened Kevin what we have mid range Kimball.
And we also have I don't care for a comprehensive program that provides value to customers. So we see the market is rational.
And given the supply demand dynamics, we anticipate continuing to be rational, but we are less exposed than probably any other competitor in the mass channel doesn't really have many of the brands that we really do the majority of our business with.
Great. That's very helpful. And then just a follow up on the top line you gave some comments about gross margin cadence as we think through the year is there anything to keep in mind as we think about same store sales or just general revenue revenue growth as we think about the cadence of the year. Thanks very much.
Yes, the one thing I would say Steve is similar to the comments I made on Q4 to Q1 seasonality remember that in Q1 last year, we called out a 700 to 800 basis points.
Stimulus and.
And we grew 27% last year, which was marked by outside growth in supply.
And in animal, where we grew 33% so other than that I wouldn't call out any.
Quarterly dynamics, but just a reminder.
All my questions.
Perfect. Thanks, guys.
Thank you.
The next question will be from Michael Lasser with UBS. Please go ahead.
Good morning, Thanks for taking my question.
How much inflation contribute to the 14% same store sales increase in.
<unk> and given the rise in inputs like Green.
How much inflation headwind embedded into your.
But the 8% growth outlook for 2022.
Yes. Thanks for the question, Michael I won't get into specifics on the quarter, what I will tell you as the year instead.
Inflation was about a low single digit impact to our total comp which was in line with the cost input increases that we saw we did see a little bit bigger pickup on that in Q4, but as we mentioned on the call. It no elasticity impact as we mentioned in our Q3 earnings call as well and then going forward I would just tell you that we've factored in our current expectations.
Cost input increases and any associated pricing actions.
And Brian did that take into account.
That move in some of the commodity.
Paulson.
It's been a translator.
I think that that youre going to see.
In the coming weeks and one yes.
Correct, our current understanding and look the market Michael remains fluid.
We have really good relationships with our partners I think our team did a great job of managing through the last year. We continue to remain focused on staying out in front of demand and our guidance reflects what we expect in terms of cost inputs and pricing.
Okay and my follow up question is.
It sounds like part of the improvement quarter to quarter and the gross margin was driven.
Bye.
You could promotions as well as passing along some of the price increases.
Outside of the first quarter, where you're expecting a difficult compare is there a line of sight to the gross margin stabilizing even with some of the ship.
The lower gross margin businesses.
A better than average overall operating margin.
Yeah. It's a good question Michael I mean, let me start with as a reminder, we are focused on expanding EBITDA margins as we get into 2020, we did in 2021, our guidance reflects that in 2022, you make a good point in terms of the mix dynamics, but let me ground us in a little bit of fundamentals here. Our services business is firing on all cylinders and that's really.
Margin.
P&L geography more than anything else, it's basically EBITDA neutral, we do have some margin dynamics across digital and brick and mortar given channel fulfillment, which we leverage and in our consumable business has really gone better than we expected with share gains that kind of <unk>, what we saw a year ago.
Relative to your point on Q4, and the team did a great job managing those impacts with cost management and partnerships with our vendors, but I would tell you quarter on quarter, we saw improvement in our gross margins across all of it. So consumables was better serve core services was better at our digital was better and I won't get into any more specific.
Margin guidance, but as I mentioned on the call earlier two dynamics in play Q4 to Q1 normal seasonality in the year over year stimulus.
Last year.
Okay. Thank you very much.
Thank you.
The next question will come from Anna <unk> with Needham. Please go ahead.
Great. Thanks, Good morning, guys and congrats really nice yourself.
We had a question on net customer adds.
Well continue to look really strong for the quarter can you share with us how do you think about that number for the year and any color on where you think these customers are coming from in terms of channels and maybe any additional channel.
Any additional color on the performance of that 2020 as cohort.
Would be great and then I had a follow up.
Yes.
Thanks for the question Anna.
We are pleased with your property.
New adds in the quarter.
One we had millions of net new adds taking us to $24 one as we speak at the end of the quarter rather.
We built a strategic capability.
Last three quarters and delivered customer ads at a multiple of our key online competitor and that's something that we're very proud of.
They are helping to drive our growth today and as we do so in the future.
Talked before about this for your annuity concept.
With our more robust analytics capabilities will talk about at our analyst meetings, we're getting better and better at driving spend per customer, we're getting better and better at driving share of wallet. So.
Now compounding this customer add muscle, we've built with our ability to drive spend per customer.
I would add that it's early days of Q1, but we're pleased with what we're seeing thus far in terms of your channel question.
We're adding customers across both channels I will tell you that 'twenty, one vis vis 20 brick and mortar was even stronger so that people can return to brick and mortar it didn't.
Happened, we saw a return to brick and mortar not only a return of our existing customers.
Picked up a lot of new customers in our brick and mortar. We also picked up a lot of new customers. If you want to get the same day delivery.
We're one of the only places where you can get the same day deliveries do you want to get both because you can't get that or online competitors.
We saw strength across both channels.
Okay. That's great really helpful. Ron I appreciate that and just as a follow up on the Lowe's partnership I know, it's still very early days, but could you just give us an update on how the rollout is proceeding.
How the mix of merchandise will differ compared to typical zipcar's center location.
In terms of owned or third party brands.
And do you see additional opportunities for new partnerships.
To get that incremental distribution down the road. Thank you so much.
Yeah, Great question and something we're really excited about I would first ladder up close to me its toll as an initiative and it's similar.
We have been we are.
Dedicated to being the innovation leader in our space and Lowe's to me is a great example of that and.
We're looking for partners that give us access to new customers that have high density of pet parents will provide supplemental services and partners that are appealing to our higher end customer base.
Fantastic brand a great experience a great culture and they have a lot of DIY focused millennial and Gen Z customer base for Incrementals of ours, one of the other things that I love about this partnership I grew up.
Pepsico and kind of that's one of the brand building academies and I have been I was amazed when I came in and growing at a more robust this ability to build brands and its ability to build products and it is just great to see us kind of letting the kids leave the house in terms of our four walls.
Again too.
Our broader distribution on products like ready product cycle harder and more and more you'll see us take that brand building capability and take it outside our house for incremental customers and incremental revenue.
Early days on that partnership but the initial results are promising as our I would say at this stage.
That's great. Thank you so much and best of luck.
Thank you.
And the next question is from John Heimbach <unk> with Guggenheim Partners. Please go ahead.
So Ron I want to start.
Finally to point out.
As you think about formulating that marketing that.
How big do you think vital care can be.
Let's say in a reasonable period of time, let's say the next three to five years.
And what do you think the.
What do you think the monthly fee will shake out.
As you put additional tiers.
Above the COVID-19 Bucks.
Yeah.
I'll probably get punished by.
And my legal team, but we're going to get to a million customers question as an acid plant.
So that is what we're going to do.
And I see it as the manifestation.
Four years ago, we made a big bet Big bet was we are going to bet on a comprehensive ecosystem.
And.
That's owned by the way just got a lot stronger with our acquisition of <unk>.
Yes.
Describe other half of the JV, which might can elaborate upon but we made that to me final care is the customer facing manifestation of that it shows up in many many different ways, but that is the comprehensive manifestation of that we made on delivering an ecosystem and that.
That was grounded in the fact that 54% of pet parents want.
One stop shop partner taken care of their pets and those customers by the way.
Highest.
And pet parents, who care to most out there so.
So we will get to a $1 million. The question is when not if in terms of hydro care to that though we love the additional capabilities.
We love the expansion of Cat actually were really pleasantly surprised at what percent.
The initial sign ups, our cat, we saw an acceleration.
Once we launched launched vital care treat I know in our pet care centers.
And then I liked this affiliate program to more tentacles that are feeding title care sign ups to better and partners like Rover partners by Colgate Palmolive Hills multiple shelters, they're going to see final care and help us accelerate in terms of financial impact is baked into our guidance. This isn't held.
EV play for US this is an L.
We placed 20% new to foods, 30% due to services and Theyre spending three times, our average customer. So this is great for our business. We have no plans to move off of 1999, our focus is making sure that we're monetizing those customers and providing a great experience, yes, Ron I would just add too.
We hear all the time, how important the benefit is as part of the vital care offering and so one of the elements of the thrive transaction was to unify our programs under vital care. So are our thrive hospital clients will be able to access vital.
Care in a more seamless way and so that's another really exciting part of the transaction great point just to build on that <unk> had a different membership program. This is one of the revenue synergies and this is bringing that into our vital care program.
And then maybe just to follow up on that.
You look at your share of wallet with your best customers. The most attractive demographics, where do you think that sits today and.
I imagine vital care overlaps right with that.
Demographics are vital care, which would be a natural one.
Wallet share builder.
An easy one with those customers.
So I don't care customers are pretty much the highest value customers the entire Caroline.
That's why I'm, so focused on driving that and probably the highest value customers in the category. We're one of the highest value category customers and the category our share of wallet is absolutely growing.
That is what's the intentive vital care and now at 160 at the quarter in well over that at this point. We now know it is a share of wallet driver for us and just a reminder from some of the early documentation we gave at the IPO and we'll talk about this at the analyst day, we have the highest value customers.
Okay.
So capturing more of their share of it.
In some ways is our upside Tam for us.
Way to think about it is it's all upside Tam for us so that is very much our focus so it's a great question.
Thank you.
Thank you.
The next question is from Kate Mcshane from Goldman Sachs. Please go ahead.
Hi, good morning, Thanks for taking our question.
You had mentioned that the elasticity response.
Since then the price increase that we needed to take with neutral.
You had seen any impact.
Trading down as more.
Yes.
As a result.
Hey, Jay.
Thanks for the question I would answer it in two different parts first.
I talk.
March towards premium innovation.
That is a multi year March we have not seen that abate. So we continue to drive <unk> shipments and our portfolio whether that takes the form of fresh frozen whether that takes the form of high end Kimball like origin and <unk> to the while so we are continuing to see that and on the supply side driving towards ready the highest the highest end.
Kind of fashion definitional fashion brand in pet supplies.
So that continues separate from that is the growth.
Wholehearted, which is strong we're driving penetration into cohort.
I would not consider wholehearted down trading I would consider wholehearted active shifting some commodity brand in a similar or lower priced into cohort. So we've taken a lot of actions to shift those customers and lower value commodity brands into whole.
<unk> as an explicit strategy and that strategy is working.
Okay.
That's helpful. Thank you and then.
Question is on the digital fulfillment.
You've had a lot of success with focus on the same day fulfillment, but I know theres been some limitation with the inventory availability.
Firstly on the same day fulfillment. So I just wondered how that inventory availability has changed over the year in terms of what you're offering the customer for same day and what we can expect for 2022.
Yes, So let me start by.
To reiterate the digital growth rate, 143%, it's one of the best in all of that reach out 25% was a very good number in the quarter.
And if you look at our digital performance versus what I'm seeing from kind of some of the NPD data.
Very strong and I think it speaks to the model.
So my question over 80% of our Tech our digital orders are fulfilled through our Tech care Center, we talk about that as a competitive advantage versus our online competitors and it shows up every single day, Here's an amazing factoid for you 91% of the time, 91% of the time when a customer comes on.
Through our website or App and has the opportunity to co pays or same day they choosing.
And thats something that our online competitor cannot too.
In terms of inventory, we've all kind of had had challenges in inventory. There is not one of our vendors that that plan for $11 million new pads in 'twenty elevated in 'twenty, one and elevated today, so they're all kind of stretching out the bad news. The good news is they're adding capital and labor situation is getting better so we see improvement.
And our trucks are more and more.
Going out to health care centers.
In terms of any gaps one of the things that we like and we think is an advantage of ours is if youre coming in to one of our pet care centers to get a.
Urinary track product for your Cat and we don't have an exact product.
You are used to buying our pet care center folks are so trust that they can ship them into another product where in other other channels you might lose that sale. So it hasn't been perfect, but I would say if you will.
Look at the numbers, 143% gross and 25% growth we're doing.
Doing better than that in the vast majority and it's getting better yes, I would just add that we're going to remain opportunistic in terms of staying out in front of demand, which we did not succeed.
Thank you.
<unk>.
And the next question will come from Oliver Winter mantle with Evercore ISI. Please go ahead.
Yes. Good morning, I had a question follow up question to the.
By JV integration.
I think Brian you said, it's EBITDA neutral at breakeven in the first year.
Would it add to revenues or is that.
And is that included in the 6% to 8% guidance and.
And also overall.
How will that change your trajectory in <unk>.
<unk> is that overall will that accelerate the rollout.
Thanks.
Yes, let me, let me talk financials, and then I'll turn it over to Mike in terms of strategically so in terms of revenue.
There is no direct revenue benefit in the sense, we already have.
Consolidated those results into our financials. So the revenue is already in and that gets thrive share of the JV against adjusted out through our eliminations.
Eliminations and adjusted EBITDA add backs. So the revenue is actually already in what you heard Mike touch on it earlier with some of the synergies that we expect to get from this transaction in terms of the center store uplift, which we think will be enhanced vital care expansion, which we think will be enhanced all of that's baked into the 16% in terms of the pure revenue that's all.
In our results now I'll turn it over to Mike can talk more about strategically website.
Yeah Oliver Thanks for the question I'm excited on a number of fronts about this transaction.
The first callout that we built a really great business together with thrive team, we love working with them and we've been really happy with the performance of the hospital and the bond that they've created with our pet care Center teams.
Talk about scale and this is where as you referenced the potential for.
The acceleration in the vet business, it's all about your links and euro bonds with debts. So we have now 1300 over 1300 bets, we engage with around our mobile vet clinics, we have over 400 owned that model.
<unk> teams and now we're excited to bring onboard 800 best in class bet Hospital professionals and field staff.
They will add significantly to our capabilities our ability to network. In this space are learnings there really going to help us improve our model and I'm really excited about that and then I will not I will not understate the importance of what Ron referenced in the script.
This ability for us to go to market as one major branded national player. So you referenced that perfectly one playbook, one culture, one face to the customer I.
I think thats going to be really really important and then of course, we referenced the synergies in the script.
And we referenced the operational advantages this whole connection with our ecosystem I think is another really strategic part of this transaction, we see it in our owned hospitals today.
Are able to reach a higher elevation of Custer customer experience.
Through the links with our operations our data our technology, our membership program and so we're really excited to bring that benefit to the thrive hospitals.
Got it thanks, very much and good luck.
Thank you.
The next question is from Zach <unk> with <unk>.
<unk> Fargo. Please go ahead.
Hi, Good morning, Ron first question on the industry as a whole as we're dealing with some pretty funky comparison, but I'm curious if you could talk through your assumptions on broader pet category growth in 'twenty two both in terms of volume as well as price and then when you think about your 6% to 8% growth what are you.
Distributing to broader category growth versus company specific drivers and share gains.
Yes, thanks for the question Zack.
Let me be clear we are.
Operator.
Amazing categories large growing and resilient.
If you look at any of the economic downturns Upturns. The category continues to performance from a consumer standpoint, there are a lot more pets people are spending a lot more time with them and they are spending more time on their pets.
And the fact that the majority of the new pets adopted we adopted by millennials and Gen Z years, only puts upward pressure on spend per test, which is good and we're really well positioned to capitalize on these humanization and presentation trends that I've talked about.
In terms of 'twenty two.
<unk> continued growth.
As I said, we see continued spend per customer growth and we're seeing that show up in our numbers. So we have a lot of faces a category.
Related gain share we got another share report last last week and we gained share overall, we gained share in digital and gained share in brick and mortar. So we have a strong category that we're gaining share.
Got it and then for Brian and Mike.
Can you talk about the driver.
The capex uptick a little bit more detail as you mentioned the store base will remain pretty flat year over year. So perhaps you could talk about the number of store Remodels four relocations here.
<unk> for 'twenty, two and then what type of uptick you're typically seeing from some of your recent remodels over the past year. Thanks.
Yes, good question so.
As you saw in our range today, the midpoint of our Capex spend is about a $60 million increase year over year.
I will tell you is that we're going to go into more detail on this at the analyst day, but I'll say this suffice it to say that we have no shortage of attractive areas for investment you touched on them.
That is one the remodels the extension of our fresh frozen and trees and runs within the stores. We also have investments and innovation in areas like supply chain, where we're investing in automation and reducing cost per <unk>. That's an area, where you invest to get efficiencies. So if you think about operating leverage going forward a lot of what.
We do in terms of our Capex investments, but we're relentless about our ROI return on those capex investments and a lot of those areas, we invest and begin efficiencies P&L over time, So we'll double click into this more on analyst day, So I want to steal my Thunder.
Got it appreciate the time.
Thank you very much.
Yeah.
And the next question is from Seth Basham with Wedbush. Please go ahead.
Thanks, a lot and good morning, I have a follow up question on the industry outlook. What are you expecting in terms of net new pet adoptions in 2000, and pointing to and what are you expecting in terms of growth in the discretionary or supplies.
Of the business for 2022.
Yes, if you look at.
Pets coming into homes, we see we've seen a continued elevated actually one of the things we saw in the second half of 'twenty, one because we saw heightened cat adoptions, which is part of the reason you see us expanding too.
I don't care to cat and actually we will talk.
Our analyst meeting about increasing focus on cat, which is already paying dividends.
In terms of supplies.
As Brian stated as high as in Q1 of 'twenty one.
Were stimulated if you will.
At a heightened level, we see that going back to normalization in terms of overlap dynamics from Q2 on.
Supplies will grow in 'twenty, one as a category.
And again, we plan on taking share just the.
Q1 dynamic with that heavy.
Yes.
This is an overlap dynamic in Q1 category of that.
Yeah.
Thank you and my follow up is around the <unk> point out very exciting opportunity and launch here just in terms of the LTV of a vital care customer how would you peg it relative to your average customer.
Yes, it's about <unk>.
So when we think about the wireless carrier customer as Ron mentioned this is a share of wallet players potentially play.
This is going to LTV.
So those customers, we do a lot of analytics around that.
What we've seen from the early adoption in biotech <unk>.
<unk> dot out.
We're already good customers, which then when we get them into filed here at <unk> and we look at that LTV is kind of a three X.
Awesome. Thanks.
Thank you.
And our last question today will come from Peter Benedict with Baird. Please go ahead.
Hey, guys. Thanks for thanks for sneaking me in.
First question, just kind of Dovetailing, maybe all of that Capex question, the fresh and frozen push can you maybe talk about.
Are you guys looking to add more square footage there as you continue to push further into this.
This category.
That's kind of my first question.
Absolutely if you look at fresh frozen.
And I've had this conversation before.
And I love the fresh frozen category, we're at $1 billion plus is a cabin category 1 billion plus now it will get to over $4 billion by 2025 or the retail leader.
91% of fresh frozen kits.
Filled through.
Michael retail because of the dynamics of the product. So it is right down the sweet spot for US we have a wonderful relationship with GST that we only strengthened.
And we also have instinct and fresh.
Well in terms of space, yes, it will expand it would expand naturally but it's definitely can expand now that we agreed with just food for dogs for them to supply a fantastic fresh frozen products under the.
We're really really excited by that it gives our own brand wholehearted another growth vector.
And it allows us to kind of have a better and best strategy and fresh frozen.
It really has us fired up and then the other part about just food for dogs agreement is we'll have more marketing.
Against just food for dogs as well. So overall, we plant we are leading we plan on meeting our fresh frozen and I would just tell you Peter as it relates to the Capex. These are some of the easier capex decisions.
Thank you Roy really attractive.
The trip frequency is a wonderful box actually.
Yes.
Definitely it sounds good and my last question is Moreover, on the services side of things you guys talked about having unique capabilities for personalization, obviously, bringing the thrive share of the business in house, how are you positioned from a system standpoint too.
Kind of optimize the sharing of data leveraging of data across Europe .
Your service offerings and are there any improvements.
On that front on tap for the year ahead.
I'll, let Mike take that we will focus a lot actually at the analyst meeting you're going to get to meet our head of analytics and how we're moving data around the enterprise, which we firmly believe it is a competitive advantage, but I'll let Mike.
Address that.
Yes, Peter we've actually we've come a long way and Theres a lot more opportunity.
Think the stat is over 50% of our appointments for services.
<unk>.
Roaming and training are.
Done on our online platforms and primarily on our App increasingly on our App. So the digital the digital marriage of our of our services business. I think has been one of the big Big game Changers for us over the past couple of years and when you think about it we talk about this all the time.
Most of our competition is.
Smaller proprietors, who just do not have the marketing or the technology capabilities that will bring to bear.
That's that's our starting point and so now we are building a lot more capacity for integration with vital care.
Additional elements around loyalty involved with our digital platforms and so we've got a we've got a runway of enhancements. In addition on the digital side related to services that I think will just bring more and more value to the customer and yes, we will talk more about that our analyst day presentation.
The single most important data.
In a pet ecosystem is the vet data fact.
The fact that we now have that we're able to move that data around the organization to the groomer to the aisle.
Super Super powerful and we'll talk about how we're going to do so but to thrive acquisition only furthers our ability to do that.
Yeah.
Terrific look forward to seeing you guys in couple of weeks. Thanks. Thank you Peter.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Ron Coughlin for any closing remarks.
Thank you operator.
I'll just conclude by saying we have a strong growth category, our competitive moats are deepening and a world class team is executing.
This is delivering record breaking performance and share gains in a very dynamic environment and.
In fact, we've delivered growth at the top end of the retail industry consecutively over the last seven quarters make no mistake about it we have exited the pandemic Europe , a stronger company better positioned for long term share and business growth and better positioned to drive enhanced shareholder value we vary.
Appreciate you spending time with us today and the support center our investors.
Every single day.
That concludes <unk> fourth quarter and fiscal 2021 earnings conference call Investor Relations will be available after the call. If you have any follow up questions.
Yeah.
And ladies and gentlemen. This concludes today's conference call. Thank you for attending today's presentation you may now disconnect.
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