Q1 2023 Petco Health and Wellness Company Inc Earnings Call

Speaker 1: These risks and uncertainties include those set out in our earnings materials and our SEC filings. This specific veg may also be considered a? times the true Cornell correlation.

Speaker 1: In addition, on today's call, we will refer to certain non-GAAP financial measures.

Speaker 1: Reconciliations of these measures can be found in our earnings release and our presentation, as well as in our SEC filings. And finally, during the Q&A portion of today's call, we ask that you please keep to one question and one follow-up. With that, let me turn it over to Ron.

Speaker 2: Thank you, Cassie. Good morning, everyone. We appreciate you joining us today. In Q1, Petco delivered its 18th consecutive quarter of comp sales growth up 5%, with revenue growth also up 5%. And we achieved our 12th consecutive quarter of brick and mortar growth.

Speaker 2: These results demonstrate the successful execution of our strategy through the current environment, the ongoing resilience of both the pet category and the secular trends of humanization and PECCO's continued delivery of purpose-driven performance.

Speaker 2: None of this could have been achieved without the hard work of the approximately 29,000 Petco partners across the country. I want to personally thank for their ongoing dedication and commitment to the health and wellness of pets, pet parents, and each other.

Speaker 2: In the short and medium term, we are laser focused on executing against our strategic priorities, controlling our controllables, and driving further efficiencies and productivity out of our cost structure. Brian will elaborate on this further.

Speaker 2: Longer term, we remain confident in the competitive advantages derived from our unique 360 degree care offering delivered through the three core pillars of our business.

Speaker 2: services, a differentiated and comprehensive merchandise mix, and our omni-channel capabilities, all tied together by our loyalty and membership programs that benefit pets, pet parents, and Petco.

Speaker 2: Focusing on these core pillars, I'll start with services where revenue is up double digits in the quarter. By evolving and growing our fully integrated services offering with veterinary grooming and training, we continue to further differentiate our business model through hands-on pet care. Our full-service veterinary business continues to scale.

Speaker 2: And to be clear, there is not another retailer or online player in our competitive set with a scaled and owned veterinary network, and this is a big differentiator for Petco.

Speaker 2: Between our clinics that provide convenient and affordable preventative care and our expanding number of vet hospitals that provide a full spectrum of diagnosis and treatment, Petco is well positioned as one of the top 10 veterinary providers in the U.S.

Speaker 2: In Q1, we saw 20% more pets for vet appointments year over year, underscoring our momentum and growth trajectory.

Speaker 2: A key driver of this is our mobile clinics, which provide a powerful growth lever that enables us to bring even more pets into our ecosystem.

Speaker 2: Averaging over 1,300 clinics a week during Q1, up 22% year over year. These fast, affordable and convenient clinics that operate extended and weekend hours allow us to meet the ongoing demand for veterinary services in an agile way while delivering robust economics.

Speaker 2: In the short term, our high performing clinics are well suited in this environment to address the needs of more cost sensitive pet parents, while also providing a pipeline of incredible veterinary talent to our hospitals. In turn, we've created a dynamic working environment for veterinarians.

Speaker 2: within our ecosystem that enhances our attractiveness as a flexible employer of choice in a competitive labor market.

Speaker 2: Similarly, we continue to be extremely pleased with the progress of our full service vet hospital business.

Speaker 2: We added a record 375 veterinarians for ecosystem in Q1, up to 60% year over year, and opened 10 new hospitals to reach a total of 257. Meaningful progress towards our anticipated 50 to 55 new hospitals this fiscal year.

Speaker 2: In the medium and long term, maturing vet hospitals will increasingly contribute to top and bottom line growth while further supporting our four wall economics.

Speaker 2: In aggregate, our pet care centers with hospitals are seeing a mid-single digit lift to center store sales after just one year. And as a result, PCCs with hospitals have been growing tangibly faster than those without.

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Speaker 2: In short, in addition to providing a world-class veterinary care offering, the operational and financial progress we made in both our clinics and hospitals is securing the runway for long-term, profitable growth in strengthening our integrated ecosystem.

Speaker 2: Grooming also generated record sales in the quarter. We continue to increase capacity and efficiencies in our salons. Demand remained high, with our knowledgeable and skilled grooming teams delivering a retentive experience while further driving traffic and center store uplift.

Speaker 2: Combined, our fully integrated service model continues to position us well in the market, offering consumers flexibility and choice across all wallet sizes.

Speaker 2: Turning to our second pillar, our differentiated merchandise continues to provide a competitive edge.

Speaker 2: Total merchandise sales increase in the quarter on a year-on-year basis, led by double-digit growth in consumables.

Speaker 2: Importantly, our assortment of health-focused premium brands continues to resonate with pet parents and remains an important driver of demand in our ecosystem. Specifically in Q1, Fresh Frozen delivered both double-digit sales and customer growth year over year.

Speaker 2: Additionally, our exclusive and exciting custom meals offering with Freshpet gives us the opportunity to capture further share of this rapidly scaling market.

Speaker 2: Similarly, we continue to see momentum with premium brands including Science Diet, Royal Canin and Acana, all up double digits this quarter. At the same time, we're also seeing some value seeking behaviors in our customer base.

Speaker 2: For those customers, we saw demand shift into our own brand offerings, such as Whole Hearted, providing pet parents with a value-oriented yet health-focused alternative that positions us well competitively.

Speaker 2: As a result, Wholehearted continues to grow double digits year over year. We also enhanced our positioning, quality, more affordable, consumables.

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Speaker 2: We're addressing this in two ways. First, we're making sure we meet the needs of more price sensitive consumers by working with vendors on costing and supplementing our own brand portfolio with high quality value offerings.

Speaker 2: Second, we're getting more proactive where we know there is demand. For example, over the last few weeks while it was extremely warm in the Northwest, we heavily marketed flea and tick. As a result, flea and tick supplies have performed strongly.

Speaker 2: Turning to the third pillar of our business, our omni-channel model and the structural advantages that it provides.

Speaker 2: Our digital business delivered double-digit sales growth, driven by strength and repeat delivery customers, the continued growth for a rapidly scaling ad network, our digital pharmacy, and dynamic growth in same-day delivery orders, which more than doubled year over year, underscoring the significant competitive moat same-day delivery offers relative to our online-only competitors.

Speaker 2: Our brick and mortar pet care centers continue to provide an engaging and helpful in store experience with our Petco partners guiding pet parents in the aisles while also delivering a structural and competitive micro-dispution advantage for our digital channels.

Speaker 2: In terms of our people, I am very proud as we experienced stellar Petco partner retention in Q1. In fact, we saw nearly 800 basis point improvement year over year for our full-time partners working in pet care centers. Through both enhancements to our compensation and benefits.

Speaker 2: and the exciting career opportunities Petco provides for partners working in a passion category like Pet.

Speaker 2: Finally, tying our three growth pillars together is a relentless focus on the customer, with our fully integrated health and wellness ecosystem providing a unified customer experience. Our customer loyalty programs continue to build momentum with our highest value customers, and Q1 market over 50%.

Speaker 2: year-over-year increase in recurring customer revenue. Building at our milestone of $1 billion reached in 2022. Additionally, in Q1 we delivered year-over-year NSPAC growth as we bring pet parents deeper into our ecosystem.

Speaker 2: Our vital care membership program continues to provide clear value for customers, while also driving loyalty.

Speaker 2: especially after consolidating all of our loyalty programs under the vital care umbrella earlier this year. Our paid vital care premier customers grew over 100,000 in Q1, ending the quarter with over 580,000 customers. Vital care premier is now on track.

Speaker 2: to generate over $100 million a year in recurring revenue on an annualized basis.

Speaker 2: Our end of period total active customer count was roughly flat at 25.1 million driven by some trip consolidation and lapse discretionary visits.

Speaker 2: Concurrently, the value of our customer base continues to build. The agro-thin programs such as vital care premier and repeat delivery, which is showing up in the positive NESPAC trends we are seeing.

Speaker 2: Before I close, I want to take a moment to acknowledge how proud I am of the impact PECO continues to have on our communities and PECO partners. This quarter, together with PECO Love, we saved over 100,000 PEC lives and delivered over 240,000 free vaccines.

Speaker 2: to underserved communities through the Vaccinated and Loved Initiative. And we've now reunited over 20,000 pets to date through Petco Love Loss.

Speaker 2: We join the leadership circle of Open to All, reinforcing our ongoing commitment to fostering safe and discrimination-free retail environments for our customers and partners.

Speaker 2: And in April , we honored our Epic Achievers, recognizing a select group of high-performing Petco partners for their incredible work over the last year.

Speaker 2: To conclude, our results underscore the enduring appeal of our unique model and our focus on operational excellence.

Speaker 2: our results underscore the enduring appeal of our unique model and our focus on operational excellence in the current environment.

Speaker 2: We're incredibly proud of our fully integrated services business, including a veterinary offering as a growth catalyst.

Speaker 2: are differentiated assortment and the structure advantages of an Army Channel retailer at scale.

Speaker 2: Combined, these pillars will enable us to capture continued growth, capitalizing on the secular mega trends of humanization and premiumization in the resilient pet category.

Speaker 2: Now, let me pass it over to Brian . Thanks, Ron, and good morning, everyone.

Speaker 3: To build on Ron's remarks, I also want to extend my thanks to our Petco partners and their continued dedication to delivering the very best for pets and pet parents.

Speaker 3: This mindset, combined with the team's focus on execution and agility in this environment, demonstrates the benefits of the competitive advantages we've been building over the last few years, and reinforces the foundation we've laid to drive long-term profitable growth.

Speaker 3: Looking at the quarter, net revenue was 1.56 billion and increase of 5% year-over-year.

Speaker 3: Comparable sales, driven by sustained strength in average basket trends, grew 5% year over year and 10% on a two-year stack.

Speaker 3: Total services grew double digits driven by the strength and vet and grooming under the leadership car exceptional services team.

Speaker 3: I also want to spend some time expanding on Ron's comments on our vet hospitals.

Speaker 3: At our investor day last year, we set out the projected unit economics of our veterinary business, with hospitals ramping up from being margin-diluted in the first year to break-even in year 2, and accelerating to margin-accretive by year 5.

Speaker 3: When thinking about this trajectory, it's helpful to dissect our existing hospitals into two primary distinct covalence.

Speaker 3: Hospitals that were originally operated as part of our joint venture with Thrive and our own hospitals that we've opened. The oldest of our own hospitals is now reaching three years. Since inception and aggregate, those hospitals have outperformed both our model and the earlier cohorts of the Thrive hospitals, which are now roughly in their 50 year.

Speaker 3: Both cohorts provide a compounded tailwind to medium and long-term profitable growth, and on Thrive, we've seen continued positive trajectory post-integration.

Speaker 3: Additionally, as Ron mentioned, our pet care centers with hospitals in aggregate continue to see a mid-single digit lift in center-store sales after just one year relative to those without.

Speaker 3: Pied together as the weighted average life of our cohorts continues to mature, the outcome has been incrementally possible.

Speaker 3: Turning to merchandise, consumables were up 11% in the quarter year over year.

Speaker 3: Strength and consumables was partially offset by the ongoing impact of discretionary purchasing and supplies and companion animals, which were down 8% in Q1.

Speaker 3: Our digital business showed strength with double digit sales growth in the quarter.

Speaker 3: Moving down the P&L, Gross Profit was down 50 basis points in the first quarter at 604.5 million.

Speaker 3: Q1 gross margin of 38.9% was down 230 basis points year over year.

Speaker 3: The decline was driven primarily by the mixed impact of consumable strength and ongoing supplies and companion animal softness.

Speaker 3: Our team continues to drive efficiencies by focusing on strategic cost initiatives.

Speaker 3: I'm pleased to report that in Q1, S-CNA as a percentage of revenue improved from 37.8% to 37.1% year-over-year, found 70 basis points. Demonstrating our cost discipline in a balanced approach to managing the short term while making strategic long-term investments such as raising our entry wage to $15 or above.

Speaker 3: which as Ron mentioned has paid dividends through employee retention.

Speaker 3: Q1-adjusted Iveda was 111 million, down 6.9% from prior year, so that adjusted Iveda margin rate of 7.1% down 90 basis points year-to-year.

Speaker 4: Q1 adjusted EPS with 6 cents, a decrease of 8 cents from the prior year, driven primarily by a 5 cent year of year increase in interest expense.

Speaker 5: based on 266 million weighted average fully diluted shares and a normalized effective tax rate 26%.

Speaker 6: Turning to our balance sheet our liquidity position remains strong.

Speaker 7: We ended the quarter with $593 million, inclusive of 149 million in cash and cash equivalents, and $444 million of availability on our revolving credit facility.

Speaker 8: Our strong liquidity enabled us to pay down 35 million of principal on our debt in Q1 and an additional 25 million last week.

Speaker 9: In total, we have paid down 60 million toward our target debt paydown of 100 million for the year.

Speaker 10: Turning to guidance. We continue to see uncertainty in the discretionary environment and anticipate the macro environment to remain fluid. As such, we remain focused on executing on the factors within our control and the business.

Speaker 11: But that in mind, we are reaffirming our guidance for the full year and continue to expect revenue of 6.15 to 6.275 billion.

Speaker 12: Adjusted EBITDA of 520 to 540 million.

Speaker 13: Interest expense of 145 to 155 million. Adjusted EPS of 40 cents to 48 cents.

Speaker 14: and 225 to 250 million of capital expenditures.

Speaker 15: We also continue to expect to add 50 to 55 own vet hospitals in 2023 and 10 to 15 rural locations, both of which are reflected in our guides.

Speaker 16: Although we typically don't provide quarterly or intra quarterly commentary, and we don't want to establish a precedent.

Speaker 17: In light of the unique environment, we do want to provide some more detail.

Speaker 18: Like other retail sector peers, we saw more cost as consumer beginning in the second half of the first quarter, resulting from banking uncertainty and lower tax refunds, which continues to weigh on discretionary.

Speaker 19: While our top line growth continues into May, our reaffirmation of guidance is reflective of our desire to remain prudent in this environment.

Speaker 20: As such, we expect Q2 ebada to be flat to slightly up relative to Q1 ebada and continue to anticipate ebada to be flat up in the second half on a year-of-year basis, given the year-of-year dynamics of supplies and companion animals.

Speaker 21: I also want to spend a moment discussing how we're driving additional savings in this environment. We continue to proactively manage costs, including examining real estate needs, optimizing overhead and extracting additional efficiencies out of market expense.

Speaker 22: We remain hyper focused on execution while investing in long-term growth drivers to enhance profitability and create additional shareholder values, including importantly, supporting our vet hospitals and expanding our digital competitive advantages. Similarly, our continued execution toward working capital optimization provides us confidence to support our balance sheet.

Speaker 23: We remain confident in our ability to continue to improve free cash flow, not just this year, but longer term, and to do so without significantly sacrificing strategic investments.

Speaker 24: To conclude, we remain focused on navigating the short term through strong execution in this environment, while ensuring we're well positioned in the long term to deliver profitable growth in a resilient category for our unique and differentiated business model.

Speaker 25: Thank you for your time, and with that, we'd be happy to take your questions.

Speaker 26: We will now begin the question and answer session.

Speaker 27: To ask a question, you may press star then one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. In the interest of time, please limit yourself to one question and one follow-up.

Speaker 28: And if you are unable to enter the queue, you will have to hang up and dial back into the call. At this time, we will pause momentarily to assemble our roster.

Speaker 29: Our first question comes from Oliver Wintermantle from Evercore ISI. Please go ahead.

Speaker 30: Yeah, thanks. Good morning, guys. Just regarding your, the commentary on 2Q, Brian , can you clarify that EBITDA number, is that a year-over-year number that you quoted or was that versus Q1? Versus Q1, Ollie. So let me take a couple of things on Q2.

Speaker 31: is we would expect Q2 EBITDA to be flat to slightly up relative to Q1 reported EBITDA.

Speaker 32: Got it, thank you. And then maybe a quick follow up. Just when you look at the mix of your business, obviously since pre-pandemic, the growth in consumables made that mix a lot higher versus the supply business.

If you look for the rest of the year and that maybe you can tie that into your commentary about the EBITDA number as well, how do you see that playing out? Do you still think the consumable businesses remain strong for the rest of the year and supplies weaker, which then might have a bigger impact on your growth?

profit margin. So maybe you can tie that into your commentary about EBITDA. What are the drivers of that? Thank you. Yeah, good question, Ollie. So let me start with Consumables. Consumables was up double digit in the first quarter, but so was Services. So we've continued to see strength in Services. Our grooming business remains really strong. Our vet business model is continuing to scale. Our own hospitals are actually tracking up.

dynamic in the second half of last year. And hopefully that's a little bit helpful in terms of how to think about different business segments.

Our next question comes from Peter Benedict Crumbbaard. Please go ahead.

Oh, hey guys, thanks. Two questions, I guess I'm just gonna go ahead and get first on just the trend and consume. We'll just talk about some more value seeking behavior. Can you maybe expand upon that? I'll talk about the availability of those value products and just where you're seeing that. Is that in dry? Is that happening in fresh and frozen?

Just some more color there and then secondly just curious on the promotional tone in your business Particularly around the supplies area. What do you see there? Are you taking prices down as you're working on costs with your vendors?

Thanks Peter. First on food, we continue to see a bifurcation. That's a little different than many other categories.

You have a host of customers for whom doing the absolute best thing for their pet is non-negotiable. So what we're seeing is strong double digit growth in Fresh Frozen, strong double digit growth in super premium kibble like Origin or Taste of the Wild and our science diet products.

So we continue to see strong growth there. And in actuality, we continue to revenue mix shift towards those higher priced products, which is a positive for us. And that's a category truth as well. That's a decade long trend. In this current environment, there is a sub segment of the customers that are looking for more value. And the first beneficiary of that is wholehearted.

Wholehearted is a premium holiday product for a mid price range. So we're seeing double-digit growth on a wholehearted, which is obviously good for us in terms of stickiness.

On the lower end, there are some customers who are looking for value. We've supplemented our line in the short term with a product called Diamond, which is a high quality product. And we'll continue to look to supplement that part of our portfolio, but to make no mistake about it, we're not doing low quality products.

We're not doing products that don't have any margin associated with it. That's the food side of the house, on the supply side of the house.

We are working with vendors at the more disaggregated vendor base. We are working with vendors on the cost side of the house. We are similarly supplementing our line with more value offerings there. In terms of the promotional environment, promotional environment, Q4 to Q1 sequentially was pretty flat. So we're not seeing significant increase in promotional activity at this point.

Thank you.

Thank you. Thanks, Peter.

The next question comes from Stephen Forbes from Guggenheim Securities. Please go ahead. Good morning, Ron Bryan.

I wanted to start maybe with recurring revenue trends. The 50% growth impressive rate again in the first quarter. Curious about what the percentage of total sales is of recurring revenue, how you think about this.

this channel evolving over 2023, given your commentary around the macro. And then as we look out to 2024 and beyond, what are some of the core initiatives that you wanna highlight that can really drive this penetration higher as we think about that out your potential to business?

Thanks for the question, Steve. Yeah, actually, if you go back to maybe our first earnings call, we talked about our desire to build more recurring revenue into our model. At that point, our recurring revenue as a percent of total was pretty small.

In Q4, we announced that it had reached over a billion dollars, which is a pretty big milestone. Obviously, with the growth number that we put up in Q1, that penetration furthered. I'll let you do that math. Key drivers of that are repeat delivery, which we're very excited about, and we have a very competitive offer, and our customer sat on that. It's very high. Q5.

And particularly since we have some products that are exclusive to us and Fresh Frozen particularly, we're able to be very competitive there. The second piece is VitalCare Premier and our sign up rate only increased in Q1 versus Q4.

which we're really excited about. Consumers see the value in it. They save over $200 on average a month. And for us, we're picking up more share of wallet. So over 30% of our VitalCare Premier customers weren't getting food with us, even more weren't having services with it. So it's a share of wallet play for us. It is.

very, very strategic for us. As I said, we talked about it a couple of years ago as an aspiration. Now we're delivering on it. And we are very focused on continuing to drive more recurring revenue out of our model. And if you think about the interconnectedness of our model, as we bundle more initiatives like insurance into it, it only gets more powerful. And I think that would only accelerate our recurring revenue.

But he did be still expect a negative sort of mixed impact on gross margin or just any contextualization on the margin outlook for the second quarter gross margin outlook.

Yeah, I think, let me start with, we would expect services to continue to remain strong, consumables to continue to remain strong into the second quarter. As I mentioned on the call, overall, we've continued to grow in May. We reiterated the guide for the full year, Steve, and if you go back to the commentary on the call about the intra-quarter dynamics.

of Q1. We did see in the back half of Q1 some softening in the environment and therefore we wanted to be prudent about how we talked about Q2 and reaffirm for the balance of the year.

I would just remind everyone of what we've talked about in the past on services.

So as services continue to grow, it's relatively neutral on the EBITDA line, but there is P&L geography because the labor is in cost of sales.

Our next question comes from Kate McShane from Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for taking our question. I wondered if you could help us think through traffic versus ticket in the quarter, but then also how you're thinking of that breakdown for the rest of the year.

Yeah, good question, Kate. How are you? Honestly, we don't think of ourselves as a traditional retailer given the fully integrated model that we have featuring services, digital and Omni. That said, I would tell you that our basket remains healthy and we're pleased with what we see.

I would just build on that. From a traffic standpoint, we're seeing positive trends on the veterinary business, which is bucking industry trends. Where we saw 20% more pets this quarter. We're also seeing positive traffic on the grooming side. So those are important areas where we want to be driving traffic and then help the total box. Merck, there's some trip consolidation.

Thank you. And our second question is just around that. It sounds like you're seeing some encouraging signs there with the owned vet. And just I wondered if you could maybe

Double click, I can go into that a little bit more in terms of just what progress you're seeing now that that is fully owned by Petco, what things are looking like competitively, just how you're doing with regards to the hiring of vets.

Yeah, I'll start and maybe Brian and I will tag team. Thanks for the question, Kate. So, first, you know, we've had a lot of conversations about hiring, and we've never hired so many vets as we did this past quarter brought them into our ecosystem. In the case of the clinics.

And I'll start on the clinics. This is a maybe underappreciated asset. I will tell you that our vet clinic business is very, very strong. It's the right offer at the right time. It's growing rapidly. We have over 1,300 clinics a week.

And that is high appeal, but also it is a feeder system, a minor leagues, if you will, for bringing our vets into our hospital. And nobody else has that feeder system, which gives us an absolute advantage. So that's number one. We executed, we opened 10 new hospitals in the quarter.

Yeah, I would say from a margin dollar perspective when you think about the model in total vets are accretive from a rage standpoint at maturity, certainly they're projected to be. And as I said in the call, and as you mentioned Kate, on aggregate, we are ahead of our model on our own.

owned that cohort. Over the last three years, just a reminder, we've added 176 of our 257 hospitals in the last three years. So a lot of our hospitals are younger than three years. The good news with that is it gives us a lot of runway ahead of us that will allow us to take advantage of the maturity curve of that and that accretion.

And as Ron mentioned, that vet clinic business is such a strong business and that's helped us contribute to a 20% year-over-year increase in vet visits. And so overall, we feel really good about our vet position. Our next question comes from Seth Basham from Whitebush Securities. Please go ahead. Thanks a lot and good morning. It's great to see continued sign-outs for the Vital community.

Yeah, so let me kind of walk you through it, Seth. So $20 a month is what they pay in a subscription fee. So if you run that out over the balance of the year, you're talking 240. The $400 that we quoted is an enterprise value. So if you think about on an annualized basis what we're getting from those customers, the subscription is just one part of it. The additional trips and the fact that it's three and a half x.

LTV for those customers from up compared to an average customer of vital care. That gives us a greater share of wallet It gives us greater on ramp to the overall ecosystem Free bringing a vital care customer

Maybe they weren't doing services with us. Maybe they were a service customer, not getting food with us. And we're seeing significant incidences of that, which is driving the share a while at number that Brian cited. Very good. And as my follow-up just thinking about the margin delusion associated with new bio-care customers, has that been significant and have you expect that to trend going forward?

Yeah, when we think about VitalCare, we do look at it as an LTV and share of wallet playsets. So from a enterprise margin dollar, we look at it as an LTV and share of wallet playsets.

standpoint, it is very accretive. From a rate standpoint, there's some impact, but when you're talking about, you know, 580 vital care premier members on a base of 25 million customers, it's not significant. Our next question comes from, on Andreva from a Needham & Company. Please go ahead. Mr. Hunter. Mr. Hunter.

Great, good morning. Thanks so much guys. Two quick ones from us. I wanted to follow up on the active customer count. I think this is the first time you are not seeing growth in NetApp. Could you provide color on that? What are you seeing with churn, and how should we think about net customer growth as we go through?

Hi, Ana, thanks for the question. While our customers were flat sequentially due to trip consolidation and laps and supplies visits, we are seeing a strength and nest pack, and that's really due to the strength of our loyalty programs and driving more share wallet, which we talked about a little while ago. And some great examples, 31% of RedoCare Premier customers.

our youth and schools, 36, due to services. So it's driving that share wall that I talked about earlier. And again, 3.5 times more than average customers. So we're making a lot of progress on NESTPAC in an environment where you're seeing some lack-lapsed visits due to the discretionary environment. From an ad standpoint, we have significant levers on our desk. One is marked.

early days there. So we have levers on our desk to drive net customer ads, but in the meantime we're going to continue driving NEST PAC and the value from our customer base.

Yeah, and then on the back question, Ana, I would just say a couple of things. You asked about whether that's revenue or profit. If you think about the maturity of a vet business, it's all about scale and utilization. So just by nature, if we're ahead of model, it's gonna be both top line and bottom line. You asked about the difference in sort of cohorts. The only thing I would call out is the difference between owned and the ones that we originally opened under the tribe joined venture.

Those were tracking the high model, the own hospitals were tracking ahead of model. Part of the reason we made that acquisition of the additional 50% last year is because we felt like we could improve the performance of the hospitals and get a greater enterprise return for PETCO. And if you go back to once we fully integrated those Thrive hospitals

the performance of those hospitals under the VEDCO brand have improved. That model automatically measures effect from people's health.

All right, fair enough. Thank you so much, Dave. Thanks, Ana. Our next question comes from Zach Fadum from Wells Fargo. Please go ahead.

Hey, good morning. Do you think that 7.6% to climb in supplies and companion animals is a fair reflection of the supplies category as a whole? Or have you seen some shareship to mass? And then as you think about the components within the category, any callouts?

of segments doing well versus particularly challenged? And how should we think about deferral versus just a divot for these categories when the macro recovers?

that's not really a mass dynamic. Um so the categories. Um that's really a category dynamic. Um in terms of supplies, could there be, you know, champagne Choi band

on higher value, we're focused on where there is a profit pool. So might there be some things underneath where there's a profit pool? Sure, but that's not where we're focused. But that said, we believe there is profit to be had on some of the value segments. And as I said, we're both supplementing our line, as well as working with those vendors to reduce cost so that we can be more competitive on some of those products.

Okay, great. And then on your services business, still growing nicely, did you talk about the contribution across grooming that co and that hospitals? And as you look at 2023 and into 24, community, wellness and on this ??, darly bow PowerPoint.

Can you help us think through the evolution of sales and EBITDA growth contribution from these businesses?

Yeah, I probably won't get as specific as you want, Zach, but let me walk through it. By nature, total vet is going to have a higher growth rate than the other subcomponents of services, just given the fact that we're adding hospitals every year, right? So if you look at overall revenue growth, that's going to be growing faster. VETCO, we don't disclose that overall growth number, but we continue to scale that business at very high utilization.

Thank you very much for taking my question. I wanted to ask on the cadence of the year. At this point last year, we were talking about the fact that sequentially in the second quarter you typically see revenue increase, whereas this year it looks like it's going to be down sequentially just based on your commentary about May. So could you just help us talk about the balance of the year?

you know, how should we think about that second quarter? And then, you know, Brian , as you think about the puts and takes on the top line to get you to maybe the high end versus the low end, what are the big factors in the second half of the year?

Yeah, thanks for the question Steve. Let me first start with we continue to grow. We made the comment on the call that in May we continue to see growth. And we would expect that to continue. The comments on Q2 are more to do with what I mentioned on the call about the back half of Q1. So we did see a shift in the back half of the first quarter and today's stand that continues into Q2.

of what we reported in discretionary in Q1, and you drag that out, Q2 to Q3 to Q4, the comp in that category will improve just by nature of the lapping by this. Okay, fair enough. We haven't heard about the farm and pet supply. This quarter housed out progressing overall.

and then just remind us how many of those stores will you have by year end. Thank you.

Thanks, Steve. The rural pet care centers are doing very well. We're really encouraged. They're performing above our expectations. And this is important because the $7 billion opportunity for us and 7 billion and growing. We closed the quarter with eight rural PCCs.

We opened three in Q1, making meaningful progress towards our 10 to 15, which we said we would open this year. I mentioned this earlier, but I have to admit it surprised even me, 35,000 new customers to Petco from this initiative already, which is really, really exciting. After earnings last quarter, I stopped in...

as if it was staged. So this is a great extension of our PCCs and great extension of our merchandise as well. We're bringing some of those products on in terms of our online product assortment. So very exciting thus far ahead of our model.

Our next question comes from Greg Sommer from Borden Haskett. Please go ahead.

Hi, thanks for taking my question. I wanted to dig into the comment about the second half of the quarter being a little more conscious from the consumer. And I was just curious if that was more so traffic, being a little softer across the business, or if that was just more consumer behavior.

either from a category standpoint or customer looking for more value.

Yeah, it was more a consumer behavior standpoint. If you think about what happened in the overall environment and the banking headlines to perhaps to a lesser degree lighter tax refunds, it's not dissimilar to what you've for other retail sector peers. So I'd more talk about consumer sentiment.

Okay, I got a quick fall off as well on pricing. So before you guys said that you believe the majority of the pricing had already come through, although there could be pockets, just curious if that's still kind of the anticipation for the remainder of the year. Yeah, so.

First, the pricing that we took is sticky, which is good news. And second, the majority of pricing has come through in terms of the vendors that we engage with, the scale vendors. We know that to be a truism. And as I said, on the supply side of the house, where it's more disaggregated vendor-based.

there's probably more deflationary opportunities than inflationary opportunities. Our next question comes from Michael Lasser from UBS. Please go ahead.

Good morning. Thanks a lot for taking my question. You indicated that the bulk of the comp was driven by growth in average transaction size. So how did that break down between like for like inflation?

and more items in the basket due to trip consolidation, and if the majority of it was inflation, how is that going to impact the flow of the comp over the next few quarters as you start to lap some of the price increases that you took last year? Thank you very much. I have one follow-up after that. Yeah, let me start with consumables, Michael. We grew in unit.

services, unit growth and concernables, and we've talked about discretionary.

Okay, and my follow-up question is, you've made a case in the past that typically when you enter these periods of softness in the supplies category, they'll last five or six quarters. Is it still your expectation that that's the case, especially if you're not a supplier?

as you laid out the math that simply by getting to easier comparisons in the back half of the year, that the growth rate should start to stabilize. And this is the new norm where the penetration of supply is structurally lower and given the margin dynamics associated with that, how do you

look at your long term profitability profile in light of what could be a lower business that's more profitable.

the next slide. Thanks. Thanks for the question. Um for let me establish a couple facts. First of all, if you look at on a three year basis, our supplies is up double digits. If you look at many categories, that's not the case are now turning

today. The first you have a life stage of pet dynamic and the second is you have a macroeconomic dynamic. The life stage of pet, we talked about this a couple years ago, is heavy on supplies in the initial couple years and then flew out. There we go. There's a good example.

and now he's already up to 50 pounds and he's eating more food every single day. So that is one dynamic that has impacted things right now and the second dynamic is the current economic environment which historically has impacted discretionary and then it rolls off and I'll come to the five to six quarters. So from a long-term structural standpoint we don't see a major shift.

in the relative size of the categories. We do see a shift within our portfolio because of the nature of the rapid build out of our services. And again, services has a P&L geography dynamic, but services will be more and more of our mix as we go forward. As to the five district quarter element,

If you look at November , December , and compare that to January , February , we were exactly on that trajectory. Historically, when the category has gone through recessions, first the category has grown about five to six points, which lines up. Consumables hangs right in there, and then there's a temporary hit.

and some of the other dynamics with tax refunds, et cetera, and that abated a bit. We're confident in the mid to long-term that normalizes, but again, the short-term macro environment had a moderating influence on that. Actually, the last thing I would say on that is we're not passengers on the bus.

We're taking actions across advertising and across assortment, across promotional activity to make sure we're driving those programs, as well as our in-store and online activities to drive supply sales. And we have a lot of confidence in our ability to shape our own destiny.

It seems like the consumer has been trending a little worse and we get the comments towards the end of your quarter. Has that stabilized or we're still trending and we haven't felt the bottom? And then the second part of this question is, you mentioned the majority of the gross margin was mixed.

Can you either quantify or what the other factors was, was anything in terms of price and promotion in that GM weakness?

could just to make habitable whale right up the is. Um thanks rameon. Um let me go back to where I started on the

can use to be robust regardless of the macro environment. Now on merchandise, we're seeing a bifurcation. We continue to see strong sales on our premium products. That's a timeless trend. And that continues during this time period.

In terms of the value seeking, I already talked about that. I would say that the trend that we saw at the back half of Q1 has continued into Q2. We're launching initiatives and the marketing campaign I talked about.

And that's what we're seeing as of right now, which is why we were prudent in our guidance. Yeah, and Simeon, when we talk about the majority impact of the impact being affected by a mix in gross margin, what we're really talking about there is that mix dynamic between discretionary and consumables. The only other thing I would call out and remind you of is the mixed impact by business, primarily services. Anytime services are strong and we are very happy when it is.

there is a margin rate impact that quite honestly is okay for us because if you look at EBITDA dollars, EBITDA dollars and EBITDA rates in the services business are very, very attractive. So services growing strong is good news for the business.

Okay, my second question is on the shape of the year. It felt like your initial guidance for the full year, Hani, but felt like there was some conservatism in it.

I don't know how the first half is playing out versus expectations. I get the sense maybe it's coming in a little bit lighter given some of the dynamics you mentioned. We are lapping these items that you mentioned in the second half, but it also feels like maybe the second half has gotten a little bit steeper. Is that fair or we're just taking some of that conservatism from the model that you had in the first place? No, I don't think that's fair Simeon, to be honest. I think if you look at what happened in Q1, I think...

This concludes our question and answer session. I would like to turn the conference back over to Ron Coghlan for any closing remarks.

Thank you, operator. To close today's call, I want to reinforce that Petco operates in a highly resilient category with an ecosystem that is both unique and delivers on pet parents' desire for an integrated health and wellness partner. In this environment, we're focused on progressing our key long-term growth strategies like that.

and controlling our controllables. Of course, none of this would happen without our incredible Petco partners to whom I'm grateful for providing us with an incredible competitive advantage every single day. Thank you for your time.

That concludes our first quarter of 2023 earning conference hall. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.