Q3 2023 Petco Health and Wellness Company Inc Earnings Call

Speaker 1: I'd like to express my utmost appreciation to all our pet go partners across the country. Their dedication makes pet go the special place that it is, and this quarter the team worked especially hard to deliver the very best for pets. In Q3, results were below our expectations.

Appreciation to all our petco partners across the country their dedication makes petco the special place that it is in this quarter. The team worked especially hard to deliver the very best for pets. In Q3 results were below our expectations and we are taking swift and decisive action to improve the performance of our business by <unk>.

Speaker 1: We're taking swift and decisive action to improve the performance of our business by broadening our appeal with customers and tightly managing costs and capital. This work is already underway and is the top priority for the entire pet go team. This includes progress against the targeted $150 million in run rate savings by the end of fiscal 2025, which we outlined last quarter. We remain on track to deliver 40 million in year one.

<unk>, our appeal with customers and tightly managing costs and capital. This work is already underway and is a top priority for the entire petco team. This includes progress against the targeted $150 million in run rate savings by the end of fiscal 2025, which we outlined last quarter, we remain on <unk>.

Track to deliver $40 million in year one.

Speaker 1: Over the past years, we've seen significant changes that have impacted consumers spending. While we saw surge in pet adoptions during the pandemic period, coupled with stimulus, the facilitated discretionary spending, the current economic environment needs many consumers or increasingly discerning in their spending and actively seeking out more value. As a result, it's clear we must adapt our business to meet the needs of consumers in this environment.

Over the past years, we've seen significant changes that have impacted consumer spending.

We saw a surge in pet adoptions during the pandemic period, coupled with stimulus and facilitated discretionary spending the current economic environment means many consumers are increasingly discerning in their spending and actively seeking out more value. As a result, it is clear we must adapt our business to meet the needs of consumers in this environment.

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Speaker 1: Consequently, we've launched an operational reset to improve the performance of our business, which is well underway and consistent for key pillars.

Consequently, we've launched and operational reset to improve the performance of our business, which is well underway and consists of four key pillars.

Speaker 1: The first and most significant is our focus on delivering value. We brought in the category's largest nationally available value brands and food and treats for both dog and cat. These brands include Friskeys, Pettigree, Purina 1, Beneful, Temptations and Milkbone, among others. These will complement our best-in-class premium and fresh frozen food, treats, and toppers, allowing us to cycle out slower moving brands and skews and focus on the highest velocity and the highest velocity skews.

The first and most significant is our focus on delivering value. We brought in the categories largest nationally available value brands in food and treats for both dog and Cat. These brands include Friskies pedigree, Purion, one beneficial temptations and milk bone among others. These will complement our best in class premium in fresh frozen.

Food treats and toppers, allowing us to cycle out slower moving brands and Skus and focus on the highest velocity skus food as a primary driver of where and how pet parents shop with over 70% of households, buying at least one of the food brands that we're now bringing into our portfolio and equating to approximately.

Speaker 1: Food is a primary driver of where and how pet parents shop with over 70% of households buying at least one of the food brands that we're now bringing into our portfolio and equating to approximately $12 billion in category sales for dog and cat annual.

<unk> $12 billion in category sales for dog and cat annually supported by powerful and targeted marketing. We expect these brands will bring more customers through our doors, increasing traffic and delivering incremental sales through services and supplies attach.

Speaker 1: supported by powerful and targeted marketing. We expect these brands will bring more customers through our doors, increasing traffic, and delivering incremental sales through services and supplies attack.

Speaker 1: What I remain committed to being a leader and is still rapidly growing super premium and fresh frozen categories, this is about choice. Bringing as many pets as possible into our health and wellness ecosystem.

While we remain committed to being a leader and is still rapidly growing premium super premium and fresh frozen categories. This is about choice.

And as many pets as possible into our health and wellness ecosystem.

Speaker 1: Whether chosen because of price sensitivity, brand preference, a picky eater or a combination of these, we believe in the current environment. It's important that no pet is excluded. Simply put, we can't improve the health of a pet whose pet parent doesn't walk through our doors or shop with us. Digit.

Where they're chosen because of price sensitivity brand preference, a picky eater or a combination of these we believe in the current environment. It is important that no pet is excluded simply put we can't improve the health of a pet whose pet parent doesn't walk through our doors or shop with us digitally our team has acted fast.

Speaker 1: Our team has acted fast. These brands are already on shelves, having been set in the first few weeks of November . This is an addition to fancy feast where we began expanding our sortment in Q2.

These brands are already on shelves haven't been set in the first few weeks of November.

In addition to fancy feast, where we began expanding our assortment in Q2.

Speaker 1: I'm grateful to our vendor partners for their collaboration and I'm exceptionally proud of the speed and agility with which our merchandising, supply chain and pet care center teams were able to get these products in distribution centers and on shelf. This move has already proved a quiz.

I am grateful to our vendor partners for their collaboration and I'm exceptionally proud of the speed and agility with which our merchandising supply chain and pet care Center teams were able to get these products and distribution centers and on shelf.

This move has already proved acquisitive to our customer base in the first months since introduction a significant number of hands <unk> customers were new or lapsed food customers with petco. Moreover, they demonstrated significantly higher attach rates when compared to other cat food customers, including litter and supplies purchases that visits.

Speaker 1: In the first months in introduction, a significant number of fanatical customers were new or lapsed food customers with pet go. Moreover, they demonstrated significantly higher attach rates when compared to other cat food customers, including litter and supplies purchases that visits and vital care premieres find.

And vital care premier sign ups.

Speaker 1: I personally worked in multiple stores or last month helping our teams put these value products on shelves and meeting many customers who are now products like fancies, friskeys or pre-need one at pet go instead of a grocer or mass out.

I personally worked in multiple stores or last months, helping our teams put these value products on shelves and meeting many customers who are now purchasing products like fancy feast Friskies printer wanted petco instead of a grocer for mass outlets.

Speaker 1: Importantly, while the upfront costs and investment in labor and logistics to get these products on shelves has impacted near term profitability. We fully expect to realize profitability gains in 2024 as we build loyalty and basket with these incremental questions.

Importantly, while the upfront cost and investment in labor and logistics to get these products on shelves has impacted near term profitability, we fully expect to realize profitability gains in 2024, as you build loyalty and basket with these incremental customers.

Speaker 1: The second pillar is about honing our pricing. We have seen progress with targeted pricing actions to address competitive gaps in key traffic driving brands. In Q3, we adjusted pricing on several hundred SKUs with a tangible uplift in sales.

The second pillar is about honing our pricing we have seen progress with targeted pricing actions to address competitive gaps in key traffic driving brands in Q3, we adjusted pricing on several hundred skus with a tangible uplift in sales we will continue to use both pricing and promotional cadence surgically at key moments.

Speaker 1: We will continue to use both pricing and promotional cadence surgically at key moments, including through the holidays, with a focus on driving traffic, customers, units, and revenue growth.

Including through the holidays with a focus on driving traffic customers' units and revenue growth.

Speaker 1: In aggregate, these actions contributed to pet go returning to customer growth in Q3, with approximately 60,000 NADs in the quarter and year-over-year NESPAC growth. These changes will enable even greater top-of-final acquisition, loyalty, basket, and share of wallet. As we bring customers deeper into our ecosystem through memberships, services, data-driven personalization and the attentive expertise of our partners in the eye.

In aggregate these actions contributed to petco returning to customer growth in Q3 was approximately 60000 net adds in the quarter and year over year NES pack growth. These changes will enable even greater top of funnel acquisition loyalty basket and share of wallet as we bring customers deeper into our ecosystem through <unk>.

Memberships services data driven personalization and the intensive expertise of our partners in the aisle.

Speaker 1: Third, we're focusing on driving efficiency in our supply chain. While we expect the bulk of our supply chain savings to take effect in fiscal 24 and 25, some of the early actions we have taken are already showing favorable results, including your over your improvements in distribution costs per unit.

Third we're focused on driving efficiency in our supply chain, while we expect the bulk of our supply chain savings to take effect in fiscal 'twenty four and 'twenty five some of the early actions. We have taken are already showing favorable results, including year over year improvements in distribution costs per unit.

Speaker 1: And in labor, the fourth and final pillar of operational reset, we've completed the previously announced adjustment to our corporate and field leadership headcount by 25%. And we're working hard to ensure we leverage synergies between teams and optimize our labor model.

And in labor in the fourth and final pillar of operational reset we've completed the previously announced adjustment to our corporate and field leadership head count by 25% and are working hard to ensure we leverage synergies between teams and optimize our labor model.

Speaker 1: Inside the PCC's, we made target investments in our people and further enhanced process.

Inside the PCC as we made targeted investments in our people and further enhanced processes. These actions positively impacted store retention, improving over 800 basis points year over year, and allowing us to up level, our overall talent and deliver better engagement with our customers.

Speaker 1: These actions positively impacted store retention, improving over 800 basis points year-over-year, and allowing us to up-level our overall talent and deliver better engagement with our customers.

Speaker 1: As we reposition our business better served at parents, we remain focused on extending our core long-term strides.

As we reposition our business to better serve pet parents, we remain focused on executing our core long term strategy.

Speaker 1: expansion of services, merchandise differentiation, and seamless Omni Channel delivery.

Expansion of services merchandise differentiation and seamless omnichannel delivery.

Speaker 1: In services, we delivered double-digit growth. Our veterinary services teams are driving both revenue and customer.

In services, we delivered double digit growth our veterinary services teams are driving both revenue and customer growth. We now have a total of 282 full service veterinary hospitals and are averaging <unk> hundred 81, veterinary clinics, a week without a doubt our veterinary offerings strengthen our hands on pet capabilities in a way.

Speaker 1: We now have a total of 282 full service veterinary hospitals and are averaging 1481 veterinary clinics a week. Without a doubt, our veterinary offerings strengthen our hands on pet capabilities in a way none of our competitors can match.

None of our competitors can match stores with hospitals continue to drive mid single digit center store uplift and are outgrowing rest of chain.

Speaker 1: Stores of hospitals continue to drive mid-single digit center store uplift and are out growing rest of.

Speaker 1: in merchandise. In addition to strong continued demand and premium.

In merchandise in addition to strong continued demand and premium.

Speaker 1: Fresh frozen supplements, pest, farming feed, and RX all show it's sustained growth as they continue to resonate with pet parents who gravitate to our health and wellness office.

Fresh frozen supplements pest farm and feed and Rx all showed sustained growth as they continue to resonate with pet parents, who gravitate to a health and wellness offerings.

Speaker 1: In Army Channel, we saw revenue growth across our digital channels, including growth in BOPIS, while also leveraging reduced shipping costs in same-day delivery.

<unk> channel, we saw revenue growth across our digital channels, including growth in both base, while also leveraging reduced shipping costs and same day delivery.

Speaker 1: And our membership offerings, you can be both a value driver pet parents and an indispensable tool to drive loyalty and share of wallet.

And our membership offerings continue to be both a value driver at parents and an indispensable tool to drive loyalty and share of wallet.

Speaker 1: Medicare premier members now totaling 672,000 remain our most engaged and valuable

So I don't care Premier members now totaling 672000 <unk>.

Remain our most engaged and valuable customers.

Speaker 1: They continue to visit more and spend triple what non-members spend and are fully immersed in the full benefits or a unique ecosystem offers in a way no other pet care membership program does.

They continue to visit more and its been triple what non member spend and are fully immersed in the full benefits of our unique ecosystem offers in a way no other pet care membership program does.

Speaker 1: As I close, I'd like to reiterate my thanks to our pitful partners.

As I close I'd like to reiterate my thanks to our Petco partners over the last few weeks they've work extra hard to prepare our business for the holidays and with dedicated additional effort to delivering against the operational changes that I've outlined today.

Speaker 1: Over the last few weeks, they've worked extra hard to prepare our business for the holidays and have dedicated additional effort to delivering against the operational changes that I've outlined today.

Speaker 1: Above all, we continue to believe that our unique ecosystem means no one can take better care of pets than we can. And we are absolutely focused on executing our operational reset with urgency. Thank you for your time. And with that, let me pass it over.

Above all we continue to believe that our unique ecosystem means no one can take better care of pets, and we can and we are absolutely focused on executing our operational reset with urgency.

You for your time and with that let me pass it over to Brian.

Thanks, Ron.

Speaker 2: I too would like to extend my thanks to our pet go partners for their enduring commitment to doing the best for pets. Over the last few weeks, I've seen firsthand their dedication come to life by executing against our strategic objectives, and I'm humbled by their approach to doing everything they can to ensure every pet is fed, loved, and cared for.

I too would like to extend my thanks to our adult partners for their enduring commitment to doing the best for pets over the last few weeks I've seen firsthand their dedication come to life by executing against our strategic objectives and I'm humbled by their approach doing everything they can to ensure every pad is bad loved and cared for.

Speaker 2: Turning to numbers for the quarter net revenue was 1.49 billion, a slight decrease of 50 basis points year over year.

Turning to numbers for the quarter net revenue was $1 49 billion, a slight decrease of 50 basis points year over year.

Speaker 2: Comparable sales were flat, primarily a result of the ongoing pressure on discretionary spending and the increase in value seeking seen in the quarter.

Comparable sales were flat, primarily a result of the ongoing pressure on discretionary spending and the increase in value seeking seen in the quarter.

Speaker 2: Within the business, the hard work of our service has teamed delivered 14% growth driven by ongoing strength in our vet hospitals, mobile clinics, and grooming service.

Within the business the hard work of our services team delivered 14% growth driven by ongoing strength in our vet hospitals mobile clinics and grooming services.

Speaker 2: In merchandise, consumables were up 2% year-over-year, while our discretionary supplies and companion animal businesses experienced continued softness down 9% year-over-year.

And merchandise consumables were up 2% year over year, while our discretionary supplies and companion animal businesses experienced continued softness down 9% year over year.

Speaker 2: Moving down the P&L, gross profit was $550 million down from $597 million in the prior year. Gross margin for the quarter was $36 million.

Moving down the P&L gross profit was $550 million down from $597 million in the prior year.

Margin for the quarter was 36, 8%.

Speaker 2: To reiterate what Ron said in his remarks, the impact of gross profit and gross margin in the quarter was primarily due to the continued softness of discretionary spending, coupled with the investment we made in bringing additional brands into our consumables assortment.

To reiterate what Ron said in his remarks, the impact of gross profit and gross margin in the quarter was primarily due to the continued softness in discretionary spending coupled with the investment we made in bringing additional brands into our consumables assortment.

Speaker 2: These upfront costs were necessary to act with the agility needed to get these products on shelves in a timely manner.

These upfront costs were necessary to act with the agility needed to get these products on shelves in a timely manner.

Speaker 2: And while they cause a lag on profitability in the short term, we expect this expanded assortment to be margin dollar-acreative in 2024.

And while they cause a lag on profitability in the short term. We expect this expanded assortment to be margin dollar accretive in 2024.

Speaker 2: In Q3, SGA is a percentage of revenue increased from 36.6% to 37.5% year-over-year. As a result of investments made in store labor, as well as depreciation and stock-based comp.

In Q3, SG&A as a percentage of revenue increased from 36, 6% to 37, 5% year over year as a result of investments made in store labor as well as depreciation and stock based compensation.

Speaker 2: Due to three adjusted eva-dow was 72.2 million down 40% for the adjusted eva-dow margin rate, the 4.8% down 318 basis points year-to-year.

Q3, adjusted EBITDA was $72 2 million down 40% with an adjusted EBITDA margin rate of four 8% down 318 basis points year over year.

Speaker 2: Cuse-free adjusted EPS was negative 5 cents compared to 11 cents per share in the prior year.

Q3, adjusted EPS was negative <unk> <unk> compared to <unk> 11 per share in the prior year.

Speaker 2: As we look at the balance sheet, our liquidity remains strong, with 586 million inclusive of 140 million in cash and cash equivalents and 446 million of availability on our revolving credit.

As we look at the balance sheet, our liquidity remains strong with $586 million inclusive of $140 million in cash and cash equivalents and $446 million of availability on our revolving credit facility.

Speaker 2: Additionally, we continue to make progress on our plan of accelerated debt.

Additionally, we continue to make progress on our plan of accelerated debt paydown.

Speaker 2: This quarter we paid down 15 million in principle bringing our total year to date that paid out to 75

This quarter, we paid down $15 million of principal, bringing our total year to date debt pay down to 75 million.

Speaker 2: As a reminder, we also maintain callers on roughly two-thirds of our debt, which has protected and will continue to protect meaningful portions of our debt from potential interest rate rates.

As a reminder, we also maintain callers on roughly two thirds of our debt, which is protected and will continue to protect meaningful portions of our debt from potential interest rate risk.

Speaker 2: Our year-to-date cat-backs of 177 million was down 17% year-over-year as a result of our continued optimization of cash flow, balancing short-term cash flow management with long-term investments.

Our year to date Capex of $177 million was down 17% year over year as a result of our continued optimization of cash flow balancing short term cash flow management with long term investment.

Speaker 2: Before turning to Outlook and Guidance, it's important to note that we recorded a goodwill impairment of 1.2 billion in Q3 associated with Goodwill recorded in 2015 well before our IPO in 2021.

Before turning to outlook in guidance. It is important to note that we recorded a goodwill impairment of $1 2 billion in Q3 associated with goodwill recorded in 2015, well before our IPO in 2021.

Speaker 2: The charge is non-cash and made in accordance with the accounting rules governing the evaluation of the gridwell.

Charges noncash and made in accordance with the accounting rules governing the evaluation of goodwill.

Speaker 2: Looking ahead as Ron outlined, while we remain focused on the long-term drivers of growth and differentiation, the balance of this year and early 2024 will focus on making operational changes necessary to align our business to the current consumer dynamics.

Looking ahead as Ron outlined while we remain focused on the long term drivers of growth and differentiation. The balance of this year and early 2024 will focus on making operational changes necessary to align our business to the current consumer dynamics.

Speaker 2: In terms of guidance for the balance of 2023, given the results of our fiscal third quarter and the current consumer dynamics, we are updating our full year guidance to the following.

In terms of guidance for the balance of 2023, given the results of our fiscal third quarter and the current consumer dynamics, we are updating our full year guidance to the following.

Speaker 2: Revenue of 6.15 billion to 6.275 billion, which is on June .

Revenue of $6, one 5 billion to $6 $2 $75 billion, which is unchanged.

Speaker 2: Adjusted EBITDA of approximately 400 million, adjusted EPS for approximately eight cents, each reflective of the year-to-date results and expectations for the fourth quarter.

Adjusted EBITDA of approximately $400 million adjusted EPS of approximately eight each reflective of the year to date results and expectations for the fourth quarter.

Speaker 2: And 250 million to 225 million of capital expenditure which is unchanged.

And $215 million to $225 million of capital expenditures, which is unchanged.

Speaker 2: Assumptions in the guidance include interest expense of 145 million, 155 million, which is unchanged, and 268 million weighted average fully diluted shares down from 269 million. Also, as a reminder, fiscal 2023 is a 53-week year for an incremental week of operation.

Assumptions in the guidance include interest expense of $145 million $155 million, which is unchanged and 268 million weighted average fully diluted shares down from $269 million.

Also as a reminder, fiscal 2023 53 week year with an incremental week of operations.

Speaker 2: When thinking about our 2020's regidance and laying the foundations for next year, the actions we are taking now and will continue to take in the coming months, are focused on generating further operating leverage and earnings growth going forward.

When thinking about our 2023 guidance and laying the foundations for next year. The actions. We are taking now and will continue to take in the coming months are focused on generating further operating leverage and earnings growth going forward.

Speaker 2: Specifically, while we did see upfront costs associated with the addition of value brands, we fully expect to see a healthy return associated with those brands in 2000.

Specifically, while we did see upfront costs associated with the addition of value brands, we fully expect to see a healthy return associated with those brands in 2024.

Speaker 2: We will continue to seek out opportunities to enhance our supply chain and labor models to generate additional compounds.

We will continue to seek out opportunities to enhance our supply chain and labor models to generate additional compounds savings.

Speaker 2: We are on track to deliver against our projections of 40 million in cost benefits in the first year from the planned 150 million in run rate savings outlined in our Q2 call.

We are on track to deliver against our projections of $40 million in cost benefits in the first year and the planned $150 million in run rate savings outlined in our Q2 call.

Speaker 2: We will continue to be prudent and surgical with capital allocation. Specifically, while we remain focused on evolving our business head.

We will continue to be prudent and surgical with capital allocation, specifically, while we remain focused on evolving our business as needed. We have plan from reduced capital expenditure fiscal 2024, while optimizing our existing infrastructure.

Speaker 2: We have planned for reduced capital expenditure in fiscal 2024, while optimizing our existing infrastructure.

Speaker 2: To close, I want to reinforce Ron's remarks that were fully focused on navigating the current economic environment and controlling our controllables as a top priority for the entire pet go team so that we quickly return to staying growth and profitability. Thank you.

To close I want to reinforce Ron's remarks that were fully focused on navigating the current economic environment and controlling our controllable is it a top priority for the entire Pepco team. So that we can quickly return to sustained growth and profitability.

Thank you for your time and with that we'll be happy to take your questions.

Speaker 3: Yes, thank you. We will now begin the question and answer session. To ask a question, you may press star followed by the number one on your telephone keypad.

Yes. Thank you we will now begin the question and answer session to ask a question you May press star followed by the number one on your telephone keypad.

Speaker 3: If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your phone.

If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two please.

Speaker 3: Please them in yourself to one question and one follow up. If you have further questions, you may re-enter the question here.

Please limit yourself to one question and one follow up.

Further questions you may reenter the question queue.

Speaker 3: If you do not hear a tone after pressing star of the one, please hang up and dial back into the call. For this time, we'll pause momentarily. And we'll pause momentarily.

If you do not have a talent after pressing star then one please hang up and diabetic into the call.

We will pause momentarily to assemble the roster.

Speaker 3: And today's first question comes from Oliver Wintermante with a record ISI.

And today's first question comes from Oliver Winter mental with Evercore ISI.

Speaker 4: Yeah, thanks. I had a question regarding the merchandise strategy. It sounds to us that this is a big shift in focus during the IPO. You always mentioned, you know, the the premiumization and premium food. If this, do you consider this a long-term shift in merchandise strategy or is that just adjusting for the current environment?

Yes, Thanks, I had a question regarding the merchandize strategy.

It sounds to us that this is a big shift shift in focus.

Doing the IPO you always mentioned.

Amortization and premium foods.

Is this do you consider this as a long term shift and merchandize strategy was to just adjusting for the current environment.

Speaker 4: And then second, what are the impacts on revenues and especially on margins? I think Brian , you said you expect gross profit dollars creative in 2024, but if you could maybe talk a little about the margin impact, thank you.

And then second.

What are the impact on revenues and especially on margins I think Brian you said you expect gross profit dollars accretive in 2024, but if you could maybe talk a little about the.

A margin impact thank you.

Speaker 1: Thanks for the question, Ali. So you're right. We have talked a lot about premium and super premium. And if you look at the past decade plus, and if you look at the future decade plus...

Thanks for the question Ali.

You are right, we have talked a lot about premium and Super premium and if you look at the past.

A decade, plus and if you look at the future decade, plus the dominant macro trend is about premium position and Humanization, which is why we believe we have the best portfolio in the industry against those trends whether that be fresh frozen offerings, whether that be limited distribution offerings like origin. There <unk> of the wild we can.

Speaker 1: The dominant macro trend is about premiumization and humanization, which is why we believe we have the best portfolio in the industry against those trends, whether that be fresh frozen offerings, whether that be limited distribution offerings, like origin, economy, taste of the wild. We continue to drive against that. That has been the largest deliverer of revenue growth and

Can you to drive against that that has been the largest deliverer of revenue growth and profit growth in the category that said in this economic environment, we're supplementing that strategy with value offerings.

Speaker 1: profit growth in the category. That said, in this economic environment, we're supplementing that strategy with value offerings.

Speaker 1: And we're bringing in some of the largest brands in the entire pet food and pet treat industry. And the whole idea is to meet customer demand. I was in a store in Charleston, South Carolina.

And we're bringing in some of the largest brands in the entire pet food and pet treat industry and the whole idea is to meet customer demand.

In a store in Charleston, South Carolina, and I met a customer who is buying friskies and what I found out where she was buying wholehearted from us or our own brand, but she was going someplace else for Friskies. So we have customers that are looking for these products and we when we provide them.

Speaker 1: And I met a customer who was buying friskeys. And what I found out was she was buying wholehearted from us, our own brand.

Speaker 1: but she was going someplace else for frisky. So we have customers that are looking for these products and when we provide them, they are pleased that we're meeting that customer need. This is about incremental footsteps.

They are they're pleased that we're meeting that customer need this is about incremental footsteps into our stores we're seeing.

Speaker 1: into our stores. We're seeing a similar basket from these customers. We brought in an expanded assortment of fancy feast in Q3.

A similar basket from these customers we brought in an expanded assortment of fancy feast in Q3, and we're seeing a similar basket to our overall food customer that means they are buying more supplies. They are signing up for vital care Premier and Theyre also actually signing up for vet visits. So it's good for our ecosystem and from our mission standpoint.

Speaker 1: And we're seeing a similar basket to our overall food customer. That means they're buying more supplies, they're signing up for vital care premier, and they're also actually signing up for vet visits. So it's good for our ecosystem. And from our mission standpoint, we can't make a pet healthier. If that pet parent doesn't walk through our door, if that pet parent doesn't visit our digital asset.

We can't make a pet healthier if that pet parent doesn't walk through our door if that pet parent doesn't visit our digital digital assets, but to sum. It all up this is about supplementing our strategy and it will drive gross margin dollars and I'll, let Brian elaborate yes. Thanks, Oliver the margin rates on these products are lower than the average food <unk>.

Speaker 2: But to sum it all up, this is about supplementing our strategy and it will drive gross margin dollars and I'll let Brian elaborate. Yeah, thanks all over. The margin rates on these products are lower than the average food margin.

Speaker 2: of the rest of our chain. However, as Ron said, they will drive incremental dollars to the company. It's about getting more bats, it's about getting more customers into the ecosystem. It's about driving incremental profit dollars to the company across both food, supplies, and service.

<unk> of the rest of our chain. However, as Ron said, they will drive incremental dollars to the company. It's about getting more at bats is about getting more customers into the ecosystem, it's about driving incremental profit dollars to the company across both food supplies and services.

Speaker 3: And the next question comes from Peter Benedict with Bear.

Thank you.

The next question comes from Peter Benedict with Baird.

Speaker 5: Oh, hey guys, thanks. Thanks for your question. Um, first one just around the cat- next year. That's my first question.

Oh, Hey, guys. Thanks, Thanks for your question.

First one just around the Capex view on next year coming down a bit.

Can you give us a sense for maybe where maintenance capex in the business and then also what the what the plan is for the hospitals and the Rollouts there what kind of.

Assumptions are you embedding.

So that next year, that's my first question.

Speaker 2: Thanks for the question, Peter. We're being prudent with the level of investment that we're making just in light of the current environment.

Thanks for the question, Peter and we're being prudent with the level of investment that we're making just in light of the current environment. We continue to prioritize cash generation debt reduction and continued investment in long term strategic growth initiatives in terms of the specifics around whether it be maintenance capex or other strategic initiatives you can expect to hear more of those details at our <unk>.

Speaker 2: We continue to prioritize cash generation, debt reduction, and continued investment in long-term strategic growth initiatives in terms of the specifics around whether it be maintenance, catbacks, or...

Speaker 2: You can expect to hear more of those details that are year end results, but I'll turn it over to Ron to talk a little bit more about that.

Year end results, but I'll turn it over to Ron to talk a little bit more about that yeah on that it's a key differentiator for US we continue to see the mid single digit lift in the center store.

Speaker 1: Yeah, on that, it's a key differentiator for us, we continue to see the mid single digit left in the center store.

Speaker 1: the stores with that are outgrowing the stores without. We have 22 now. We'll be adding more hospitals in Q4 in terms of 2024 as we navigate the current environment. It's all about balance, so all about balance of driving throughput from existing, investing in more clinics because the clinic business is doing very well and then overall cash flow management. So we'll have more details on that at the Q4 earnings.

The stores with our <unk>.

Outgrowing the stores without we have 282 now we will be adding more hospitals in Q4 in terms of 2024 as we navigate the current environment.

It's all about balance saw that balance of driving throughput from existing investing in more clinics because the clinic business is doing very well.

And then overall cash flow management. So we will have more details on that at the Q4 earnings.

Speaker 5: Okay, that's fair enough. And then I guess it actually just be around, anyway, maybe size the upfront cost, you guys have occurred here to load the new value brands into the store at 3Q and 4Q. It's curious kind of how material that has been. And then the supply chain efficiency action.

Okay. That's fair enough and then I guess next would just be around.

Any way you could maybe size the upfront costs you guys have occurred here.

To load the new value brands in.

Into the store in <unk> and <unk> I'm, just curious kind of how material that has been and then the supply chain efficiency actions that you that you alluded to maybe maybe a little more color as to what exactly youre doing there.

Speaker 5: that you alluded to maybe a little more colors to what exactly you're doing there to take those distribution costs down and just kind of the timing of all that. Thank you so much.

Take those distribution costs down.

And just kind of the timing of all that thank you so much.

Speaker 2: Thanks Peter, let me break it down actually in three different components in terms of the overall profit change in the guidance.

Thanks, Peter let me break it down actually in three different components in terms of the overall profit change in the guidance. The largest driver of the change has been the shift of customers to more value seeking process products and the associated promotional and pricing environment related to those products that tap.

Speaker 2: The largest driver of the change has been the shift of customers to more value-seeking products and the associated promotional and pricing environment related to those products. That's happened a bit faster than we anticipated. And that represents a little over a third of sort of the impact.

And a bit faster than we anticipated and that represents a little over a third of sort of the impact.

Speaker 2: Second is the continued softness in discretionary spend. That's about a third of the impact. The balance of that are increased cost, which includes the increase investments associated with getting these products onto shelves. And there's three tiers of that. There's logistics, there's store labor.

<unk> is the continued softness in discretionary spend thats about a third of the impact the balance of that our increased costs, which includes the increased investments associated with getting these products onto shelves and those and there are three tiers of that there is logistics. There is store labor, which was the primary driver of the SG&A year over year in the.

Speaker 2: The primary driver of the NSTNA Europeaer and the third piece was advertising. So this is about making the

Third piece was advertising. So this is about making the right investments to get the products on shelves. It happened faster than we anticipated at a at a larger scale than we expected and then the advertising is awareness building campaign to make sure that we get the right customers through the doors.

Speaker 1: products on shelves, it happened faster than we anticipated at a larger scale than we expected. And then the advertising is an awareness building campaign to make sure that we get the right customers through the door. I would just build on Brian's comment. When we spoke in Q3, we did not have line of sight to getting all these brands.

Build on Brian's comment.

When we spoke in Q3, we did not we did not have line of sight to getting all of these brands.

Speaker 1: as at the accelerated timing that we were able to get them in the quantities that we got them, which obviously is a positive given the adjustment that we wanted to make. The broader common I'd make is we understand that EBITDA was below expectations. We recognize the importance of meeting our commitments while they're market dynamics. There are things that we can do better.

At the accelerated timing that we were able to get them in the quantities that we got them, which obviously is a positive given the adjustment that we wanted to make the broader comment I'd make is we understand that EBITDA was below expectations. We recognize the importance of meeting our commitments while the market dynamics. There are things we can do better.

Speaker 1: and we're attacking those and folks on driving and improve execution and that's the operational reset that we talk about today but we take these commitments very seriously.

And we're attacking those and focus on driving improved execution and that's the operational reset that we talk about today, but we take these commitments very seriously.

Yes.

Speaker 3: Thank you. And the next question comes from Simmy and Gotman with Morgan Stanley .

Thank you and the next question comes from Simeon Gutman with Morgan Stanley.

Speaker 6: Hey, good morning, or good afternoon, good morning everyone. My first question, it's on the top line. If we look at the deceleration we've seen this year and maybe even part of last year, can you separate what you're seeing in terms of reversion or how much of the slowdown is explained by discretionary reversion?

Hey, good morning, or good afternoon, good morning, everyone.

My first question is on the top line if we look at the deceleration we've seen this year and maybe even part of last year can you separate what youre seeing in terms of reversion or how much of the slowdown is explained by discretionary reversion.

Speaker 6: move to value for the category and then can you separate that out from the wallet share with your core cost.

Our move to value for the category and then can you separate that out from the wallet share with your core customer.

Speaker 2: Thanks, I mean, first the implied guidance for Q4 is low single digits, which believe we believe is appropriate given what we're currently seeing that does include the extra week.

Yes. Thanks, I mean first the implied guidance for Q4 is low single digits, which believe we believe is appropriate given what we're currently seeing that does include the extra week.

Speaker 2: In terms of some of the drivers, we are lapping pricing from the second half of last year. So the inflation benefit that we like others to in the first half of the year is beginning to abate in the second half. So that is a driver. Secondarily, if you look at the discretionary business, it has continued to stay at kind of a minus 9% clip what that we reported this quarter. And that's off of a compare that was a bit easier. So arguably that's a larger impact than last quarter of the year.

In terms of some of the drivers we are lapping pricing from the second half of last year. So the inflation benefit that we like others saw in the first half of the year is beginning to abate in the second half. So that is a driver secondarily. If you look at the discretionary business. It has continued to stay at kind of a nine.

Minus 9% clip what that we reported this quarter and thats off of a compare that was a bit easier. So arguably that's that's a larger impact than last quarter on the top line.

Speaker 6: And then one quick follow up. Can you share with us if you look back several years, maybe five years ago, before you moved upstream with product? What percentage of either the consumables business or the overall business did value brands represent?

And then one quick follow up can you share with US if you look back.

Several years, maybe five years ago before you moved upstream with product what percentage of either the consumables business or the overall business did value brands represent.

Speaker 1: Yeah, we'd have to get back to you on that. What I can tell you is...

Yes.

We'd have to get back to you on that what I can tell you is the value brands have grown significantly in the last two years, which is why we're making the move if you look at Super premium fresh frozen as I said they were the predominant drivers of growth in the category.

Speaker 1: Value brands have grown significantly in the last two years, which is why we're making the move. If you look at super premium, fresh frozen, as I said, they were the predominant drivers of growth in the category. Basically, since the second half of 22 into 23, we've seen strong double digit growth in the value brand. So they have scaled significantly from where they were back then. But we can follow up with you.

Basically since the second half of 'twenty two into 'twenty three.

We've seen strong double digit growth in the value brands. So they have scaled significantly from where they were back then but we can follow up with you on that Simeon.

Speaker 3: Thank you and once again as a reminder please press star then want if you'd like to ask a question.

Thank you and once again as a reminder, please press star then one if you'd like to ask a question.

And the next question comes from Steven Zaccone with Citigroup.

Speaker 2: Big and more than thanks very much for taking my question. Ron, I wanted to get your assessment of something's changed in the overall pet industry. You know, premarization has been a good category, but now you're doing this pretty significant shift to focus on value. Do you think this is something that's going to be a multi-year trend, or maybe the consumer is going to have more of a high-low approach to the category? Thank you.

Hey, good morning, Thanks, very much for taking my question.

Ron I wanted to get your assessment, if something's changed in the overall pet industry.

Premium inflation has been a great category, but now youre doing this pretty significant shift to focus on value. Do you think this is something that's going to be a multiyear trend where maybe the consumer is going to have more of a high level approach to the category. Thank you.

Speaker 1: Thanks for the question Steve. So first, if you look at the past,

Okay. Thanks for the question, Steve So first from a if you look at the past decade, plus and if you look at projections going forward.

Speaker 1: And if you look at projections going forward, there continues to be a projection.

There continues to be a projection.

Speaker 1: of premembrization and humanization. Underneath that is the dynamic of more millennials and Gen Zers adopting pets and they spend more and they are more inclined towards premembrization and humanization. And you've seen some of the announcements on fresh frozen that reflect that, right? So we continue to see that. And on the food side of the business, we see a bifurc-

Premium position Humanization underneath that is the dynamic of more millennials and Gen Z are adopting pets and.

They spend more and they are more inclined towards premium musician Humanization and <unk> seen some of the announcements on fresh frozen.

Reflect that right. So we continue to see that and.

On the food side of the business, we see a bifurcation, we continue to see strong growth on fresh frozen we continue to see solid growth on Super premium what has really accelerated as value between those two.

Speaker 1: We continue to see strong growth on fresh frozen. We continue to see solid growth on super premium.

Speaker 1: What is really accelerated is value. Between those two is where the pencious come in the category.

Is where the pinch has come in the category coupled with the discretionary spend thats impacted supplies.

Speaker 1: coupled with the discretionary spend that's impacted supplies.

Speaker 1: and a companion animal. But that bifurcation is real. We continue to believe and projections continue to show that fresh frozen super premium will grow, which is why.

Companion animal, but that bifurcation is real we continue to believe and projections continue to show that fresh frozen Super premium will grow which is why we have our portfolio why we brought in products like Ali.

Speaker 1: We have our portfolio, why we brought in products like Oli.

Speaker 1: But there's a short-term impact to the value seeking that we're responding to. And again, it is all about not only selling those products for customers that want those products.

But there is a short term impact of the value seeking that we're responding to and again it is all about.

Not only selling those products for customers that want those products, but it's also about driving them into our ecosystem getting the supplies getting the services getting the vital care premier sign ups, and which has a financial benefit in terms of gross profit dollars speed to growth for us, but it also has a benefit for the <unk>.

Speaker 1: But it's also about driving them into our ecosystem, getting the supplies, getting the services, getting the vital care premier signups, and which has a financial benefit in terms of gross profit dollars speed to growth for us, but it also has a benefit for the pets, because in an uninsisted environment, that pet's not gonna get healthier. In our environment, that pet is gonna be healthier. The pet's on a

Pets, because in an unassisted environment that pets, not going to get healthier in our environment that pad is going to be healthier.

Okay and then.

Speaker 7: Flawb I had is more for Brian . Could you talk about the cash flow outlook for this year and then into next year because you had the commentary about catback?

Follow up I had is more for Brian.

You talk about the cash flow outlook for this year and then into next year, because you had the commentary about capex and along those same lines. If you think about the building blocks to see EBITA margin rate improve over time could you walk through the biggest factors because now you are.

Speaker 7: And along those same lines, if you think about the building block to see EBITDA margin rate improve over time, could you walk through the biggest factors? Because now you're...

Speaker 7: You know, implementing this area, this assortment, that's a little bit more value, and it's a little bit lower margin. So do you really just need the discretionary side of the business to get better to see either down margin rate improves? Thanks very much.

Implementing this area. This assortment, that's a little bit more value and it's a little bit lower margin. So do you really just need the discretionary side of the business to get better to see EBITDA margin rate improve thanks very much.

Speaker 2: First on cash flow, see, let me comment on the quarter itself. Year to date, we are at roughly the same free cash flow as last year, even though earnings are down the way they are. And I think the team's done an exceptional job working, managing working capital. Fables has been a big dry report, so working capital improvement. And I think on inventory, although we're up slightly year over year, that team has just done a remarkable job. Instox, throughout the year over year, inventory turns throughout the year over year.

Firstly on cash flow. So you let me comment on the quarter itself year to date, we are at roughly the same free cash flow as last year, even though earnings are down where they are and I think the team has done an exceptional job managing working capital payables has been a big driver for us of working capital improvement and I think on inventory, although we're up slightly year over year that team.

It's just done a remarkable job in stocks are up year over year inventory turns are up year over year. So in terms of overall cash flow year to date.

Speaker 8: So in terms of overall cash flow a year to date, I'm pleased with where we are given the working capital management, not going to get into specific guidance on Q4 and in terms of 2024, we'll come back with that on the Q4 call.

Pleased with where we are given the working capital management not going to get into specific guidance on Q4 in terms of 2024 will come back with that on the Q4 call.

Speaker 8: As for the building blocks of EBITDA, first of all, it's all about customers and baskets. I mean, that is the primary driver. The extension of the assortment that we announced just now is about getting more footsteps through the door, building basket with those customers and getting them across the ecosystem.

As for the building blocks of EBITDA first of all it's all about customers and basket I mean that is the primary driver the expansion of the assortment.

We announced just now is about getting more footsteps through the door building basket with those customers and getting them across the ecosystem. The second component of that would be cost, we talked about $150 million cost take out the first leg of that in the first $40 million.

Speaker 8: The second component of that would be cost. We talked about $150 million cost takeout. The first leg of that, the first $40 million to talk about in year one, is primarily op-ex and associated partially with the actions that we announced last quarter around head count reduction.

<unk> is primarily opex and associated partially with the actions that we announced last quarter around head count reduction the next leg and we when we get into second half 'twenty four 'twenty five an exit run rate as more to do with cost of sales across supply chain and the merchandise overall bucket of cost of sales. So I put those two in that order.

Speaker 8: The next leg, and when we get into second half, 24 into 25, the next at run rate, has more to do with cost of sales across supply chain and the merchandise overall bucket across sales. So I put those two in that order. Customers in basket first cost.

Our customers in basket first cost sector.

Speaker 3: Thank you. And the next question comes from Michael Lasser with UBS.

Thank you and the next question comes from Michael Lasser with UBS.

Okay.

Speaker 2: Hi, it's Michael Aster from UBS. Thank you so much for taking my question. What is the competitive response you're expecting not only from the price investments that you've been making, but now the addition of the YB distributed brands? How do you prevent this from becoming a race to the bottom?

Hi, Michael Lasser from UBS. Thank you so much for taking my question.

Competitive response, you're connecting not only from the price investments that you've been making but now with the addition of the widely distributed brands. How do you prevent us from becoming a race to the bottom.

Okay.

Speaker 1: Thanks for the question, Michael. So first, a lot of these products, actually all these products are controlled by Matt and the vendors. These are large-scale vendors.

Thanks for the question Michael.

So first.

A lot of these products actually all these products are controlled by map and the vendors. These are large scale vendors.

Speaker 1: like the Nestle's of the world, the Mars of the world. These are large scale vendors.

Like the <unk> of the world the <unk> of the World. These are large scale vendors, who have a vested interest in making sure that their prices are managed managing the market via map map tool. So.

Speaker 1: who have invested interest in making sure that their prices are managed, managed in the market via map tools. So there are controls in place in terms of that.

There are controls in place in terms of that.

Speaker 1: Again, this is about driving more footsteps. I talked about the customer in South Carolina. There was another customer that I met in Northern California. And she was buying fancy fees. And I asked her if she bought that from us before. And the answer was no, she didn't know we had it. She was buying it previously at a mass. She was buying a litter.

Again this is about driving more footsteps I talked about the customer in South Carolina. There was another customer that I met in in Northern California, and she was buying fancy feast and I asked her if she brought that from us before and the answer was no. She didn't know we had it she was buying it previously at a masters buying litter.

Speaker 1: So there's a lot of customers for whom they are looking for these products from us, whether they are existing products.

From us so.

So there's a lot of customers for whom.

They are looking for these products from us.

Whether it's our existing products.

Speaker 1: or existing customers or new customers that we have a better proximity to. I've met another customer who was buying it from another pet specialty player. So there is demand out there. We're hearing it from customers directly. If you look at our assortment.

Existing customers or new customers that we have a better proximity to I've been another customer who was buying it from another pet specialty player. So there is demand out there we're hearing it from customers.

Directly.

If you look at our assortment.

Speaker 1: We can marry the premium brand.

We can marry the premium brands that we have either exclusively or in limited distribution with.

Speaker 1: that we have either exclusively or in limited distribution with these value-based brands. And again, in many instances, you have finicky cats.

These value based brands and again in many instances you have finicky cat.

Speaker 1: to only eat one brand or only one flavor and we're now expanding to those brands and it's a matter of meeting those needs. 50% of our services.

Who.

Only one brand or only one flavor and we're now expanding to those brands and it's a matter of meeting those needs, 50%, 50% of our services customers.

Speaker 1: don't buy food from us. And a lot of instances is because they have a cat who has a certain product or they're more value conscious. I met a customer who had eight dogs.

Don't buy food from us and a lot of instances, it's because they have a cat who has a certain product or they are more value conscious I met a customer who had eight dogs.

Speaker 1: and they needed to have a affordable product and they sort of pedigree, but they loved our groomers. Right, and so now we have at-baths with those customers and then those at-baths lead to us being able to attach. So that's more where we're focused on it. We will have aggressive marketing, but it's really about our differentiation is one stop shop that now includes these value brands.

And they needed to have affordable product and they serve pedigree, but they loved our groomers alright, and so now we have of at bats with those customers.

Then those at bats lead to us being able to attach so that's more of where we're focused on it.

We will have aggressive marketing.

But it's really about our differentiation as a one stop shop that now includes these value brands.

Speaker 9: That's super helpful, Ron. If I can ask one more quick follow up, is the decision at value brands due to your perception that you're using market share? And if that's the case, who are you using market share?

That's super helpful. Randy if I could ask one more quick follow up is.

Is the decision to add add value brand due to your perception that youre, losing market share and if thats. The case, who are you losing market share too.

Speaker 1: It's about customers, right? Business like ours is going to be successful when we listen to our customers.

It's about customers right.

A business like ours is going to be successful when we listen to our customers and whether that be customers migrating to <unk>.

Channel, where they can get these products.

Or even our own customers looking for these products.

Are you pinch or seeing these services customers arent buying food from us it's about.

Customers.

And bringing more customers through our doors, if you have double digit growth in the value products that means customers are looking for those products and we want to participate in that growth not only from a share standpoint, as you cite but also to two.

Builds our baskets.

And do the attach.

Thank you and the next question comes from Steven Forbes with Guggenheim Securities.

Good morning, Ron Brian.

Given the new category level disclosure on gross margin or cost of sales. We went through the pressure is right on the product side, but.

I think the the services margin expanded pretty significantly year over year. So I was wondering if you can maybe expand on the drivers of that improvement within that segment.

A couple of things Steve. Thanks for the question first of all the vet model. So if you think about the vet model we've talked about this historically that as you invest in that model.

First year of those hospitals being openness is traditionally a loss and as you start to mature those hospitals you start to get to breakeven and then positive in the end of the second year into the third year. We are at 282 hospitals and if I go back and think about how many of those have been added in the last two years, it's roughly a couple hundred.

<unk> hundred 75, so you've got a weighted average life of a hospital, that's maybe two two and a half years as those mature that's going to drive profit improvement secondly, the grooming business. The grooming business has been such a strong business for us and a huge driver of the 14% services growth year over year that team continues to do an exceptional drive job driving productivity it's something.

That our customers remain sticky about so that the grooming business strength, coupled with the debt maturity and just some good cost actions and basket building opportunities that the team is integrated.

Thank you for that and then maybe just a quick modeling question. The 50 <unk> week as we think about appropriately sort of modeling next year can you give a little more color on the sales EBIT and EPS impact.

Probably no better Steve that if you take the implied guide for Q4 and assume that there is an extra week in there and do that math, you're going to get close.

It's not entirely linear, but it's close enough.

Thank you and once again, thanks very much.

Thank you.

And so again as a reminder, please press star then one if you would like to ask a question.

And the next question comes from Andreas <unk> with Needham <unk> Company.

Great. Thanks, so much good morning, guys.

Two quick ones from us so inventories up one exiting the quarter the trend had been down in the first half can you just talk about the comfort level with the amount of carryover within that and how are you buying inventory for 24.

Considering also the addition of the value type of offering and then secondly, just looking out as you focus on operational savings.

Over 1400 that centers have only closed a handful in the last couple of years.

Real estate analysis.

Potential additional door closures.

Part of what you guys are looking at.

Let me start with inventory on and thanks for the question the team's done a really good job with inventory, yes inventory was up slightly year over year at the end of this quarter as we brought in the new value assortment, we did see that bump as we got products into our Dcs and from our D. C is out of our pet care centers that product came in faster and at larger scale.

We anticipated, but we're happy with where inventory ended for the quarter, especially since in stocks are up year over year inventory turns are up year over year that said, we continue to take the opportunity with this reset to further evaluate the composition of both our consumables and supplies inventory to focus on aligning that inventory, where we can drive the right velocity.

That will improve reducing skus in certain areas that are lower and velocity. So we're early in the reset I do expect inventory on a year over year basis at the end of the fourth quarter to be up but we are doing that tactically and eyes wide open as we continue to build out the value of assortment.

Hey, it's Ron.

Just to add to Brian's commentary when we brought in the value brands. Obviously, there was a significant lift in terms of the resets, but part of that activity was either taking out brands or reducing skus within brands that were slower moving so.

This was not a total add we took out a lot of Skus. We took out some brands that were slower moving as part of this process, which should make ourselves more productive and I'm sorry, the second part of your question.

Yes, the real estate portfolio.

Real estate, yes.

Yes, so we actually if I go back and look.

I would characterize it as more than a handful down.

Go back not Q4 last year, but Q4 coming out of the year before that I think we closed 30, some odd pet care centers in the fourth quarter alone we're at.

1400, plus but if I go back three years ago that number was $50 75, lower so it's more than a handful of stores. We always look at our real estate portfolio I would tell you I think that team has done a good job managing both cost and making sure that we are in the right locations with the right profit profile we have.

We have gone through the process of making sure. If we have an unprofitable store that we have the right plan for that and Thats, a big part of what you've seen in the reduction of pet care centers over the last couple of years as the unprofitable ones.

Thank you.

And the next question comes from Seth Basham with Wedbush Securities.

Thanks, a lot and good morning, my question's on gross margin.

Given the dynamics of adding these value oriented foods I assume the expectation is that year gross margin is going to continue to decline in 2024, even with the fact that some of the pressure recently is related to the transition first of all can you confirm that assumption.

I'm not going to get into 2024 guidance Seth. Thanks for the question. The value brands is as I mentioned have a on a product for product basis have a lower margin rate than the rest of our food prior enterprise food products. However, this is about driving customers through the door and driver.

Incremental profit dollars, it's about getting more of that it's about getting customers across the ecosystem. We're taking some pretty bold actions and we believe those actions will help drive that dollar profit growth over time, whether it's strengthening our competitive positioning with pricing as we talked about last quarter, whether it's the expanded assortment in the basket associated with that that we talked.

This quarter and then the third leg would be the cost actions that we're taking which are primarily on the cost of sales line and will kick in on that line, mostly in the second half 'twenty four into 2025.

And again I would just I would just reinforce what we're seeing and what we've seen historically is the basket for these value brands is the same roughly the same as the rest of our food portfolio, which means actually that the supplies and services are larger as a percentage of that customer's basket.

Yes.

That's helpful and I assume that price competition. These value brands is more intense in the premium brands.

When you look forward do you see increasing competition in this macroeconomic environment and who is driving that is it all our <unk> and <unk>.

We see this as incremental for us.

Yes. These are.

These are mass distributed brands, but we see it as incremental for us.

And I would break it down into two buckets, there are existing customers, who buy products from us whether that be litter, whether that be they get groomed with us whether that be dog food and go other places to get these value brands for other pets, because there are multiple pads multiple species types.

We even have companion animal customers that buy companion animal products from US and then go other places for these products. So the first bucket is our existing products, we can consolidate their shopping and we've seen multiple instances and being communicated multiple instances of that the second our customer new customers that we can bring through.

Our doors and if you look at Q3, when we expanded the distribution of fancy feast I would say a tangible portion tangible portion of those fancy feast customers were new to petco. So we see this as incremental for us.

Is it more of a price centric subcategory, yes. It is but it's incremental for US and then we're able to add the basket on top of it and the fact that they are signing up for vital care Premier tells me that they are actually planning on being a pretty dedicated customers because otherwise they wouldn't be signing up for a monthly fee on top of it.

So and again these are map map.

<unk> managed products by the vendors that doesn't mean, it's perfect pricing environment, but it is a controlled pricing environment.

Thank you and this concludes our question and answer session I would like to turn the call Ron Coughlin for any closing comments.

Well. Thank you everyone for your questions today, as we close I would like to reiterate that we are fully focused on controlling our controllable and delivering against the plan that we shared today. We continue to believe that no. One can take better care of pets and weekend and these operational changes are laser focused on bringing as many pets as possible.

Into our 360 degree pet care ecosystem, and returning our business to long term growth and profitability.

You for your time and have a happy holiday.

That concludes <unk> third quarter 2023 earnings conference call. Thank you everyone.

Thank you and as mentioned the conference has now concluded. Thank you for attending today's presentation and you may now disconnect your lines.

Goodbye.