Q4 2023 Petco Health and Wellness Co Inc Earnings Call
Cathy Yao: These risk uncertainties include those set out in our earnings materials and SEC filings. In addition, on today's call, we will refer to certain non-GAAP financial measures. Reconciliations of these measures can be found in our earnings release, presentation, and SEC filings.
Turning to use include those set out in our earnings materials and SEC filings.
In addition on today's call, we will refer to certain non-GAAP financial measures reconciliations of these measures can be found in our earnings release presentation and 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 we will allow for 30 minutes for Q&A with that let me turn it over.
Cathy Yao: And finally, during the Q&A portion of today's call, we ask that you please keep to one question and one follow-up. We will allow for 30 minutes of Q&A. With that, let me turn it over to Mike. Thank you, Cathy. Good morning, everyone, and thank you for joining us today.
Mike.
Mike: Thank you Kathy.
Mike: Everyone and thank you for joining us today.
Mike: I'm going to spend some time discussing the leadership changes that we've announced today, while Brian will take us through our financial results and initial expectations for the year ahead. As you have seen from today's news, I have been appointed by the board to serve as interim CEO while we conduct a comprehensive search for a new CEO. Ron Coughlin has stepped down as CEO and Chairman and will serve as an advisor to the board during the transition.
Mike: I'm going to spend some time discussing the leadership changes that we've announced today, while Brian will take us through our financial results and initial expectations for the year ahead.
Mike: As you will have seen from todays news I have been appointed by the board to serve as interim CEO will be conduct a comprehensive search for a new CEO.
Mike: Ron Coughlin has stepped down as CEO and chairman and will serve as an adviser to the board during the transition.
Mike: I am honored to be here with you today and serve such an incredible company with a mission that matters, to improve the lives of pets and pet parents. I've served as Petco's lead independent director for the last three years, and I'm proud to be stepping in to lead our 29,000 dedicated Petco partners who bring our mission to life every day. The board has spent some time with the executive team over the past several months to assess our operating and financial results. I'm confident that given our position as a leader in pet health and wellness, we will be able to improve performance in the years ahead. I want to share my initial perspective on the business and what we'll do to drive improvement.
Mike: I am honored to be here with you today and sort of such an incredible company with a mission that matters to improve the lives of pets and pet parents.
Speaker Change: I've served as Petco as lead independent director for the last three years and I am proud to be stepping in to lead our 29000 dedicated Petco partners, who bring our mission to life every day.
The board has spent some time with the executive team over the past several months to assess our operating and financial results Im confident that given our position as a leader in pet health and wellness, we will be able to improve performance in the years ahead.
Speaker Change: I want to share my initial perspective on the business and what we'll do to drive improvement.
Mike: Petco is an iconic brand in the pet care category that is benefiting from the long-term mega trends of humanization and premiumization, supporting consistent and resilient category growth in a market that is expected to approach $200 billion in sales by the end of this decade. Petco has a combination of differentiated products, a commitment to veterinary and other services in an omni-channel model that, taken together, is unmatched in our industry, and is the only full-service pet health and wellness ecosystem.
Speaker Change: <unk> is an iconic brand in the pet care category that is benefitting from the long term megatrends of Humanization and premium amortization supporting consistent and resilient category growth in a market that is expected to approach $200 billion in sales by the end of this decade.
Speaker Change: Tesco has a combination of differentiated products a commitment to veterinary and other services and our Omnichannel model that taken together is unmatched in our industry.
Speaker Change: With the only full service pet health and wellness ecosystem.
Mike: Petco sits at the forefront of the industry and is uniquely positioned to win for the long term. While we have made progress in a number of key areas over the last several years, I recognize we have not been executing the way we need to in a number of areas to deliver on our full potential. Most critically, we have not adapted quickly enough to recent changes in consumer preferences. First, we did not anticipate the magnitude of the shift to value in both our consumables and discretionary business, and second, we did not expect customers to pull back as quickly as they have and for this duration when spending on discretionary items. As a result, our in-store and omni-channel offering was not appropriately aligned with our customers' needs. This has led to two fundamental problems that we need to address with speed.
Speaker Change: <unk> sits at the forefront of the industry and is uniquely positioned to win for the long term.
Speaker Change: While we have made progress in a number of key areas over the last several years I recognize we have not been executing the way we need to in a number of areas to deliver on our full potential.
Speaker Change: Most critically we have not adapted quickly enough to recent changes in consumer preferences.
Speaker Change: First we did not anticipate the magnitude of the shift to value in both our consumables and discretionary business and second we did not expect customers to pull back as quickly as they have and for this duration when spending on discretionary items.
Speaker Change: As a result, our in store and Omnichannel offering was not appropriately align with our customers' needs.
Speaker Change: This has led to two fundamental problems that we need to address with speed one an erosion of market share as customers sought alternatives and to a significant decline in profitability.
Mike: One, an erosion of market share as customers sought out alternatives. And two, a significant decline in profitability. Our work here has already begun with the reintroduction of value brands in our consumable business and adjusting our discretionary offering to provide a more balanced price. However, simply reintroducing these products into our assortment is not enough.
Speaker Change: Our work here has already begun with the reintroduction of value brands in our consumable business and adjusting our discretionary offering to provide more balanced price points.
Speaker Change: But simply reintroducing these products into our assortment is not enough.
Mike: This more balanced assortment must be supportive of stronger retail and online customer experiences and more disciplined execution. This starts with effective marketing to both existing and potential customers. It builds with strong in-store and online merchandising. It is further supported by the education of Petco partners to ensure they can effectively sell our complete line. And finally, it needs to be supported by effective supply chain management that delivers inventory profitability with high-end stocks across our store base and efficient delivery to omni-channel customers. Going beyond these critical near-term actions, we have to engage pet parents more effectively.
Speaker Change: More balanced assortment must be supportive of stronger retail and online customer experiences and more disciplined execution.
Speaker Change: This starts with effective marketing to both existing and potential customers.
Speaker Change: It builds with strong in store and online merchandising. It is further supported by the education of Petco partners to ensure they can effectively sell our complete offering.
Speaker Change: And finally, it needs to be supported by effective supply chain management that delivers inventory profitability with high in stocks across our store base and efficient delivery to omnichannel customers.
Speaker Change: Going beyond these critical near term actions, we have to engage pet parents more effectively we are focused on executing against high quality top of funnel customer acquisition and long term retention, so more customers benefit from the full <unk> offering.
Mike: We are focused on executing high-quality, top-of-the-funnel customer acquisition and long-term retention so more customers benefit from the full Petco offering. In doing so, we'll double down on our efforts to fully leverage the competitive advantages and opportunities we have with our in-store and online customer experience and will act purposefully to connect with pet parents to drive share gains and grow margins through improved baskets and quality of sales in a meaningful and substantial way. Improving our customer experience, retail execution, and overall cost structure will help us drive profit stabilization in the near term and growth in the medium and long term. I plan to have us work against fewer and more clearly stated priorities and outcomes while keeping our teams energized, supported, and equipped to execute against achievable goals and make progress against promises we make to ourselves, our customers, and shareholders. Throughout my over 36-year career in retail, one truth has remained. This journey is never linear, but it must be built on a world-class retail experience. If our comprehensive ecosystem is the engine that drives Petco's success, then the trust and advocacy of our customers, vendors, and partners is the fuel that powers it.
Speaker Change: In doing so we'll double down on our efforts to maximize the opportunity to fully leverage the competitive advantages and opportunities we have with our in store and online customer experience.
Speaker Change: And we will act purposely to connect with pet parents to drive share gains and grow margins through improved baskets, and our quality of sales and a meaningful and substantial way.
Speaker Change: Improving our customer experience retail execution and overall cost structure will help us drive profit stabilization in the near term and growth in the medium and long term.
Speaker Change: I plan to have us work against fewer and more clearly stated priorities and outcomes, while keeping our teams energize supported and equipped to execute against achievable goals and making progress against promises we commit to for ourselves our customers and shareholders.
Speaker Change: Throughout my over 36 year career retail one truth has remained this journey is never linear but it must be built on a world class retail experience.
Speaker Change: If our comprehensive ecosystem is the engine that drives <unk> success in the trust and advocacy of our customers vendors and partners is the fuel that powers at.
Mike: This principle will sit at the heart of everything we do, beginning with our employee experience. This is an exceptional business that serves millions of pets every year. And I believe that by focusing on our mission while addressing the realities of the business's performance with clear, consistent, and focused prioritization, we can unlock Petco's full potential. Finally, on behalf of the board and all of us at Petco, I want to thank Ron for his leadership over the last six years. Ron has overseen the evolution of Petco as a full service, omni-channel retailer and champion for pet health and wellness. We are grateful for his leadership, dedication, and passion for pets, people, and our business. Thank you for your time.
Speaker Change: This principle will sit at the heart of everything we do beginning with our employee experience.
Speaker Change: This is an exceptional business that serves millions of pets every year and I believe that by focusing on our mission, while addressing the realities of the businesses performance with clear consistent and focused prioritization, we can unlock <unk> full potential.
Speaker Change: Finally on behalf of the board and all of US at <unk> I want to thank Ron for his leadership over the last six years, one is overseeing the evolution of petco as a full service omnichannel retailer and champion for Pet health and wellness. We are grateful for his leadership dedication and passion for pets.
Speaker Change: And our business.
Brian: I'll now pass it over to Brian to cover our financial... Thanks, Mike. I'd like to start by thanking our Petco partners for their relentless efforts in 2023. While we experienced a challenging year, they continue to do everything they can to deliver the very best for pets and pet parents day in and day out. Turning to numbers, for the quarter, net revenue was $1.7 billion, an increase of 6% year-over-year, which includes an extra week in the fourth quarter. For the full year, net revenue was $6.3 billion, up 4% year-over-year, inclusive of the extra week, which contributed approximately $120 million in revenue in Q4 and for the full year. In Q4, comparable sales on a like-for-like fiscal basis were down 1%, driven primarily by the absence of discretionary recovery and lapping a more inflationary environment.
Speaker Change: Thank you for your time I'll now pass it over to Brian to cover our financial performance.
Brian: Thanks, Mike I'd.
Brian: I'd like to start by thanking our petco partners for their relentless efforts in 2023, while we experienced a challenging year. They continue to do everything they can to deliver the very best for pets and pet parents day in and day out.
Brian: Turning to numbers for the quarter net revenue was $1 7 billion, an increase of 6% year over year, which includes an extra week in the fourth quarter.
Brian: For the full year net revenue was $6 3 billion up 4% year over year inclusive of the extra week, which contributed approximately $120 million in revenue in Q4 and for the full year.
Brian: In Q4 comparable sales on a like for like fiscal basis were down 1% driven primarily by the absence of discretionary recovery and lapping a more inflationary environment.
Brian: While we saw early gains in revenue from the aggregate impact of our assortment actions, they were relatively small in magnitude for the quarter. For the full year, comp sales were up 2%. Unless otherwise specified, the results I'll discuss are on an as-reported basis, including the extra week in Q4. In the fourth quarter, our services team delivered 17% revenue growth driven by ongoing strength in our veterinary hospitals, mobile clinics, and grooming services. In merchandise, consumables were up 9% year over year, reflecting the impact of lapping prior year inflation coupled with the pricing actions we took in the third quarter. Our discretionary supplies and companion animal businesses experienced continued softness, down 1% year over year. Moving down the P&L, Q4 gross profit was $606 million, down from $627 million in the prior year.
Brian: While we saw early gains in revenue from the aggregate impact of our assortment actions they were relatively small in magnitude for the quarter.
Brian: For the full year comp sales were up 2%.
Brian: Unless otherwise specified the results I'll discuss are on an as reported basis, including the extra week in Q4.
Brian: In the fourth quarter, our services team delivered 17% revenue growth driven by ongoing strength in our vet hospitals mobile clinics and grooming services.
Brian: And merchandize consumables was up 9% year over year, reflecting the impact of lapping prior year inflation, coupled with the pricing actions, we took in the third quarter.
Brian: Discretionary supplies and companion animal businesses experienced continued softness down 1% year over year.
Brian: Moving down the P&L Q4, gross profit was $606 million down from $627 million in the prior year gross margin for the quarter was 36, 2% a decline of 350 basis points driven by our investment in bringing value brands into our consumables assortment and ongoing discretionary headwinds.
Brian: Gross margin for the quarter was 36.2%, a decline of 350 basis points, driven by our investment in bringing value brands into our consumables assortment and ongoing discretionary headlines. In Q4, we also took a $21 million inventory write-down charge as a direct one-time response to our assortment actions that were taken in connection with our operational reset, with approximately 60% of the charge related to lower-velocity supplies and 40% related to consumable skews that will no longer be part of the assortment. This charge was a necessary step to optimize our SKU footprint, and our reset is now completed, and we believe we are in a good place with inventory. X inventory reset, gross margins would have been 37.5. In terms of the new brands, although it is still early days, we are pleased to say that we are seeing positive momentum in both transactions and basket, leading to a small but positive net impact on revenue from our assortment and price. This has translated to positive customer net ads in the fourth quarter, suggesting early momentum from our reset. In Q4, SG&A's percentage of revenue increased from 34.8% to 36.2% year-over-year as a result of ongoing investments made in store labor as well as increased depreciation. Q4 adjusted EBITDA was $105.3 million, down 33%, with an adjusted EBITDA margin rate of 6.3%, down 370 basis points year-over-year. Q4 adjusted EPS was $0.02 compared to $0.20 per share in the prior year.
Brian: In Q4, we also took a $21 million inventory write down charge is a direct onetime response to our assortment actions that were taken in connection with our operational reset with approximately 60% of the charge related to lower velocity supply skus and 40% related to consumable skus that will no longer be part of the assortment.
Brian: This charge was a necessary step to optimize our SKU footprint with our reset and our reset has now completed and we believe we are in a good place with inventory.
Brian: <unk> inventory reset gross margins would have been 37, 5%.
Brian: In terms of the new brands. Although it is still early days. We are pleased to say that we are seeing positive momentum in both transactions and basket, leading to a small but positive net impact on revenue from our assortment and pricing changes.
Brian: This has translated to positive customer net adds in the fourth quarter, suggesting early momentum from a reset.
Brian: In Q4, SG&A as a percentage of revenue increased from 34, 8% to 36, 2% year over year as a result of ongoing investments made in store labor as well as increased depreciation.
Brian: Q4, adjusted EBITDA was $105 3 million down 33% with an adjusted EBITDA margin rate of six 3% down 370 basis points year over year.
Brian: Q4, adjusted EPS was <unk> <unk> compared to <unk> 20 per share in the prior year.
Brian: Turning to the balance sheet, our liquidity remains strong, with $572 million, inclusive of $125 million in cash and cash equivalents, and $447 million of availability on our revolving credit facility. As a reminder, we also maintain callers on roughly two-thirds of our debt, which has helped mitigate the impact of rising rates this year. Our Q4 CapEx of $49 million is down 26% year over year. I'll now turn to our 2024 outlook. Given the change in leadership, we are not providing full-year guidance at this time.
Brian: Turning to the balance sheet, our liquidity remains strong with $572 million inclusive of $125 million in cash and cash equivalents and $447 million of availability on our revolving credit facility.
Brian: As a reminder, we also maintain callers on roughly two thirds of our debt, which have helped mitigate the impact of rising rates. This year.
Brian: Our Q4 Capex of $49 million is down 26% year over year.
Speaker Change: I'll now turn to our 2020 for outlook.
Speaker Change: Given the change in leadership, we are not providing full year guidance at this time instead, we are providing revenue adjusted EBITDA and adjusted EPS guidance for fiscal Q1 only.
Brian: Instead, we are providing revenue, adjusted EBITDA, and adjusted EPS guidance for fiscal Q1 only. For the first quarter, should current demand conditions persist, we would expect revenue of approximately $1.5 billion, adjusted EBITDA of approximately $70 million, and adjusted EPS of approximately negative $0.06. For 2024, which, as a reminder, will be a 52-week year, the environment remains uncertain.
Speaker Change: For the first quarter should current demand conditions persist, we would expect revenue of approximately $1 5 billion adjusted EBITDA of approximately $70 million and adjusted EPS of approximately negative six.
Speaker Change: For 2024, which as a reminder, we'll be a 52 week year the environment remains uncertain and as a result, we are taking a prudent approach to our plans for the year.
Brian: And as a result, we are taking a prudent approach to our plans for the year. From a full-year perspective, we expect net interest expense of approximately $145 million, inclusive of the estimated impacts of our hedges against the forward rate curve, and $272 million weighted average fully diluted shares. Approximately $140 million in capital expenditures, including the build-out of approximately 5 to 10 veterinary clinics. In the meantime, our mobile clinics business continues to perform ahead of our expectations, and we're confident that the demand there will help support that economy. To provide some additional color regarding assumptions for the full year, we are currently not expecting a substantive change to the underlying demand environment, including discretion. With respect to profitability, there are a number of actions that are being contemplated as part of the leadership transition.
Speaker Change: From a full year perspective, we expect net interest expense of approximately $145 million inclusive of the estimated impacts of our hedges against the forward rate curve and 272 million weighted average fully diluted shares.
Speaker Change: Approximately $140 million of capital expenditures, including the build out of approximately $5 to 10 vet locations.
Speaker Change: In the meantime, our mobile clinics business continues to perform ahead of our expectations and we're confident that the demand there will help support that economics.
Speaker Change: To provide some additional color regarding assumptions for the full year. We are currently not expecting a substantive change to the underlying demand environment, including discretionary.
Speaker Change: With respect to profitability there are a number of actions that are being contemplated as part of the leadership transition we will communicate as those plans are finalized.
Brian: We will communicate as those plans are finalized. However, we do expect stabilization of profitability as the year progresses. Although we are seeing early traction from implementing our assortment and pricing actions, we believe the scaled revenue and profit benefits will take time to phase in, increasing throughout the year. We remain on track to achieve $40 million in cost benefits in year one from the cost opportunities we identified as part of the planned $150 million in run rate savings by year end 2025. That said, the cost benefits will be partially offset by additional investments in store labor to ensure that we deliver a differentiated, hands-on customer experience in our stores, as well as mitigation against gross margin.
Speaker Change: We do expect stabilization of profitability as the year progresses.
Speaker Change: Although we are seeing early traction from implementing our assortment and pricing actions. We believe the scaled revenue and profit benefits will take time to phase in increasing throughout the year.
We remain on track to achieve $40 million in cost benefits in year, one from the cost opportunities. We identified as part of the planned $150 million in run rate savings by year end 2025.
Speaker Change: That said the cost benefits will be partially offset by additional investments in store labor to ensure that we deliver a differentiated hands on customer experience in our stores as well as mitigation against gross margin.
Operator: On capital allocation, we remain focused on our balance sheet as we navigate this environment, leading to a deceleration in our pace of debt build-outs and a balanced approach between investments and cash flow. To close, our focal points this year are disciplined execution, operating in a more efficient manner with a focus on expenses. Stabilizing Margins and Cash. Thank you for your time, and with that, we'll be happy to take your questions. We will now begin the question and answer session. To ask a question, you may press star and 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: On capital allocation, we remain focused on our balance sheet as we navigate this environment, leading to a deceleration in our pace of that build outs and a balanced approach between investments and cash flow.
Speaker Change: To close our focal points this year, our disciplined execution operating in a more efficient manner with a focus on expenses stabilizing margins and cash thank.
Speaker Change: Thank you for your time and with that we'll be happy to take your questions.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question you May press star and one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
Steven Paul Forbes: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. In the interest of time, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from Steven Forbes with Guggenheim. Please go ahead. Good morning.
Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: In the interest of time, please limit yourself to one question and one follow up.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Steven Forbes with Guggenheim. Please go ahead.
Steven Paul Forbes: Good morning.
Brian: Mike, Brian, I wanted to focus on capital expenditures, the guide for the full year, maybe a two-part question. Of the $140 million, can you break it down between maintenance and strategic capital expenditures? You mentioned 5-10 bed hospitals, but just how are you thinking about the broader sort of strategic initiatives here? And then, although you're not providing full year guidance, was the $140 a result of sort of planning the business to a neutral free cash flow state, or any sort of comments on where you sort of are bridging free cash flow for the year? Thanks for the question, Steve.
Steven Paul Forbes: Mike Brian I wanted to focus on capital expenditures the guidance for the full year, maybe a two part question.
Steven Paul Forbes: Of the 140 million can you break it down between maintenance and strategic Capex, you mentioned five to 10 bed hospitals, but just how youre thinking about the broader sort of strategic initiatives here.
Steven Paul Forbes: And then although you are not providing full year guidance. It was the $1 40, a result of sort of planning the business to a neutral free cash flow state or any sort of comments on <unk>.
Steven Paul Forbes: Where are you sort of are bridging free cash flow for the year.
Speaker Change: Thanks for the question, Steve Let me start with the announcement today, we are taking a disciplined approach to capital allocation. Your question specifically on how the 140 breaks down that is the full year guide that approximately $1 40, I will just tell you that you get kind of triple digits ish and north of that when you. When you talk about maintenance and thats inclusive of it infrastructure some of that.
Brian: Let me start with the announcement today. We're taking a disciplined approach to capital allocation. Your question specifically on how the 140 breaks down, that is the full-year guide, that is approximately 140.
Brian: I'll just tell you that you get kind of triple digits and north of that when you talk about maintenance, and that's inclusive of IT infrastructure, some of the maintenance that you have in the storefront, whether that be HVACs, replacement of aquarium tanks, etc. Beyond that, 5 to 10 VET builds, you know what the math is; it's 600K per VET, another 600, 700 for the center store build-out. There are some other projects that we have. We've been very mindful about balancing the investments this year against what we're trying to do with cash flow. I'm not going to get to a specific cash flow guide for you, but what I will tell you is that it's a function of three NOPs, earnings, working capital, and CapEx.
Speaker Change: The maintenance that you have in the storefront whether that be HVAC replacement of aquarium tanks et cetera beyond that 5% to 10 that builds you know what.
Speaker Change: That math is at 600 K provide another 600 700 for the center store build out there are some other projects that we have we've been very mindful about balancing the investments this year against what we're trying to do on cash flow I'm not going to get too specific cash flow guide for you, but what I will tell you is that as a function of three knobs, earning.
Speaker Change: <unk> working capital and Capex, we've talked about Capex. The most powerful of those three as earnings Steve and our focus is on bending the profitability curve of this company and improving profitability.
Brian: We've talked about CapEx. The most powerful of those three is earnings, Steve, and our focus is on bending the profitability curve of this company and improving profitability. And then, just a quick follow-up.
Speaker Change: And then and then just a quick follow up I don't know if we could maybe focus on the fourth quarter supplies trends or or sort of what's implied by the first quarter sales guidance for supplies, but.
Brian: I don't know if we can maybe focus on the fourth quarter supplies trends or sort of what's implied by the first quarter sales guidance for supplies. But any way to help better understand whether we're seeing any path to stability or any stabilization in supply trends or how that business today compares to, I don't know if you want to baseline it back to 2019, just is there any path to sort of stability in the underlying supply trends now that you've reintroduced value brands and reengineered the assortment? Yeah, let me kind of help you with the revenue, Steve. So we reported down by one percent. That's on it. That's what the extra week is for.
Speaker Change: Any way to help better understand like.
Speaker Change: Whether we're seeing any path to stability or.
Speaker Change: Any stabilization in supplies trends or how.
Speaker Change: How that how that business today compares to I don't know if you want a baseline it back to 2019 just.
Speaker Change: Is there any path to sort of stability in the underlying supplies trends now that you've you've re induced range reduce value brand brands and reengineer the assortment.
Speaker Change: Yes, let me, let me kind of help you with the revenue Steve So we reported down 1% that's on it that's what the extra week in there, we didnt break that $120 million extra revenue by sub category, but if you do the math you get to about the same decline rate as we've had the last couple of quarters and supplies and CA combined so from a growth rate standpoint, there hasnt been.
Brian: We didn't break that 120 million extra revenue by subcategory, but if you do the math, you get to about the same decline rate as we've had the last couple of quarters in supplies and CA combined. So from a growth rate standpoint, there hasn't been any stabilization.
Mark Jordan: We've taken significant action on the cost side, on the assortment side in terms of pricing. So we're confident we have the right actions in place. We felt it was most prudent to plan our year as if there were no meaningful change in the demand environment at the holistic level, but specifically to that category. The next question comes from Kate McShane with Goldman Sachs. Please go ahead. Good morning, this is Mark Jordan on behalf of Kate McShane.
Speaker Change: Stabilization, we've taken significant action on the cost side on the assortment side in terms of pricing. So we're confident we have the right actions in place. We felt it was most prudent to plan. Our year is if there is no meaningful change in the demand environment at the holistic level, but specifically to that category.
Speaker Change: The next question comes from Kate Mcshane with Goldman Sachs. Please go ahead.
Speaker Change: Good morning, This is mark Jordan on for Kate Mcshane.
Mike: I'm thinking about the change in leadership that was announced today. Can you help us better understand what the board might be looking for in new leadership? Hey Mark, Mike here.
Mark Jordan: Thinking about the change in leadership that was announced today can you help us better understand what the board might be looking for in new leadership.
Mark Jordan: Hey, Mark Mike here. Thanks for the question appreciate it.
Mike: Thanks for the question. I appreciate it. You know, right now, we are really focused on improving our urgency and driving operational performance and profitability and really operating at a world-class retail level. So from a board standpoint, we're doing a comprehensive search, and we're looking for skills in that realm to help drive our business forward. Let me just add, you know, Mike probably won't say this, but he's coming in with 36 years of retail experience and a reputation for operational excellence. So this is somebody who can come in and actually make meaningful changes. Perfect.
Brian LaRose: Right now, we're really focused on improving our urgency on driving operational performance and profitability and really operating at a world class retail level. So from a board standpoint, we're doing a comprehensive search and we're looking for skills in that realm.
Brian LaRose: To help drive our business forward.
Speaker Change: Let me just add.
Speaker Change: Mike probably won't say this but he is coming in with 36 years of retail experience with a reputation for operational excellence. So this is somebody who can come in and actually make meaningful change.
Mike: And just one follow-up question, if I could, you know, does this change anything with regard to the near-term strategy that was communicated, maybe going more down market with the value brands, still committed to that? Yeah, Mark. We're an iconic brand and an advantaged ecosystem. And if you look at how we think about our customer offerings and the reintroduction of value brands, it's just one part of our story of making sure we have the assortment that makes sense for our customers. We have work to do, though, to make sure our customers and our partners truly understand what we offer and make sure that they can navigate that entire assortment, but it fits well within our current strategy. Yeah,
Speaker Change: Perfect and just one follow up if I could.
Does this change anything with regard to the near term strategy those communicated maybe going more down market with the value brands still committed to that.
Yes, Mark we have an iconic brand an advantage ecosystem and if you look at how.
Speaker Change: How do we think about our customer offerings and the reintroduction of value brands is just one part of our story of making sure. We have the assortment that makes sense for our customers. We have work to do though to make sure our customers and our partners truly understand what we offer and make sure that they can navigate that entire assortment, but it fits well within our current strategy and I would just add to.
Peter Sloan Benedict: And I would just add to you, you know, whether it pertains to the reset or just adding more broadly to our portfolio, anytime we bring new offerings into our portfolio, job one is to make sure that those offerings are what the customer wants and that we're selling what they want, where they want it, how they want it, at the right price over time. We need to make sure we continue to cultivate that assortment so that everything we bring in contributes profitably to the enterprise. The next question comes from Peter Benedict with Baird. Please go ahead. Hey, good morning.
Speaker Change: Whether it pertains to the reset or just adding more broadly to our portfolio anytime we bring new offerings into our portfolio job. One is to make sure that those offerings or what the customer wants and that we are selling what they want where they want it how they want it at the right price over time, we need to make sure. We continue to cultivate that assortment so that everything we bring in.
Speaker Change: As if contribute profitably to the enterprise.
Speaker Change: The next question comes from Peter Benedict with Baird. Please go ahead.
Peter Sloan Benedict: Hey, good morning, good morning, guys.
Peter Sloan Benedict: Good morning, guys. My first question is just around some of the near-term opportunities to impact the business. Mike, I think you mentioned supply chain management. I'm just curious, any more detail there on what you guys can do on that front and related to that kind of on the customer experience side? Is that a suggestion that you're going to be putting more labor back into the stores? Or I'm just kind of curious at the store level. What do you envision on that front? Thanks, Peter.
Peter Sloan Benedict: First question is just around some of the near term opportunities.
Peter Sloan Benedict: <unk> to impact the business.
Peter Sloan Benedict: Mike I think you mentioned supply chain management and I'm just curious.
Peter Sloan Benedict: Any more detail there what you guys can do on that front and related to that kind of on the customer experience side is that is that a suggestion that you are going to be putting more labor back into the stores or just kind of curious at the store level, what you envision.
Peter Sloan Benedict: Right.
Mike: You know, it's pretty early to give you some specifics, but I'm going to start with the customer experience, and then I'll get to your supply chain question. You know, when you look at the broad offering we have of products and services, we definitely have work to do to improve our in-store and online shopping experience so our customers can navigate our breadth of offerings. We have a very unique proposition that needs to be clear for people when they shop us in-store and online, and that work can commence immediately, and it has. And as we think about being an omnichannel retailer, you know, we have this unique position of having our 1,500 stores as pickup locations, but there's a group of consumers who want merchandise shipped to them, and we have work to do in our supply chain operations to make sure that we can find the I don't know if you could add something to that.
Speaker Change: Thanks, Peter it's pretty early to give you some specifics, but I'm going to start with the customer experience and then.
Speaker Change: I'll get to your supply chain question.
When you look at the broad offering we have our products and services, we definitely have work to do to improve our in store and online shopping experience. So our customers can navigate our breath of offerings. We have a very unique proposition that needs to be clear for people when they shop in store and online and that that work and commence immediately and it has and as we think about being an omnichannel.
Speaker Change: A retailer we have this unique position of having our 15 other stores as pickup locations, but there is a group of consumers who want merchandize shipped to them.
Speaker Change: We have work to do in our supply chain operations to make sure that we can find the most effective way of getting products to people and the team is making progress there I don't know if you could ask.
Speaker Change: I would just start Peter by saying our.
Brian: Yeah, I would just start, Peter, by saying, you know, our profitability is unacceptable. We recognize that we need to look at every vector across the spectrum, so while you mentioned supply chain, I'll tell you it starts at the top of the P&L with sales, making sure that we have the right sales construct and that we're getting – meeting customers' needs across our entire assortment. Within gross margin, obviously, sales flow through gross margin, but there are multiple components to that.
Speaker Change: Our profitability is unacceptable we.
Speaker Change: Recognize that we need to look at every vector across the spectrum. So while you mentioned supply chain I'll tell you. It starts at the top of the P&L sales, making sure that we have the right sales construct and that we're getting we're meeting customers needs across our entire assortment within gross margin. Obviously sales flows through gross margin, but there are multiple components to that there's a <unk>.
Brian: There are broader merchandising cost and supply chain opportunities, and then, of course, within SG&A, we will look at everything. You know, while SG&A this quarter was up, part of that was investment in store labor. We do expect some additional investment in store labor in the first quarter with other offsets within SG&A, but we have opportunities across SG&A and gross margin.
Speaker Change: <unk> merchandising cost and supply chain opportunities and then of course within SG&A, We will look at everything while we've done a.
Speaker Change: While while SG&A. This quarter was up part of that was investment in store labor. We do expect some additional investment in store labor in the first quarter with other offsets within SG&A, but we have opportunities across SG&A and gross margin.
Peter Sloan Benedict: That's helpful. I guess my follow-up would be maybe I'll try Steve's question a little bit. Just is there any opportunity within working capital as you think about 24? I think you've spoken about there being some, but is working capital the type of thing that could be, maybe, neutral to cash flow in 24? Is that a reasonable starting place? Just curious what you're working on from a working capital standpoint. Thank you. That's a good question, Peter.
Speaker Change: Got it that's helpful and I guess my follow up would be.
Speaker Change: Steve's question a little bit.
Speaker Change: Just is there any opportunity within working capital as you think about 2004, I think you've spoken to there being some but is working capital that type of thing that could be maybe neutral cash flow in 'twenty four is that a reasonable starting place just curious what youre, what youre working on from a working capital standpoint. Thank you.
Speaker Change: It's a good question Peter.
Brian: Of those three levers, I will tell you again, earnings is the most powerful lever we have for free cash flow. We have taken a very strategic approach to capital this year and reduced that number down to $140 million. We did a good job with working capital this year. If you look at free cash, if you look at the cash flow statement, what we did with inventory and payables, we made meaningful progress this year. So I don't want to overcommit on working capital. I will tell you there are opportunities, probably not to the size and scale that we saw in 2023.
Speaker Change: Of those three levers I will tell you again earnings is the most powerful lever we have for free cash flow. We have taken a very strategic approach to capital this year and reduce that number down to $140 million. We did a good job in working capital. This year. If you look at the free cash if you look at the cash flow statement, but we did on inventory and payables, we made meaningful progress this year. So.
Speaker Change: Want to Overcommit on working capital I would tell you there are opportunities probably not to the size and scale that we saw in 2023. The biggest lever we have is earnings.
Brian: The biggest lever we have is earnings. The next question comes from Oliver Wintermantel with Evercore ISI. Please go ahead.
Speaker Change: The next question comes from Oliver Winter Nieto with Evercore ISI. Please go ahead.
Speaker Change: Yes. Thanks.
Oliver Wintermantel: Yeah, thanks. I had a follow-up question on gross margins being down for the last several quarters. Brian, you mentioned trying to be more stable on profitability. Can you maybe lay out how you want to stabilize gross margin in this kind of environment with consumables still very strong and value offerings? Thank you.
Speaker Change: I just had a follow up question on gross margins being down for the last.
Speaker Change: Several quarters.
Speaker Change: Brian you mentioned.
Speaker Change: <unk>.
Speaker Change: Going to be more stable on profitability.
Speaker Change: Can you maybe lay out how you want to stabilize gross margin in this kind of environment with consumables still very strong and to value offerings. Thank you.
Brian: Yeah, thanks for the question, Oliver. Let me do it in the construct of the first quarter guide. I will tell you, if you look at the guide relative to last year, the implied decline in dollars, the vast majority of that is in gross profit, with a lesser, much lesser impact in SG&A. We have investments in store labor offset by, and offset by OPEX savings in other areas, not one for one, but close. So most of that's gross profit. So it's a combination of three things, Oliver.
Brian LaRose: Yes. Thanks for the question Oliver Let me do it in the construct of the first quarter Guide I would tell you. If you look at the guide relative to last year.
Speaker Change: The implied decline in.
Speaker Change: The vast majority of that is in gross profit with a lesser much lesser impact in SG&A, we have investments in store labor offset by offset by Opex savings in other areas not one for one but close so most of that is gross profit. So it's a combination of three things Oliver it's mix, it's margin pressure in both consumables and discretionary.
Brian: It's mix, it's margin pressure on both consumables and discretionary items, and it's the pricing actions that we implemented in the second half of last year. So how do we improve it? Number one, you have a maturation of the pricing actions that we took. So we took those in the third quarter; we do expect those to continue improving both from a profitability and revenue standpoint. The value brands will continue to scale and contribute profitably. Our veterinary business has some maturing to do, so we've scaled back the vet bills to five to 10 this year.
Speaker Change: Items and if the pricing actions that we implemented in the second half of last year. So how do we improve it number one you have a maturation of the pricing actions that we took so we took those in the third quarter. We do expect those to continued quarter in quarter out to improve both from a profitability and revenue standpoint.
Speaker Change: The value brands will continue to scale and contribute profitably our vet business has some maturity to do so we've scaled back that that builds to five to 10, this year and that that business as it matures will contribute profitably but to be quite blunt Oliver we got to get after cost if we look at what our gross margin line that.
Brian: And that business, as it matures, will contribute profitably. But you know, to be quite blunt, you know, Oliver, we got to get after cost. You know, if we look at what's our gross margin line, that it's cost and its assortment, right products, right place, right price, and right time. Got it.
Speaker Change: Its cost and its assortment right product right place right price and right time.
Speaker Change: Got it. Thank you and then the follow up is.
Brian: And then the follow-up is, you guys mentioned net ads were turning positive in the fourth queue. Could you maybe give us some information on, you know, how much, how many customers you added, and what the recent trends are? Thank you.
Speaker Change: You guys mentioned net adds were returning positive in fourth Q.
Speaker Change: Could you maybe give us some information on how much how many of.
Speaker Change: So you added and what the recent trends. Thank you.
Brian: The only thing I'll tell you Oliver is yes, we had net ads this quarter. For us, you know, it's all about lifetime value and making sure we have the highest quality customers. So we'll continue to invest in growing customers, which continues to be important. But more importantly, it's making sure that we enhance the overall customer experience to support our profitability goals. So we're not going to disclose a specific number.
Speaker Change: The only thing I'll tell you Oliver is yes, we had net adds this quarter for us.
Speaker Change: It's all about lifetime value and making sure we have the highest quality customers. So we will continue to invest in growing customers that continues to be important but more importantly, it's making sure that we enhance the overall customer experience to support our profitability goals. So we're not going to disclose a specific number.
Operator: As a reminder, if you would like to ask a question, please press star, then 1 to be joined in the queue. The next question comes from Zach Fadem with Wells Fargo. Please go ahead. Hey guys, this is David Lanson on behalf of Zach.
Speaker Change: As a reminder, if you would like to ask a question. Please press Star then one to be joined into the queue.
Adam: The next question comes from Zacks, Adam with Wells Fargo. Please go ahead.
Adam: Hey, guys. This is David Lance on for Zach Thanks for taking our questions.
David Lanson: Thanks for taking our questions. Are there any performance-based reasons to step back on the vet hospital build out? Or is this all about cash preservation?
David Lance: Are there any performance based reasons just step back on the vet hospital build out or is this all about cash preservation and with that could you talk about current revenue and profit contribution from vet hospitals and how are you thinking about the impact for next year.
Brian: And with that, could you talk about current revenue and profit contribution from veterinary hospitals? And how are you thinking about the impact for next year? Yeah, the answer to your first question is no. I mean, this is a, this, this vet, I'll start with, I'll break it into two parts.
Speaker Change: Yes, the answer to your first question is no I mean this is.
I'll start with I'll break it into two parts.
Brian: The vet, it continues to be strategic for us, but we made a decision this year to balance capital allocation and return against what we are striving for in free cash flow. The veterinary business itself continues to perform, not just in the hospitals, but our mobile vet clinics have been a tremendous, tremendous growth vehicle for us for the past, call it 12 to 18 months, particularly in this environment. That's light capital meets the customer where they want to be in this environment. And we continue to see growth in that area. So we think overall that economics will continue to track. So we'll continue to view this business strategically. Got it.
Speaker Change: It continues to be strategic for us.
Speaker Change: But we made a decision this year to balanced capital allocation.
Speaker Change: <unk> return against what we are striving for and free cash flow.
Speaker Change: That business itself continues to perform not just in the hospitals, but our mobile vet clinics has been a tremendous tremendous growth vehicle for us for the past call. It 12 months to 18 months, particularly in this environment. That's light capital meets the customer where they want to be in this environment and we've continued to see growth in that area. So we think overall exit.
Speaker Change: That economics continue to track.
So we will continue to view this business strategically.
Brian: That's helpful. And then supplies and companion animals work down in the high single digits on a normalized basis. How would you say this compares to the supplies category as a whole? And can you talk about any share shifts you're seeing to mass? Do you mean within that category? How does it compare?
Speaker Change: Got it that's helpful and then supplies in companion animal were down high single digits on a normalized basis. How would you see this compares the supplies category as a whole and can you talk about any share shifts you're seeing to mass.
Speaker Change: You mean within that category, how does it compare I mean, the category is down I think you can look at different numbers for the category, but the category is down I think we're a little bit overweight in that category. So we've had more overweight impact in terms of mix on our business.
Brian: I mean, the category is down. You know, I think you could look at different numbers for the category, but the category is down. I think, you know, we're a little bit overweight in that category. So we've had a, you know, more overweight impact in terms of mix in our business. In terms of the share shifts, I will just acknowledge, you know, at the enterprise level, we have lost some share. Mike addressed that.
Speaker Change: Of the share shifts I will just acknowledge.
Speaker Change: At the enterprise level, we have lost some share Mike address that that's one of our top priorities is to make sure we get that share back without compromising our profitability.
Brian: That's one of our top priorities is to make sure we get that share back without compromising our profitability. The next question comes from Steven Zaccone with Citi. Please go ahead.
Speaker Change: The next question comes from Steven <unk> with Citi. Please go ahead.
Steven Emanuel Zaccone: Great, good morning. Thanks for taking my question. My good luck in the new role and Ron, best wishes for the next step if you're listening. The question I had was about stabilizing your market share this year. How do you think about that? Like, what are the key priorities?
Steven Paul Forbes: Good morning, Thanks for taking my question, Mike Good luck in the new role and Ron Best wishes for the next step and for listening.
Steven Paul Forbes: Question I had was on stabilizing our market share. This year, how do you think about that like what are the key priorities.
Mike: And the value brands that you put in the business? You know, would you consider adding more value to the assortment if that's a way to win with the customer? Hey, Steven, it's Mike.
Steven Paul Forbes: The value brands that you've put in the business would you consider adding more value to the assortment and if that's a way to win with the customer.
Steven Paul Forbes: Hey, Stephen it's Mike Thanks for the question and I appreciate.
Mike: Thanks for the question, and I appreciate your acknowledgement. I think if I looked at market share, I would first say that you know, we're participating in a really large and fragmented market, and we just have a low share. Independent of our current share performance, the opportunity is significant. And if I was frank with my assessment, which I tried to be in my prepared remarks, we have room for and improvement needed in our retail fundamentals. And if I look at those priorities around creating an experience that's easier to shop, having an assortment that makes sense, instilling more discipline on where we invest and how we fund it, it gives us a ton of space to work on, share opportunities in our categories and across our channels. So I would answer your question that, Okay, and then, Brian, a question about just thinking about the top line, because you made the comment that you're not First quarter revenue guidance, the math I'm getting to is comps could be down like low to mid single digits. Is that, is that wrong?
Brian LaRose: Your acknowledgment.
Brian LaRose: I think if I look at market share I first would start that we're participating in a really large and fragmented market and we just have low share independent of our current share performance the opportunity is significant.
Brian LaRose: And if I.
Speaker Change: As Frank with my assessment, which I tried to be in my prepared remarks, we have room and improvement needed on our retail fundamentals and if I look at those priorities around creating experience that's easy to shop, having an assortment that makes sense instilling more discipline on where we invest and how we funded it gives us this is a ton of space.
Speaker Change: Work on share opportunities in our categories and across our channels. So I would answer to your question that way.
Speaker Change: Okay and then.
Speaker Change: Brian a question on just thinking about the top line because you made the comment youre not really expecting demand to change through the year.
Speaker Change: First quarter revenue guidance, the math I'm getting to is comps can be down like low to mid single digits is that is that wrong and then how do we think about the cadence of the year.
Brian: And then how do we think about, you know, the cadence of the year if that is the trend in the first quarter? Thanks, Steve. Yeah, that's how the math would scratch out in terms of the implied guide.
Trend in the first quarter.
Brian LaRose: Thanks, Steve Yeah, that's how the math would scratch out.
Steve: In terms of the implied guide beyond that for the year, we're not going to comment beyond Q1, I will tell you. We made a comment that we would expect profitability.
Brian: Beyond that, for the year, we're not going to comment beyond Q1. I will tell you, I, you know, we made a comment that we would expect the profitability trajectory to improve throughout the year, and certainly some of that would come with Hopwell.
Steve: Trajectory to improve throughout the year, certainly some of that would come with topline.
Brian: The next question comes from Anna Andreeva with Needham. Please go ahead. Great, thanks so much, and good morning guys. Thanks for taking our questions. I wanted to follow up on the impairment charge that you took. So should we think that, within consumables, it's some of the more premium brands that are no longer being carried by Petco? Just hoping to understand that a bit more. And then, secondly, can you talk about the small town stores? Just remind us, how are those performing, and are you halting expansion with that concept as well? Thanks so much.
Steve: The next question comes from Anna <unk> with Needham. Please go ahead.
Anna: Great. Thanks, so much and good morning, guys. Thanks for taking our questions I wanted to follow up on the impairment charge that detailed so should we think that within consumables.
Anna: Some of the more premium brands that are no longer being carried by petco, just hoping to understand that a bit more and then secondly can you talk about the small town stores just to remind us how are those performing and are you pausing expansion with that concept as well. Thanks so much.
Brian: Yeah, first on the charge, I know that would not be the correct takeaway. You know, when we look across the charge, it's for lower velocity skews in both supplies and consumables. So we mentioned it was consumables that will no longer be part of the assortment, because those are lower velocity.
Speaker Change: Yes first on the charge on a no that would not be the correct takeaway.
Speaker Change: When we look across the charge is for lower velocity skus in both supplies and consumables. So we mentioned that was consumables that will no longer be part of the assortment those are lower velocity. Our premium brands are great brands with high velocity in that space with great partnerships with those vendors. So I wouldn't say, that's the right takeaway at all.
Brian: Our premium brands are great brands with high velocity in that space, with great partnerships with those vendors, so I wouldn't say that's the right takeaway at all. Secondly, in the small town stores, they've tracked to our model. You know, ultimately, are we still investing there? Yes, but it is scaled down.
Speaker Change: <unk> on the small town stores, they've tracked to our model ultimately.
Are we still investing there yes, it is scaled down, but we but we've been doing that for three or four quarters now.
Brian: But we've been doing that for three or four quarters. The next question comes from Seth Basham with Redbush Securities. Please go ahead. Thanks a lot, and good morning.
Speaker Change: The next question comes from Seth Basham with Wedbush Securities. Please go ahead.
Seth Mckain Basham: Thanks, a lot and good morning. My first question. Mike is just in terms of your marketing strategy going forward. It seems like you think there is a disconnect between what <unk> offers and what customers. Thank you offer how are you.
Seth Mckain Basham: My first question, Mike, is just in terms of your marketing strategy going forward. It seems like you think there's a disconnect between what Petco offers and what customers think you offer. How are you going to change that going forward? Yeah, Seth, thanks for the question.
Seth Mckain Basham: Change that going forward.
Seth Mckain Basham: Yes, thanks for the question.
Mike: You know, I would just draw back to the rapid introduction or reintroduction of value brands to our assortment, which was incredible thanks to the work that the team did. But you have to take it all the way through and make sure customers understand that we have the most complete offering of products and services for pets and pet parents. And we need to spend time attracting high-quality customers at the top of the funnel, which, to be fair, we're just starting to do. So, if I look at the changes we've made, it takes time for customers to resonate with what the brand stands for. And, you know, we want to be the destination for pet parents to think about every single thing they need for their pets. And so we need to spend some time and money there. That's helpful.
Seth Mckain Basham: I would just draw back to the rapid introduction or reintroduction of value brands to our assortment, which was incredible by the work that the team did but you have to bring it all the way through and make sure customers understand that we have the most complete offering of products and services for pets, and pet parents, and we need to spend time attracting.
Seth Mckain Basham: Our high quality customers at the top of the funnel, which which to be fair.
Seth Mckain Basham: Just starting to do so if I look at the changes we've made it takes time for customers to resonate with what the brand stands for and we.
Seth Mckain Basham: We want to be the destination for pet parents to think about every single thing they need for their pets and so we need to spend some time in investment there.
Seth Mckain Basham: That's helpful and how are you considering the loyalty programs going forward any changes to the idle care are the other loyalty programs as you think about being able to attract all types of pet parents.
Mike: And how are you considering the loyalty programs going forward? Any changes to Vital Care or the other loyalty programs as you think about being able to attract all types of pet parents? I know of no fundamental changes, Seth, but I would tell you we always continue to look at our loyalty programs. We had a good quarter in vital care, which we didn't talk about in the script, but we're up over 720,000 vital care premier members. Those continue to be very good customers for us that sit in the top decile of customer share wallet. We always look at those loyalty programs, and we've talked in the past about that program continuing to evolve. So we still have the one offering, but I would expect it to evolve and not change. The next question comes from Kaumil Gajrawala with Jeffreys. Please go ahead. Hey guys, good morning.
Seth Mckain Basham: No fundamental changes Seth I would tell you we always continue to look at our loyalty programs, we had a good quarter and vital care. We can talk about in the script, but were up over 720000 vital care Premier members. Those continue to be very good customers for us that sit in the top decile of customer share of wallet.
Seth Mckain Basham: We always look at those loyalty programs and we've talked in the past about that program continuing to evolve. So we still have the one offering but I would expect it to evolve and not changed fundamentally.
Seth Mckain Basham: The next question comes from Kunal <unk> with Jefferies. Please go ahead.
Kunal: Hey, guys good morning.
Kaumil S. Gajrawala: I guess there's a few things you're doing at the same time, improving share and bringing down costs. When you, um, when you think about competition and how they're behaving, those that are gaining share, they just sort of naturally gain share because of maybe channel mix or assortment? Or is there something execution-related that you're also trying to address? And if that's the case, how do you balance bringing down your costs while addressing some execution issues?
Kunal: I guess, there's a few things youre doing the same time improving share in bringing down costs when you.
Kunal: When you think about competition and how they are behaving.
Kunal: Those that are gaining share they just sort of naturally gaining share because of maybe channel mix or assortment or is there something execution related that you're also trying to address and if thats the case.
Kunal: How do you balance, bringing down your cost while addressing some execution issues.
Brian: Yeah, I would say I don't think, at the holistic level, the competitive environment has changed materially. I'll echo some of Mike's comments. This is a super attractive market, has been for 30 plus years, and will be in the future, which happens to be very fragmented. So our job is to make sure that we stabilize our own business, improve market share, and do so profitably. So we are fundamentally focused on those things, market share, profit, and cash. Got it, thank you. The next question comes from Simeon Gutman with Morgan Stanley. Please go ahead. Hi, this is Lauren Ingham for Simeon Gutman. My first question is about pet food inflation. Is there anything you can share on that?
Kunal: Yes, I would say I don't think at the holistic level the competitive environment has changed materially I'll I'll Echo back some of Mike's comments. This is a super attractive market has been for 30 plus years and we will be in the future that happens to be very fragmented. So our job is to make sure that we stabilize our own business improved market share.
Kunal: And do so profitably. So we are we are fundamentally focused on those things market share profit cash.
Speaker Change: Got it thank you.
Speaker Change: The next question comes from Simeon Gutman with Morgan Stanley. Please go ahead.
Hi, This is Lauren on for Simeon Gutman. My first question is on pet food inflation is there anything you can share on that we've heard a lot of big players in retail talk about modest inflation for 'twenty four and can you talk about how you're viewing this for the category. Thanks.
Lauren Ingham: We've heard a lot of big players in retail talk about modest inflation for 24 and food. Can you talk about how you're viewing this for the category? Yeah, on a forward-looking basis, I'm not going to comment on inflation. But I will tell you that certainly what we saw in the, if you normalized the consumables growth rate in the quarter, it would have been a deceleration and a big driver that was lapping the inflationary impacts of last year. So that would be similar to what you've heard.
Speaker Change: Yeah on a forward looking basis I'm not going to comment on inflation I will tell you that certainly what we saw in the if you normalize the consumables growth rate in the quarter. It would've been a deceleration at a big driver of that was lapping the inflationary impacts of last year, so that would be similar to what you've heard from others.
Brian: And we got it. And my follow-up question is just on traffic and tickets. I guess, relative to the 2019 baseline, can you talk about traffic and ticket trends in the business and also if they got better or worse in Q4 and also any expectations embedded in guidance for Q1. Thank you. Well, I'm not going to get into that level of detail.
Got it and my follow up is just on traffic and ticket I guess like relative to the 2019 baseline can you talk about traffic and.
Speaker Change: Ticket trends in the business and also I think got better or worse in Q4, and also any expectations embedded in guidance for Q1. Thank you.
Speaker Change: Well I'm not going to get into that level of detail I will tell you and specifically I am not going to break traffic and ticket down back into 2019, I will tell you that basket remains strong for US I think the team has done an exceptional job with very very good petco partners inside of our pet care centers and they are exceptional at as customers get through the door, making sure of that.
Brian: I will tell you specifically, I'm not going to break traffic and take it down back into 2019. I will tell you that basket remains strong for us. I think the team has done an exceptional job. We have very, very good Petco partners inside of our Petcare centers, and they are exceptional at as customers get through the door, making sure that they walk out with the largest basket that we can.
Speaker Change: They walk out with a largest basket that we can our job is to make sure that we better support them in that endeavor and we give them the right products to sell to customers, we give them the right marketing support to get those products socialized with customers and we give them the tools to actually do it their exceptional when they can do it. So basket has been a big driver for us.
Brian: Our job is to make sure that we better support them in that endeavor. We give them the right products to sell to customers. We give them the right marketing support to get those products in front of customers, and we give them the tools to actually do it. They're exceptional when they can do it, so basket's been a big driver for us.
Cathy Yao: This concludes our question and answer session. I would like to turn the conference back over to Cathy Yao for any closing remarks. This concludes today's earnings call. Thank you for joining us. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Goodbye.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Cathy Yao for any closing remarks.
Cathy Yao: This concludes today's earnings call. Thank you for joining.
Cathy Yao: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Cathy Yao: Yeah.
Cathy Yao: Goodbye.
Okay.