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PI

PetIQ, Inc. (PETQ)·Q4 2023 Earnings Summary

Executive Summary

  • Q4 net sales rose 19.5% to $219.9M with broad-based growth in Products (+21.6%) and Services (+6.9%); gross margin compressed to 20.0% on wellness center closures tied to Services optimization, while adjusted EBITDA was $12.0M including ~$3M incremental marketing spend .
  • 2024 outlook initiated: net sales $1,130–$1,180M and adjusted EBITDA $109–$114M; Q1 2024 net sales $290–$310M and adjusted EBITDA $31–$33M; H1 expected to be ~56% of FY sales; guidance includes Services optimization, expected sale of Mark & Chappell, and normalized flea/tick seasonality impacts .
  • Management expects ~50 bps gross margin expansion in 2024 (ex-mix) and highlighted stronger brand momentum from stepped-up marketing; Q4 adjusted gross margin would have been ~flat YoY excluding ~$1.2M Services inefficiency not adjusted for in the quarter .
  • Balance sheet/cash: FY23 cash from operations hit a record $61.9M; liquidity $241.4M; net leverage improved to 2.9x; company plans to reinvest ~$6M Services savings and ~$6M from operations into an incremental $12M of 2024 marketing .
  • Consensus estimate context: S&P Global consensus data was unavailable in our system for PETQ; however, management stated Q4 adjusted EBITDA exceeded implied company guidance ($6.2–$10.2M) despite incremental marketing, indicating a guidance beat on that metric .

What Went Well and What Went Wrong

  • What Went Well

    • Broad-based Products growth; manufactured brands up 36% including Rocco & Roxie (19% organic) in Q4; flea/tick, Rx, health & wellness, dental and treats all contributed .
    • Record FY23: net sales $1.102B (+19.6%), adjusted EBITDA $104.7M (+34.8%), record cash from operations $61.9M; net leverage down to 2.9x; CEO: “significantly exceed[ed] the top and bottom line guidance” .
    • Q4 adjusted EBITDA of $12.0M exceeded implied guidance despite ~$3M planned marketing; adjusted gross margin would have been essentially flat YoY excluding ~$1.2M Services inefficiency not adjusted out .

  • What Went Wrong

    • Q4 GAAP net loss widened to $(17.5)M (–$0.60/share) on Services restructuring ($5.1M total; mostly non-cash) and a $7.7M non-cash asset charge tied to the expected sale of Mark & Chappell; gross margin fell 130 bps to 20.0% .
    • Services optimization reduced margin and created operational inefficiencies in Q4 (dragging adjusted gross margin by ~60 bps), and necessitated closing 149 wellness centers in H2 2023, exiting the year with 133 .
    • Mix and seasonality headwinds: sequential step-down from Q3 to Q4 was expected; Services closures and heavier Q4 brand investment pressured near-term profitability .

Financial Results

Quarterly trend (sequential)

MetricQ2 2023Q3 2023Q4 2023
Net Sales ($M)$314.5 $277.0 $219.9
GAAP Diluted EPS ($)$0.32 $0.02 $(0.60)
Adjusted EPS ($)$0.46 $0.42 $(0.12)
Gross Margin (%)23.5% 26.2% 20.0%
Adjusted EBITDA ($M)$32.9 $29.3 $12.0
Adjusted EBITDA Margin (%)10.4% 10.6% 5.5%

Year-over-year comparison (Q4)

MetricQ4 2022Q4 2023
Net Sales ($M)$184.1 $219.9 (+19.5%)
GAAP Diluted EPS ($)$(0.24) $(0.60)
Adjusted EPS ($)$(0.10) $(0.12)
Gross Margin (%)21.3% 20.0%
Adjusted EBITDA ($M)$12.9 $12.0
Adjusted EBITDA Margin (%)7.0% 5.5%

Segment breakdown

Metric ($M)Q2 2023Q3 2023Q4 2023
Products Segment Sales$278.2 $239.7 $191.3
Services Segment Revenue$36.4 $37.4 $28.6
Total Net Sales$314.5 $277.0 $219.9

KPIs and balance sheet (period-end)

KPI6/30/20239/30/202312/31/2023
Cash & Cash Equivalents ($M)$78.4 $124.6 $116.4
Total Debt ($M)$447.8 $446.5 $445.2
Liquidity ($M)$203.4 $249.6 $241.4
Net Leverage (x, Term Loan B)3.6x 2.8x 2.9x

Notes on non-GAAP and adjustments:

  • Q4 restructuring and related charges totaled $5.1M (including $1.6M in cost of services); non-cash asset charge for expected sale of Mark & Chappell was $7.7M .
  • Adjusted EBITDA, adjusted net income/EPs, adjusted gross margin exclude various items per definitions; Q4 adjusted gross margin would have approximated 21.3% absent ~$1.2M Services inefficiency not adjusted for .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Sales ($M)FY 2024N/A$1,130 – $1,180New (first issuance)
Adjusted EBITDA ($M)FY 2024N/A$109 – $114New (first issuance)
Net Sales ($M)Q1 2024N/A$290 – $310New (first issuance)
Adjusted EBITDA ($M)Q1 2024N/A$31 – $33New (first issuance)
H1 as % of FY SalesFY 202455% (FY23 actual for context) ~56%Higher first-half weighting
Guidance includesFY 2024—Services optimization, expected Mark & Chappell sale, normalized flea/tick seasonality; combined headwind ≈$52M sales and ≈$8M adj. EBITDAIncluded

Company does not provide GAAP net income guidance nor reconcilable non-GAAP to GAAP due to variability .

Earnings Call Themes & Trends

TopicQ2 2023 (Prev-2)Q3 2023 (Prev-1)Q4 2023 (Current)Trend
Marketing investment & ROIStepping up A&P; long-term brand building, top-end of FCF guide despite spend Incremental back-half A&P, raised FY23 outlook; planning additional Q4 brand investment 2023 spend ~$44M (incl. +$3M in Q4); add ~$12M in 2024 (half funded by Services savings) Increasing, disciplined
Services optimizationHygiene pilots, community clinics performing; testing early Announced 149 closures; ~$6.3M cash costs; expect savings to reinvest Closures completed; some Q4 inefficiency (~$1.2M) not adjusted; expect normalized operations in 2024 Transition concluding
Flea & tick/seasonalityStrongest OTC season in 36 months; share gains Strong category; company share gains; noted weather boost 2024 guide assumes “more normal” season; weather remains swing factor Normalizing assumptions
Rocco & RoxieDouble-digit growth; exiting non-core SKUs +10.1% growth; expanding distribution +21.2% Q4; premium supplements launch planned (end of Q1) Expanding
Retail resets/ACVBuilding distribution; categories broadening Piloted Walmart wellness center; positive initial results Health & wellness resets in 4–6 weeks; treats resets in late Q2; growing ACV Improving shelf presence
MarginsMix pressure in Q2; FY margins up ~75–100 bps expected GM +200 bps YoY; SG&A leverage 2024 gross margin +50 bps expected; Q4 adjusted GM essentially flat YoY ex-inefficiency Gradual expansion
Leverage/liquidityNet leverage 3.6x; ample ABL availability Net leverage 2.8x; liquidity $249.6M Net leverage 2.9x; liquidity $241.4M Strengthened vs 2022

Management Commentary

  • “2023 was a record year for PetIQ… significantly exceed[ed] the top and bottom line guidance… improved the Company's net leverage to a record low.” — Cord Christensen, CEO .
  • “Our marketing budget for 2023 was $40 million… we… spend an incremental $4 million… $3 million… in Q4 2023… Included [in] 2024… an incremental $12 million of marketing… $6 million… funded by… Services segment optimization” .
  • “Adjusted gross profit… included a drag of approximately $1.2 million or 60 bps from our Services segment optimization… if you take this into account… adjusted gross margin would be… 21.3%” — Zvi Glasman, CFO .
  • “For 2024 we expect… net sales of $1,130 million to $1,180 million… adjusted EBITDA of $109 million to $114 million… first half ~56% of annual net sales” — CFO .
  • “Weather and the quality of the flea and tick season [are] the greatest variable… [and] Rocco & Roxie supplement launch… could see some meaningful upside” — Management Q&A .

Q&A Highlights

  • Guidance upsides/risks: Weather-driven flea & tick season is the largest swing factor; premium Rocco & Roxie supplement launch could provide upside; guidance assumes mid-fairway outcomes .
  • Margins: Management reiterated ~50 bps gross margin expansion expected in 2024; clarified Q4 adjusted gross margin was depressed by Services inefficiency not adjusted out .
  • Services savings & reinvestment: ~$6M Services savings plus ~$6M from operations fund ~$12M marketing step-up; expect Services to normalize in 2024 as community clinics expand .
  • Retail resets/ACV: Health & wellness resets in next 4–6 weeks; treats resets later in Q2; expect broader exposure to drive growth in 2H .
  • Capital structure/EPS: Convert accounting may add ~4.8M shares to diluted EPS calc in certain 2024 quarters; management has “no intention” to settle converts in shares .

Estimates Context

  • S&P Global Wall Street consensus data for PETQ was unavailable through our system at the time of analysis; therefore, we cannot quantify Q4 2023 revenue/EPS/EBITDA vs Street estimates (values unavailable from S&P Global).
  • Company commentary indicates Q4 adjusted EBITDA exceeded implied company guidance of $6.2–$10.2M, despite ~$3M incremental marketing expense, suggesting an internal guidance beat on profitability .

Key Takeaways for Investors

  • Product engine is driving: manufactured brands (flea/tick, supplements, dental/treats) materially outperformed categories, with Rocco & Roxie expanding and a premium supplement launch near-term—supports 2024 top-line guide and share gains .
  • Services reset behind them: 149 closures completed; expect normalized operations and margin benefit in 2024, though Q4 showed temporary inefficiency; savings are being redeployed to higher-ROI brand spend .
  • Margin trajectory intact: management targets ~50 bps gross margin expansion in 2024; watch mix (distribution vs manufactured) and Services efficiency as key drivers .
  • Weather remains the swing factor: flea/tick seasonality introduces variability; guidance assumes normalization; upside if conditions mirror 2023 strength .
  • Cash generation and leverage trends are favorable: record FY23 cash from ops and improved net leverage provide flexibility to fund growth while managing debt .
  • Retail shelf momentum: near-term resets (H1) in health & wellness and later in treats should support ACV gains and 2H consumption, an important catalyst for run-rate acceleration .
  • EPS optics: diluted share count could fluctuate in 2024 due to convert accounting; monitor EPS comparability by quarter .

Appendix: Additional Q4 details

  • Q4 net sales: $219.9M; Products $191.3M (+21.6%), Services $28.6M (+6.9%); gross margin 20.0%; adjusted gross margin 20.7% .
  • Q4 GAAP net loss $(17.5)M; adjusted net loss $(3.4)M; adjusted EBITDA $12.0M (5.5% margin) .
  • Key adjustments: $5.1M restructuring (incl. $1.6M in cost of services), $7.7M non-cash asset charge related to expected Mark & Chappell sale .
  • FY23 highlights: net sales $1,102.0M; adjusted EBITDA $104.7M; cash from ops $61.9M; free cash flow $52.7M; net leverage 2.9x .