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    Petco Health and Wellness Company Inc (WOOF)

    Q4 2024 Earnings Summary

    Reported on Feb 12, 2025 (Before Market Open)
    Pre-Earnings Price$2.45Last close (May 21, 2024)
    Post-Earnings Price$2.76Open (May 22, 2024)
    Price Change
    $0.31(+12.65%)

    What went well

    • Petco experienced positive customer net additions in the fourth quarter, indicating early momentum from their assortment and pricing changes.
    • The appointment of interim CEO Mike Mohan, who has over 36 years of retail experience and a reputation for operational excellence, is expected to drive operational performance and profitability.
    • Vet services continue to perform ahead of expectations, with mobile vet clinics being a tremendous growth vehicle over the past 12 to 18 months, offering light capital investment and meeting customers where they want to be.

    What went wrong

    • Petco is losing market share and acknowledges the need to improve retail fundamentals to regain it. The interim CEO stated, "we have room and improvement needed in our retail fundamentals" and emphasized focusing on creating an experience that's easy to shop, having an assortment that makes sense, and instilling more discipline. Additionally, the CFO admitted, "we have lost some share," making it a top priority to regain without compromising profitability.
    • Profitability is declining, and the company is facing challenges balancing cost reductions with necessary investments. Adjusted EBITDA in Q4 was down 33% year-over-year, and the adjusted EBITDA margin rate declined by 370 basis points. While aiming to reduce costs, the company acknowledges the need to invest in store labor and marketing to improve the customer experience, stating they are "fundamentally focused on those things: market share, profit and cash."
    • Leadership changes and lack of transparency on key metrics raise concerns about execution and future performance. The sudden departure of the CEO and the appointment of an interim CEO suggest underlying issues. When asked about traffic and ticket trends, the executive avoided specifics, saying, "I'm not going to get into that level of detail." Similarly, when questioned about customer net additions, the response was, "We're not going to disclose a specific number."

    Q&A Summary

    1. Gross Margin Stabilization
      Q: How will you stabilize gross margins amid pressures?
      A: Brian LaRose explained that the decline in gross profit is due to mix, margin pressure in consumables and discretionary items, and pricing actions implemented in the second half of last year. Improvement will come from the maturation of pricing actions taken in the third quarter, scaling of value brands contributing profitably, and maturation of the vet business contributing to profitability. He emphasized the need to "get after cost" and focus on cost and assortment to improve the gross margin line.

    2. Capital Expenditure Reduction
      Q: Can you break down the $140 million CapEx guidance?
      A: Brian LaRose stated that the full-year CapEx guidance is approximately $140 million, with triple-digit millions allocated to maintenance, including IT infrastructure and store maintenance like HVACs and aquarium tanks. The investment in 5 to 10 vet hospital builds is about $600,000 per vet, plus $600,000–$700,000 for center store build-out. The company is balancing investments against cash flow goals, focusing on improving profitability.

    3. Vet Hospital Build-Out
      Q: Why step back on vet hospital expansion; impact next year?
      A: Brian LaRose explained there are no performance-based reasons for reducing vet hospital builds; it's about balancing capital allocation and free cash flow goals. The vet business continues to perform, with mobile vet clinics showing tremendous growth over the past 12 to 18 months. The company views vet economics as tracking well and continues to see the vet business as strategic.

    4. Market Share Recovery
      Q: How will you stabilize and grow market share?
      A: R. Mohan acknowledged room for improvement in retail fundamentals. Priorities include creating an easy-to-shop experience, providing an assortment that makes sense, and instilling more discipline in investments. The company sees significant opportunity due to the large, fragmented market and plans to work on share opportunities across categories and channels. Brian LaRose added that regaining lost market share without compromising profitability is a top priority.

    5. Leadership Change Focus
      Q: What is the Board seeking in new leadership?
      A: R. Mohan stated the focus is on improving urgency, operational performance, and profitability, aiming to operate at a world-class retail level. The Board is conducting a comprehensive search for skills in this realm to drive the business forward. Brian LaRose added that Mike brings 36 years of retail experience with a reputation for operational excellence to make meaningful change.

    6. Supply Chain and Store Experience
      Q: What are the plans for supply chain and customer experience?
      A: R. Mohan noted the need to improve in-store and online shopping experiences to help customers navigate their breadth of offerings. Plans include optimizing supply chain operations to effectively get products to customers, including those preferring shipped merchandise. Brian LaRose emphasized that profitability is unacceptable, and they need to look at every opportunity across the P&L, including sales, gross margin, merchandising cost, supply chain, and SG&A.

    7. Supplies Category Trends
      Q: Is there a path to stabilizing supplies trends?
      A: Brian LaRose indicated there hasn't been stabilization in supplies and companion animal categories, with decline rates similar to prior quarters. Significant actions have been taken on cost, assortment, and pricing, and the company is confident in these measures. They are planning the year assuming no meaningful change in demand environment, especially in that category.

    8. Working Capital Opportunities
      Q: Any working capital opportunities for 2024?
      A: Brian LaRose stated that while they made meaningful progress in inventory and payables this year, opportunities in working capital for 2024 might not be as significant. The most powerful lever for free cash flow is earnings, and they have taken a strategic approach to capital, reducing CapEx to $140 million.

    9. Marketing Strategy and Loyalty
      Q: How will you address marketing strategy and loyalty programs?
      A: R. Mohan emphasized the need to attract high-quality customers and ensure they understand the complete offering of products and services. The company plans to invest time and resources to make customers resonate with the brand, aiming to be the destination for pet parents. Regarding loyalty programs, Brian LaRose mentioned no fundamental changes to Vital Care, which has over 720,000 Premier members and continues to evolve without changing fundamentally.

    10. Impairment Charges and SKUs
      Q: Explain the impairment charge and impact on SKUs.
      A: Brian LaRose clarified the charge relates to lower-velocity SKUs in both supplies and consumables, not premium brands. Premium brands remain with high velocity and strong vendor partnerships. Regarding small town stores, they have tracked to the model but investments have been scaled down over the past 3 or 4 quarters.

    11. Pet Food Inflation Outlook
      Q: View on pet food inflation for '24 category?
      A: Brian LaRose did not comment on forward-looking inflation but noted that normalizing the consumables growth rate would show a deceleration due to lapping the inflationary impacts of last year, similar to what others have observed.

    12. Competition and Behavior
      Q: How do you balance costs while addressing execution issues?
      A: Brian LaRose stated the competitive environment hasn't changed materially. The focus is on stabilizing their own business, improving market share, profit, and cash, and ensuring they address execution while managing costs.

    13. Traffic and Basket Trends
      Q: Can you discuss traffic and basket trends?
      A: Brian LaRose mentioned that while he won't detail traffic trends back to 2019, basket remains strong, driven by exceptional Petco partners in pet care centers. The team ensures customers leave with the largest basket possible, and efforts continue to support them with the right products, marketing, and tools.

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