Release Date: May 22, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Petco Health and Wellness Co Inc (WOOF, Financial) made meaningful progress against its strategy to reposition the business for sustainable and profitable growth.
- The company restructured its executive leadership team to simplify decision-making and align focus on fewer and clearer priorities.
- Petco Health and Wellness Co Inc (WOOF) is on track to unlock $150 million in cost savings and productivity enhancements by the end of fiscal 2025.
- Services revenue grew by 10%, driven by ongoing strength in vet hospitals, mobile clinics, and grooming services.
- The company expects to be free cash flow positive for fiscal 2024, reflecting improved cost management and capital expenditure reductions.
Negative Points
- Net revenue for the quarter was $1.5 billion, a decrease of 2% year-over-year.
- Comparable sales were down 1%, with discretionary supplies and companion animal businesses experiencing continued softness, down 7% year-over-year.
- Gross profit was $579 million, down $26 million from the prior year, with a gross margin decline of 101 basis points.
- SG&A as a percentage of revenue increased from 37.1% to 38.9% year-over-year, driven by severance expenses, increased depreciation, and a one-time expense related to the disposition of PupBox.
- Adjusted EBITDA was $75.6 million, down 32% with an adjusted EBITDA margin rate of 4.9%, down 219 basis points year-over-year.
Q & A Highlights
Q: Congrats on the improving results. I would love to get some color first on the supplies business, which remains under pressure. As you look forward and project revenue into the second quarter, how do you think that business is going to perform? Do you see changes to demand levels? Do you see any changes to the competitive environment?
A: Seth, thanks for the question. We did see some slight improvement in the year-over-year decline in our supplies and companion animals business, but we know we have more work to do. The team has taken some decisive action to deliver on this. Overall, we remain confident in our assortment strategy and plans, our breadth of offerings and how we're serving our pet parents. And I think -- I want to be really, really clear for you, we're acting every day to improve profitability in the near term. My focus is to sequence the highest priority drivers that we have while not compromising on our value proposition or our relationship with our customers.
Q: Understood. And as it relates to the gross margins, which were stronger than expected, could you provide some more color on the drivers there? As you look forward, how should we think about gross margins relative to SG&A in the second quarter?
A: Thanks for the question, Seth. I'll just say we're focused on driving bottom line improvement, and we expect sequential dollar improvement on bottom line profitability as the year progresses, steady progress throughout the year. We're looking at initiatives to drive both gross profit improvement and SG&A efficiency. And as I laid out in the prepared remarks, we're on track with our cost transformation and believe there's opportunity to both augment and accelerate progress there. I will tell you, specific to Q1, you did see some modest improvement in the discretionary categories and the team also did a good job across supply chain driving efficiencies.
Q: A lot going on, and it all makes kind of good logical sense. But can you maybe just help us out with prioritization or how you balance each of these items? For example, effectiveness of marketing, when does that come around versus the assortment versus the productivity? If you could just kind of maybe just work us up through what the timeline looks like because, obviously, doing all at once is difficult. So maybe just if we can get a better sense of prioritization, that would be helpful.
A: No, great. Thank you for the question. I would start with that we are focused on fewer and clearer priorities and we're taking decisive action to improve our profitability while we enhance our customer experience. And everyone in the organization, both at the store and leadership level has rallied around our reset plan. From an overall standpoint, our #1 focus is improving our profitability. The biggest area to improve our profitability is in merchandising, and that's why we have our focus in that area, is followed by improvement in our services profitability and a renewed focus on reviewing our SG&A spending. That's how I would line up our priorities.
Q: Okay. Great. And then in the context of all the things you're doing, it doesn't sound like optimizing the network or closing stores is part of the plan? Is that just my maybe just misreading that? Or is that something you're also evaluating?
A: I would tell you, Kaumil, that we are dynamic in the way that we look at our real estate portfolio. We have a very comprehensive process to make sure that we understand the demographics of any market that we enter and the competitive dynamics as well as our own position in the markets that we may exit. So it's a rolling portfolio. I would say that there are not any large-scale changes planned at this time.
Q: I wanted to understand the category performance outlook for the second quarter? How should we think about consumables versus some of the more discretionary categories? And then along those same lines, you mentioned returning to sustainable growth. The macro is a challenging thing to predict. But from a company-specific aspect, what do you think really needs to happen here to drive that sustainable growth going forward?
A: Thanks, Steve. I'll start here on the category outlook embedded in our guide of the $1.525 billion revenue. We know we have work to do in our assortment, and that's why merchandising excellence. And the work we're doing there is at the top of our list. We have an opportunity to improve the quality of our sales to better support our pet parents' needs. And our focus is on improving profitability, both within the mix that we sell and then every part of the mix.
Q: Good to see you guys making progress. A couple of questions from us. With Glenn's appointment as Chairman of the Board, just any of the initiatives to keep looking at that you can share? And would he be considered for the permanent CEO position with the company? That's my first one. And then we have a follow-up.
A: Great. Thanks, Anna. I've spent a lot of time with Glenn over the last few weeks, and he'll be of great value to me and the team, given the experience in retail turnarounds. We remain committed to our strategy and executing on it. And our top focus is improving our profitability. The search for the permanent CEO is ongoing, and we'll provide any updates as soon as we have additional information for you.
Q: Okay. Fair enough. And just as a follow-up on that, can you update us on some of the economics there? Should we think that most of the base is now EBITDA profitable? And are you still seeing that mid-single-digit lift to the center of the store from that, that you used to talk about?
A: Thanks, Anna. There's been no change in our long-term economics in terms of the vet model. And our plans for the year have not changed since we guided coming into the year, 5 to 10 vets for the year, which are baked into our CapEx guide. I will tell you what we're focused on is that we just brought in some additional expertise into the vet business. We have a new leader of that business with significant experience in that space. And we're focused on improving both the vet experience within our hospitals as well as the improved customer value proposition. We're also looking for ways to improve the profitability through greater utilization.
Q: I had a question regarding, first of all, the transactions versus ticket or AUR. If you could give us some updates on how that trended through the quarter and how you think about it for the rest of the year.
A: Thanks, Oliver. I'd say we're not going to break that out for you specifically. I would tell you, though, that basket was stronger than traffic, and that's been consistent with what we've been seeing.
Q: Got it. And the other one, I think, Brian, you said you're expecting free cash flow to
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
