SEC Form 10-Q filed by Petco Health and Wellness Company Inc.

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 3, 2024

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-39878

 

Petco Health and Wellness Company, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware	81-1005932
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
10850 Via Frontera San Diego, California	92127
(Address of principal executive offices)	(Zip Code)

 

Registrant’s telephone number, including area code: (858) 453-7845

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Class A Common Stock, par value $0.001 per share		WOOF		The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☐
Emerging growth company		☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s Class A Common Stock outstanding as of September 6, 2024 was 236,566,841.

The number of shares of the registrant’s Class B-1 Common Stock outstanding as of September 6, 2024 was 37,790,781.

The number of shares of the registrant’s Class B-2 Common Stock outstanding as of September 6, 2024 was 37,790,781.

 

 

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Table of Contents

 

		Page
PART I.	FINANCIAL INFORMATION	4
Item 1.	Financial Statements (Unaudited)	4
	Consolidated Balance Sheets	4
	Consolidated Statements of Operations	5
	Consolidated Statements of Comprehensive Loss	6
	Consolidated Statements of Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Unaudited Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27
PART II.	OTHER INFORMATION	28
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	29
Signatures		30

 

 

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Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 as contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements that are not statements of historical fact, including, but not limited to, statements regarding: our expectations with respect to our revenue, expenses, profitability, and other operating results; our growth plans; our ability to compete effectively in the markets in which we participate; the execution on our transformation initiatives; and the impact of certain macroeconomic factors, including inflationary and interest rate pressures, consumer spending patterns, global supply chain constraints, and global economic and geopolitical developments, on our business. Forward-looking and other statements in this Form 10-Q may also address our progress, plans, and goals with respect to sustainability initiatives, and the inclusion of such statements is not an indication that these contents are necessarily material to investors or required to be disclosed in our filings with the U.S. Securities and Exchange Commission (the “SEC”). Such plans and goals may change, and statements regarding such plans and goals are not guarantees or promises that they will be met. In addition, historical, current, and forward-looking sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future.

Such forward-looking statements can generally be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “intends,” “will,” “shall,” “should,” “anticipates,” “opportunity,” “illustrative”, or the negative thereof or other variations thereon or comparable terminology. Although we believe that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to be correct or that any forward-looking results will occur or be realized. Nothing contained in this Form 10-Q is, or should be relied upon as, a promise or representation or warranty as to any future matter, including any matter in respect of our operations or business or financial condition. All forward-looking statements are based on current expectations and assumptions about future events that may or may not be correct or necessarily take place and that are by their nature subject to significant uncertainties and contingencies, many of which are outside of our control.

Forward-looking statements are subject to many risks, uncertainties and other factors that could cause actual results or events to differ materially from the potential results or events discussed in such forward-looking statements, including, without limitation, those identified in this Form 10-Q as well as the following: (i) increased competition (including from multi-channel retailers, mass and grocery retailers, and e-Commerce providers); (ii) reduced consumer demand for our products and/or services; (iii) our reliance on key vendors; (iv) our ability to attract and retain qualified employees; (v) risks arising from statutory, regulatory, and/or legal developments; (vi) macroeconomic pressures in the markets in which we operate, including inflation and prevailing interest rates; (vii) failure to effectively manage our costs; (viii) our reliance on our information technology systems; (ix) our ability to prevent or effectively respond to a data privacy or security breach; (x) our ability to effectively manage or integrate strategic ventures, alliances, or acquisitions and realize the anticipated benefits of such transactions; (xi) economic or regulatory developments that might affect our ability to provide attractive promotional financing; (xii) business interruptions and other supply chain issues; (xiii) catastrophic events, political tensions, conflicts and wars (such as the ongoing conflicts in Ukraine and the Middle East), health crises, and pandemics; (xiv) our ability to maintain positive brand perception and recognition; (xv) product safety and quality concerns; (xvi) changes to labor or employment laws or regulations; (xvii) our ability to effectively manage our real estate portfolio; (xviii) constraints in the capital markets or our vendor credit terms; (xix) changes in our credit ratings; (xx) impairments of the carrying value of our goodwill and other intangible assets; (xxi) our ability to successfully implement our operational adjustments, achieve the expected benefits of our cost action plans, and drive improved profitability; and (xxii) the other risks, uncertainties and other factors referred to under “Risk Factors” and identified elsewhere in this Form 10-Q and our other filings with the SEC. The occurrence of any such factors could significantly alter the results set forth in these statements.

We caution that the foregoing list of risks, uncertainties and other factors is not complete, and forward-looking statements speak only as of the date they are made. We undertake no duty to update publicly any such forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required by applicable law, regulation or other competent legal authority.

In addition, statements such as “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Form 10-Q. While we believe that information provides a reasonable basis for these statements, that information may be limited or

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incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

 

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 

		August 3, 2024				February 3, 2024
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	127,620			$	125,428
Receivables, less allowance for credit losses ($1,859 and $1,806, respectively)			47,035				44,369
Merchandise inventories, net			672,328				684,502
Prepaid expenses			59,758				58,615
Other current assets			35,152				38,830
Total current assets			941,893				951,744
Fixed assets			2,206,885				2,173,015
Less accumulated depreciation			(1,447,180	)			(1,356,648	)
Fixed assets, net			759,705				816,367
Operating lease right-of-use assets			1,368,740				1,384,050
Goodwill			980,064				980,297
Trade name			1,025,000				1,025,000
Other long-term assets			201,245				205,694
Total assets		$	5,276,647			$	5,363,152
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and book overdrafts		$	474,496			$	485,131
Accrued salaries and employee benefits			135,235				101,265
Accrued expenses and other liabilities			196,518				200,278
Current portion of operating lease liabilities			306,507				310,507
Current portion of long-term debt and other lease liabilities			5,095				15,962
Total current liabilities			1,117,851				1,113,143
Senior secured credit facilities, net, excluding current portion			1,575,630				1,576,223
Operating lease liabilities, excluding current portion			1,104,709				1,116,615
Deferred taxes, net			219,574				251,629
Other long-term liabilities			127,400				121,113
Total liabilities			4,145,164				4,178,723
Commitments and contingencies (Notes 3 and 7)
Stockholders' equity:
Class A common stock, $0.001 par value: Authorized - 1.0 billion shares;     Issued and outstanding - 235.8 million and 231.2 million shares, respectively			236				231
Class B-1 common stock, $0.001 par value: Authorized - 75.0 million shares;     Issued and outstanding - 37.8 million shares			38				38
Class B-2 common stock, $0.000001 par value: Authorized - 75.0 million shares;     Issued and outstanding - 37.8 million shares			—				—
Preferred stock, $0.001 par value: Authorized - 25.0 million shares;     Issued and outstanding - none			—				—
Additional paid-in-capital			2,260,381				2,229,582
Accumulated deficit			(1,118,549	)			(1,047,243	)
Accumulated other comprehensive (loss) income			(10,623	)			1,821
Total stockholders’ equity			1,131,483				1,184,429
Total liabilities and stockholders’ equity		$	5,276,647			$	5,363,152

 

See accompanying notes to consolidated financial statements.

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PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts) (Unaudited)

 

 

		Thirteen weeks ended								Twenty-six weeks ended
		August 3, 2024				July 29, 2023				August 3, 2024				July 29, 2023
Net sales:
Products		$	1,263,749			$	1,278,598			$	2,543,480			$	2,595,194
Services and other			260,006				252,136				509,415				491,448
Total net sales			1,523,755				1,530,734				3,052,895				3,086,642
Cost of sales:
Products			787,103				789,091				1,579,825				1,594,850
Services and other			155,927				148,639				313,685				294,306
Total cost of sales			943,030				937,730				1,893,510				1,889,156
Gross profit			580,725				593,004				1,159,385				1,197,486
Selling, general and administrative expenses			578,257				568,967				1,173,699				1,145,832
Operating income (loss)			2,468				24,037				(14,314	)			51,654
Interest income			(672	)			(764	)			(1,090	)			(1,940	)
Interest expense			36,805				37,493				73,622				74,694
Loss on partial extinguishment of debt			—				305				—				746
Other non-operating (income) loss			—				(1,795	)			2,665				(4,614	)
Loss before income taxes and income    from equity method investees			(33,665	)			(11,202	)			(89,511	)			(17,232	)
Income tax (benefit) expense			(4,651	)			6,732				(9,128	)			5,724
Income from equity method investees			(4,191	)			(3,328	)			(9,077	)			(6,458	)
Net loss attributable to Class A and B-1    common stockholders		$	(24,823	)		$	(14,606	)		$	(71,306	)		$	(16,498	)
Net loss per Class A and B-1 common share:
Basic		$	(0.09	)		$	(0.05	)		$	(0.26	)		$	(0.06	)
Diluted		$	(0.09	)		$	(0.05	)		$	(0.26	)		$	(0.06	)
Weighted average shares used in computing net     loss per Class A and B-1 common share:
Basic			273,074				267,163				271,421				266,824
Diluted			273,074				267,163				271,421				266,824

 

 

See accompanying notes to consolidated financial statements.

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PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands) (Unaudited)

 

		Thirteen weeks ended								Twenty-six weeks ended
		August 3, 2024				July 29, 2023				August 3, 2024				July 29, 2023
Net loss attributable to Class A and B-1    common stockholders		$	(24,823	)		$	(14,606	)		$	(71,306	)		$	(16,498	)
Other comprehensive (loss) gain, net of tax:
Foreign currency translation adjustment			(10,921	)			1,107				(9,256	)			2,164
Unrealized (loss) gain on derivatives			(7,848	)			3,915				(1,476	)			2,931
(Gains) losses on derivatives reclassified to income			(862	)			361				(1,712	)			794
Total other comprehensive (loss) gain, net of tax			(19,631	)			5,383				(12,444	)			5,889
Comprehensive loss attributable to Class A and    B-1 common stockholders		$	(44,454	)		$	(9,223	)		$	(83,750	)		$	(10,609	)

 

See accompanying notes to consolidated financial statements.

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PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands) (Unaudited)

 

		Common stock
		Class A (shares)				Class B-1 (shares)				Class B-2 (shares)				Amount				Additional paid-in capital				Accumulated deficit				Accumulated other comprehensive income (loss)				Total stockholders’ equity
Balance at February 3, 2024			231,156				37,791				37,791			$	269			$	2,229,582			$	(1,047,243	)		$	1,821			$	1,184,429
Equity-based compensation expense    (Note 6)			—				—				—				—				17,451				—				—				17,451
Net loss			—				—				—				—				—				(46,483	)			—				(46,483	)
Foreign currency translation    adjustment, net of tax			—				—				—				—				—				—				1,665				1,665
Unrealized gain on derivatives (Note 4),    net of tax			—				—				—				—				—				—				6,372				6,372
Gains on derivatives reclassified to    income (Note 4), net of tax			—				—				—				—				—				—				(850	)			(850	)
Issuance of common stock,    net of tax withholdings			1,793				—				—				2				(277	)			—				—				(275	)
Balance at May 4, 2024			232,949				37,791				37,791			$	271			$	2,246,756			$	(1,093,726	)		$	9,008			$	1,162,309
Equity-based compensation expense    (Note 6)			—				—				—				—				11,879				—				—				11,879
Net loss			—				—				—				—				—				(24,823	)			—				(24,823	)
Foreign currency translation    adjustment, net of tax			—				—				—				—				—				—				(10,921	)			(10,921	)
Unrealized loss on derivatives (Note 4),    net of tax			—				—				—				—				—				—				(7,848	)			(7,848	)
Gains on derivatives reclassified to    income (Note 4), net of tax			—				—				—				—				—				—				(862	)			(862	)
Issuance of common stock,    net of tax withholdings			2,878				—				—				3				1,746				—				—				1,749
Balance at August 3, 2024			235,827				37,791				37,791			$	274			$	2,260,381			$	(1,118,549	)		$	(10,623	)		$	1,131,483

 

		Common stock
		Class A (shares)				Class B-1 (shares)				Class B-2 (shares)				Amount				Additional paid-in capital				Retained earnings				Accumulated other comprehensive (loss) income				Total stockholders’ equity
Balance at January 28, 2023			228,338				37,791				37,791			$	266			$	2,152,342			$	232,967			$	(4,098	)		$	2,381,477
Equity-based compensation expense    (Note 6)			—				—				—				—				22,282				—				—				22,282
Net loss			—				—				—				—				—				(1,892	)			—				(1,892	)
Foreign currency translation    adjustment, net of tax			—				—				—				—				—				—				1,057				1,057
Unrealized loss on derivatives (Note 4),    net of tax			—				—				—				—				—				—				(984	)			(984	)
Losses on derivatives reclassified to    income (Note 4), net of tax			—				—				—				—				—				—				433				433
Issuance of common stock,    net of tax withholdings			727				—				—				1				(1,254	)			—				—				(1,253	)
Balance at April 29, 2023			229,065				37,791				37,791			$	267			$	2,173,370			$	231,075			$	(3,592	)		$	2,401,120
Equity-based compensation expense    (Note 6)			—				—				—				—				24,322				—				—				24,322
Net loss			—				—				—				—				—				(14,606	)			—				(14,606	)
Foreign currency translation    adjustment, net of tax			—				—				—				—				—				—				1,107				1,107
Unrealized gain on derivatives (Note 4),    net of tax			—				—				—				—				—				—				3,915				3,915
Losses on derivatives reclassified to    income (Note 4), net of tax			—				—				—				—				—				—				361				361
Issuance of common stock,    net of tax withholdings			761				—				—				1				(1,457	)			—				—				(1,456	)
Balance at July 29, 2023			229,826				37,791				37,791			$	268			$	2,196,235			$	216,470			$	1,791			$	2,414,764

 

 

See accompanying notes to consolidated financial statements.

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PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

		Twenty-six weeks ended
		August 3, 2024				July 29, 2023
Cash flows from operating activities:
Net loss		$	(71,306	)		$	(16,498	)
Adjustments to reconcile net loss to net cash provided by operating    activities:
Depreciation and amortization			99,305				97,919
Amortization of debt discounts and issuance costs			2,435				2,446
Provision for deferred taxes			(27,782	)			(11,002	)
Equity-based compensation			29,348				46,248
Impairments, write-offs and losses on sale of fixed and other assets			7,069				1,035
Loss on partial extinguishment of debt			—				746
Income from equity method investees			(9,077	)			(6,458	)
Amounts reclassified out of accumulated other comprehensive (loss) income			(2,274	)			1,055
Non-cash operating lease costs			207,605				211,576
Other non-operating loss (income)			2,665				(4,614	)
Changes in assets and liabilities:
Receivables			(2,083	)			(16,679	)
Merchandise inventories			11,769				(23,011	)
Prepaid expenses and other assets			(7,166	)			(14,237	)
Accounts payable and book overdrafts			(9,644	)			97,062
Accrued salaries and employee benefits			34,591				1,221
Accrued expenses and other liabilities			3,015				(1,238	)
Operating lease liabilities			(209,738	)			(232,518	)
Other long-term liabilities			2,224				1,212
Net cash provided by operating activities			60,956				134,265
Cash flows from investing activities:
Cash paid for fixed assets			(60,029	)			(114,023	)
Cash paid for acquisitions, net of cash acquired			(259	)			(2,040	)
Proceeds from investment			998				10,248
Proceeds from sale of assets			1,019				—
Cash received from partial surrender of officers' life insurance			206				—
Net cash used in investing activities			(58,065	)			(105,815	)
Cash flows from financing activities:
Borrowings under long-term debt agreements			201,000				—
Repayments of long-term debt			(201,000	)			(60,000	)
Debt refinancing costs			(3,028	)			—
Payments for finance lease liabilities			(3,528	)			(3,349	)
Proceeds from employee stock purchase plan and stock option exercises			1,630				2,454
Tax withholdings on stock-based awards			(3,468	)			(4,873	)
Proceeds from issuance of common stock			2,500				—
Net cash used in financing activities			(5,894	)			(65,768	)
Net decrease in cash, cash equivalents and restricted cash			(3,003	)			(37,318	)
Cash, cash equivalents and restricted cash at beginning of period			136,649				213,727
Cash, cash equivalents and restricted cash at end of period		$	133,646			$	176,409
Supplemental cash flow disclosures:
Interest paid, net		$	69,399			$	72,005
Income taxes paid		$	15,581			$	27,423
Supplemental non-cash investing and financing activities disclosure:
Accounts payable and accrued expenses for capital expenditures		$	15,684			$	30,336

 

See accompanying notes to consolidated financial statements.

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PETCO HEALTH AND WELLNESS COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q (this “Form 10-Q”), as well as the corresponding Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended February 3, 2024 (the “2023 Form 10-K”). The discussion and analysis below contains certain forward-looking statements about our business and operations that are subject to the risks, uncertainties, and other factors referred to in Part II, Item 1A, “Risk Factors” of this Form 10-Q. These risks, uncertainties, and other factors could cause our actual results to differ materially from those expressed in, or implied by, the forward-looking statements. The risks described in this Form 10-Q and in other documents we file from time to time with the U.S. Securities and Exchange Commission (the “SEC”), including the section entitled “Forward-Looking Statements” in this Form 10-Q, should be carefully reviewed. All amounts herein are unaudited.

Overview

Petco Health and Wellness Company, Inc. (“Petco”, the “Company”, “we”, “our” and “us”) is a pet health and wellness company focused on improving the lives of pets, pet parents, and our own partners. Through our omnichannel ecosystem, we provide our customers with a comprehensive offering of products and services to fulfill their pets’ health and wellness needs through our more than 1,500 pet care centers in the U.S., Mexico, and Puerto Rico, including a network of in-store veterinary hospitals, our digital channel, and our flexible fulfillment options.

Our multicategory strategy integrates our digital assets with our nationwide physical footprint to meet the needs of pet parents who are looking for a single source for all their pets' needs. Our e-commerce site and mobile app serve as hubs for pet parents to manage their pets’ health, wellness, and merchandise needs, while enabling them to shop wherever, whenever, and however they want.

We strive to be a company that is improving millions of pet lives as well as the lives of pet parents and the partners who work for us. In tandem with Petco Love, a life-changing independent nonprofit organization, we work with and support thousands of local animal welfare groups across the country and, through in-store adoption events, we have helped find homes for nearly 7 million animals.

Macroeconomic factors, including rising interest rates, inflationary pressures, supply chain constraints, and global economic and geopolitical developments have had varying impacts on our results of operations, such as decreases in sales of discretionary items like supplies, that are difficult to isolate and quantify. We cannot predict the duration or ultimate severity of these macroeconomic factors or the ultimate impact on our operations and liquidity. Please refer to the risk factors referred to in Part II, Item 1A, “Risk Factors” of this Form 10-Q.

How We Assess the Performance of Our Business

In assessing our performance, we consider a variety of performance and financial measures, including the following:

 

Comparable Sales

Comparable sales is an important measure throughout the retail industry and includes both retail and digital sales of products and services. A new location or digital site is included in comparable sales beginning on the first day of the fiscal month following 12 full fiscal months of operation and is subsequently compared to like time periods from the previous year. Relocated pet care centers become comparable pet care centers on the first day of operation if the original pet care center was open longer than 12 full fiscal months. If, during the period presented, a pet care center was closed, sales from that pet care center are included up to the first day of the month of closing. There may be variations in the way in which some of our competitors and other retailers calculate comparable sales. As a result, data in this filing regarding our comparable sales may not be comparable to similar data made available by other retailers.

Comparable sales allow us to evaluate how our overall ecosystem is performing by measuring the change in period-over-period net sales from locations and digital sites that have been open for the applicable period. We intend to improve comparable sales by continuing initiatives aimed to increase customer retention, frequency of visits, and basket size. General macroeconomic and retail business trends are also a key driver of changes in comparable sales.

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Non-GAAP Financial Measures

Management and our board of directors review, in addition to GAAP (as defined herein) measures, certain non-GAAP financial measures, including Adjusted EBITDA and Free Cash Flow, to evaluate our operating performance, generate future operating plans, and make strategic decisions regarding the allocation of capital. Further explanations of these non-GAAP measures, along with reconciliations to their most comparable GAAP measures, are presented below under “Reconciliation of Non-GAAP Financial Measures to GAAP Measures.”

Executive Summary

Comparing the thirteen weeks ended August 3, 2024 with the thirteen weeks ended July 29, 2023 (unless otherwise noted), our results included the following:

Results of Operations

The following tables summarize our results of operations and the percent of net sales of line items included in our consolidated statements of operations (dollars in thousands):

 

		Thirteen weeks ended								Twenty-six weeks ended
		August 3, 2024				July 29, 2023				August 3, 2024				July 29, 2023
Net sales:
Products		$	1,263,749			$	1,278,598			$	2,543,480			$	2,595,194
Services and other			260,006				252,136				509,415				491,448
Total net sales			1,523,755				1,530,734				3,052,895				3,086,642
Cost of sales:
Products			787,103				789,091				1,579,825				1,594,850
Services and other			155,927				148,639				313,685				294,306
Total cost of sales			943,030				937,730				1,893,510				1,889,156
Gross profit			580,725				593,004				1,159,385				1,197,486
Selling, general and administrative expenses			578,257				568,967				1,173,699				1,145,832
Operating income (loss)			2,468				24,037				(14,314	)			51,654
Interest income			(672	)			(764	)			(1,090	)			(1,940	)
Interest expense			36,805				37,493				73,622				74,694
Loss on partial extinguishment of debt			—				305				—				746
Other non-operating (income) loss			—				(1,795	)			2,665				(4,614	)
Loss before income taxes and income    from equity method investees			(33,665	)			(11,202	)			(89,511	)			(17,232	)
Income tax (benefit) expense			(4,651	)			6,732				(9,128	)			5,724
Income from equity method investees			(4,191	)			(3,328	)			(9,077	)			(6,458	)
Net loss attributable to Class A and B-1    common stockholders		$	(24,823	)		$	(14,606	)		$	(71,306	)		$	(16,498	)

 

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		Thirteen weeks ended								Twenty-six weeks ended
		August 3, 2024				July 29, 2023				August 3, 2024				July 29, 2023
Net sales:
Products			82.9	%			83.5	%			83.3	%			84.1	%
Services and other			17.1				16.5				16.7				15.9
Total net sales			100.0				100.0				100.0				100.0
Cost of sales:
Products			51.7				51.6				51.7				51.7
Services and other			10.2				9.7				10.3				9.5
Total cost of sales			61.9				61.3				62.0				61.2
Gross profit			38.1				38.7				38.0				38.8
Selling, general and administrative expenses			37.9				37.2				38.4				37.1
Operating income (loss)			0.2				1.5				(0.4	)			1.7
Interest income			(0.0	)			(0.0	)			(0.0	)			(0.1	)
Interest expense			2.4				2.3				2.4				2.5
Loss on partial extinguishment of debt			—				0.0				—				0.0
Other non-operating (income) loss			—				(0.1	)			0.1				(0.1	)
Loss before income taxes and income    from equity method investees			(2.2	)			(0.7	)			(2.9	)			(0.6	)
Income tax (benefit) expense			(0.3	)			0.4				(0.3	)			0.2
Income from equity method investees			(0.3	)			(0.1	)			(0.3	)			(0.3	)
Net loss attributable to Class A and B-1    common stockholders			(1.6	)%			(1.0	)%			(2.3	)%			(0.5	)%

 

		Thirteen weeks ended								Twenty-six weeks ended
		August 3, 2024				July 29, 2023				August 3, 2024				July 29, 2023
Operational Data:
Comparable sales change			0.3	%			3.2	%			-0.5	%			4.1	%
Total pet care centers at end of period			1,420				1,429				1,420				1,429
Adjusted EBITDA (in thousands)		$	83,523			$	112,578			$	159,167			$	223,604

 

Thirteen and Twenty-six Weeks Ended August 3, 2024 Compared with Thirteen and Twenty-six Weeks Ended July 29, 2023

Net Sales and Comparable Sales

 

	Thirteen weeks ended																Twenty-six weeks ended
(dollars in thousands)	August 3, 2024				July 29, 2023				$ Change				% Change				August 3, 2024				July 29, 2023				$ Change				% Change
Consumables	$	744,766			$	734,077			$	10,689				1.5	%		$	1,508,740			$	1,497,128			$	11,612				0.8	%
Supplies and companion animals		518,983				544,521				(25,538	)			(4.7	%)			1,034,740				1,098,066				(63,326	)			(5.8	%)
Services and other		260,006				252,136				7,870				3.1	%			509,415				491,448				17,967				3.7	%
Net sales	$	1,523,755			$	1,530,734			$	(6,979	)			(0.5	%)		$	3,052,895			$	3,086,642			$	(33,747	)			(1.1	%)

 

Net sales decreased $7.0 million, or 0.5%, to $1.52 billion in the thirteen weeks ended August 3, 2024 compared to net sales of $1.53 billion in the thirteen weeks ended July 29, 2023. Net sales decreased $33.7 million, or 1.1%, to $3.05 billion in the twenty-six weeks ended August 3, 2024 compared to net sales of $3.09 billion in the twenty-six weeks ended July 29, 2023. We continue to experience momentum in consumables and services, although we have also experienced a decrease in supplies and companion animals sales driven by softening in discretionary spend associated with the current macroeconomic environment.

The comparison of consumables sales between the periods reflects the impact of prior year inflation, coupled with pricing actions taken in the third quarter of fiscal 2023. The decrease in supplies and companion animals sales is primarily due to a decrease in spending on certain non-essential items. The increase in services and other sales

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was primarily driven by a 10.1% and 10.3% increase in service-related sales during the thirteen and twenty-six week periods ended August 3, 2024, respectively, reflecting maturity of our veterinary hospital footprint and growth in our veterinary and grooming businesses.

We are unable to quantify certain factors impacting sales described above due to the fact that such factors are based on input measures or qualitative information that do not lend themselves to quantification.

Gross Profit

Gross profit decreased $12.3 million, or 2.1%, to $580.7 million in the thirteen weeks ended August 3, 2024 compared to gross profit of $593.0 million for the thirteen weeks ended July 29, 2023. As a percentage of sales, our gross profit rate was 38.1% for the thirteen weeks ended August 3, 2024 compared with 38.7% for the thirteen weeks ended July 29, 2023. Gross profit decreased $38.1 million, or 3.2%, to $1,159.4 million in the twenty-six weeks ended August 3, 2024 compared to gross profit of $1,197.5 million for the twenty-six weeks ended July 29, 2023. As a percentage of sales, our gross profit rate was 38.0% for the twenty-six weeks ended August 3, 2024 compared with 38.8% for the twenty-six weeks ended July 29, 2023. The decrease in gross profit rate between the periods was primarily due to the mix impact of higher consumables and services sales and softer supplies and companion animal sales during the thirteen and twenty-six weeks ended August 3, 2024. We are unable to quantify the factors impacting gross profit rate described above due to the fact that such factors are based on input measures or qualitative information that do not lend themselves to quantification.

Selling, General and Administrative (“SG&A”) Expenses

SG&A expenses increased $9.3 million, or 1.6%, to $578.3 million for the thirteen weeks ended August 3, 2024 compared to $569.0 million for the thirteen weeks ended July 29, 2023. As a percentage of net sales, SG&A expenses were 37.9% for the thirteen weeks ended August 3, 2024 compared with 37.2% for the thirteen weeks ended July 29, 2023. The increase in SG&A expenses period-over-period included higher pet care center payroll and fringe benefits and depreciation expense. This increase was partially offset by a decrease in stock compensation and advertising expenses.

SG&A expenses increased $27.9 million, or 2.4%, to $1,173.7 million for the twenty-six weeks ended August 3, 2024 compared to $1,145.8 million for the twenty-six weeks ended July 29, 2023. As a percentage of net sales, SG&A expenses were 38.4% for the twenty-six weeks ended August 3, 2024 compared with 37.1% for the twenty-six weeks ended July 29, 2023. The increase in SG&A expenses included higher pet care center payroll and fringe benefits and depreciation expense. This increase was partially offset by a decrease in stock compensation and advertising expenses.

Interest Expense

Interest expense decreased $0.7 million, or 1.8%, to $36.8 million in the thirteen weeks ended August 3, 2024 compared with $37.5 million in the thirteen weeks ended July 29, 2023. Interest expense decreased $1.1 million, or 1.4%, to $73.6 million in the twenty-six weeks ended August 3, 2024 compared with $74.7 million in the twenty-six weeks ended July 29, 2023. The decrease was primarily driven by pre-tax gains recognized in interest expense related to the Company's cash flow hedges during the thirteen and twenty-six week periods ended August 3, 2024. For more information on derivative instruments, refer to Note 4, “Derivative Instruments,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Loss on Partial Extinguishment of Debt

There was no loss on debt extinguishment and modification for the thirteen and twenty-six weeks ended August 3, 2024. Loss on partial extinguishment of debt was $0.3 million and $0.7 million for the thirteen and twenty-six weeks ended July 29, 2023, respectively. This loss was recognized in conjunction with the $35.0 million and $25.0 million repayments on the First Lien Term Loan in March 2023 and May 2023, respectively. For more information regarding these activities, refer to Note 3, “Senior Secured Credit Facilities,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

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Other Non-Operating (Income) Loss

There was no other non-operating income or loss for the thirteen weeks ended August 3, 2024. Other non-operating loss was $2.7 million for the twenty-six weeks ended August 3, 2024. Other non-operating income was $1.8 million and $4.6 million for the thirteen and twenty-six weeks ended July 29, 2023, respectively. For more information regarding this activity, refer to Note 5, “Fair Value Measurements,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Income Tax (Benefit) Expense

Our effective tax rates were 14.7% and 11.3%, resulting in income tax benefit of $4.7 million and $9.1 million for the thirteen and twenty-six weeks ended August 3, 2024, respectively, compared to effective tax rates of -85.5% and -53.1%, resulting in income tax expense of $6.7 million and $5.7 million for the thirteen and twenty-six weeks ended July 29, 2023, respectively. The change in effective tax rates for the thirteen and twenty-six weeks ended August 3, 2024 was primarily driven by a change in earnings and a decrease in the amount of compensation associated expenses not expected to be deductible for corporate income tax purposes.

Reconciliation of Non-GAAP Financial Measures to GAAP Measures

The following information provides definitions and reconciliations of certain non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP. Such non-GAAP financial measures are not calculated in accordance with GAAP and should not be considered superior to, as a substitute for or alternative to, and should be considered in conjunction with, the most comparable GAAP measures. The non-GAAP financial measures presented may differ from similarly-titled measures used by other companies.

Adjusted EBITDA

We present Adjusted EBITDA, a non-GAAP financial measure, because we believe it enhances an investor’s understanding of our financial and operational performance by excluding certain material non-cash items, unusual or non-recurring items that we do not expect to continue in the future, and certain other adjustments we believe are or are not reflective of our ongoing operations and performance. Adjusted EBITDA enables operating performance to be reviewed across reporting periods on a consistent basis. We use Adjusted EBITDA as one of the principal measures to evaluate and monitor our operating financial performance and to compare our performance to others in our industry. We also use Adjusted EBITDA in connection with establishing discretionary annual incentive compensation targets, to make budgeting decisions, to make strategic decisions regarding the allocation of capital, and to report our quarterly results as defined in our debt agreements, although under such agreements the measure is calculated differently and is used for different purposes.

Adjusted EBITDA is not a substitute for net loss, the most comparable GAAP measure, and is subject to a number of limitations as a financial measure, so it should be used in conjunction with GAAP financial measures and not in isolation. There can be no assurances that we will not modify the presentation of Adjusted EBITDA in the future. In addition, other companies in our industry may define Adjusted EBITDA differently, limiting its usefulness as a comparative measure. Refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures to GAAP Measures” included in the 2023 Form 10-K for more information regarding how we define Adjusted EBITDA.

 

 

 

 

 

 

 

 

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The table below reflects the calculation of Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented:

 

		Thirteen weeks ended								Twenty-six weeks ended
(dollars in thousands)		August 3, 2024				July 29, 2023				August 3, 2024				July 29, 2023
Net loss attributable to Class A and B-1    common stockholders		$	(24,823	)		$	(14,606	)		$	(71,306	)		$	(16,498	)
Interest expense, net			36,133				36,729				72,532				72,754
Income tax (benefit) expense			(4,651	)			6,732				(9,128	)			5,724
Depreciation and amortization			49,718				48,664				99,305				97,919
Income from equity method investees			(4,191	)			(3,328	)			(9,077	)			(6,458	)
Loss on partial extinguishment of debt			—				305				—				746
Asset impairments and write offs			3,561				1,031				7,069				1,035
Equity-based compensation			11,914				24,119				29,348				46,248
Other non-operating (income) loss			—				(1,795	)			2,665				(4,614	)
Mexico joint venture EBITDA (1)			9,902				8,544				20,398				17,278
Acquisition and divestiture-related costs (2)			—				—				3,719				—
Other costs (3)			5,960				6,183				13,642				9,470
Adjusted EBITDA		$	83,523			$	112,578			$	159,167			$	223,604
Net sales		$	1,523,755			$	1,530,734			$	3,052,895			$	3,086,642
Net margin (4)			(1.6	)%			(1.0	)%			(2.3	)%			(0.5	)%
Adjusted EBITDA Margin			5.5	%			7.4	%			5.2	%			7.2	%

 

 

		Thirteen weeks ended								Twenty-six weeks ended
(dollars in thousands)		August 3, 2024				July 29, 2023				August 3, 2024				July 29, 2023
Net income		$	8,822			$	6,656			$	18,377			$	12,915
Depreciation			6,996				6,443				13,944				12,151
Income tax expense			3,903				2,364				7,359				6,438
Foreign currency (gain) loss			(380	)			395				99				522
Interest expense, net			463				1,230				1,016				2,530
EBITDA		$	19,804			$	17,088			$	40,795			$	34,556
50% of EBITDA		$	9,902			$	8,544			$	20,398			$	17,278

 

 

Free Cash Flow

Free Cash Flow is a non-GAAP financial measure that is calculated as net cash provided by operating activities less cash paid for fixed assets. Management believes that Free Cash Flow, which measures our ability to generate additional cash from our business operations, is an important financial measure for use in evaluating the Company’s financial performance.

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The table below reflects the calculation of Free Cash Flow for the periods presented:

 

		Twenty-six weeks ended
		August 3, 2024				July 29, 2023
(dollars in thousands)
Net cash provided by operating activities		$	60,956			$	134,265
Cash paid for fixed assets			(60,029	)			(114,023	)
Free Cash Flow		$	927			$	20,242

 

Liquidity and Capital Resources

Overview

Our primary sources of liquidity are funds generated by operating activities and available capacity for borrowings on our $581 million secured asset-based revolving credit facility (as amended, the “ABL Revolving Credit Facility”). Our ability to fund our operations, to make planned capital investments, to make scheduled debt payments and to repay or refinance indebtedness depends on our future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business, and other factors, some of which are beyond our control. Our liquidity as of August 3, 2024 was $655.2 million, inclusive of cash and cash equivalents of $127.6 million and $527.6 million of availability on the ABL Revolving Credit Facility.

We are a party to contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. We believe that our current resources, together with anticipated cash flows from operations and borrowing capacity under the ABL Revolving Credit Facility will be sufficient to finance our operations, meet our current cash requirements, and fund anticipated capital investments for at least the next 12 months. We may, however, seek additional financing to fund future growth or refinance our existing indebtedness through the debt capital markets, but we cannot be assured that such financing will be available on favorable terms, or at all.

Cash Flows

The following table summarizes our consolidated cash flows:

 

		Twenty-six weeks ended
(dollars in thousands)		August 3, 2024				July 29, 2023
Total cash provided by (used in):
Operating activities		$	60,956			$	134,265
Investing activities			(58,065	)			(105,815	)
Financing activities			(5,894	)			(65,768	)
Net decrease in cash, cash equivalents   and restricted cash		$	(3,003	)		$	(37,318	)

 

Operating Activities

Our primary source of operating cash is sales of products and services to customers, which are substantially all on a cash basis, and therefore provide us with a significant source of liquidity. Our primary uses of cash in operating activities include: purchases of inventory; freight and warehousing costs; employee-related expenditures; occupancy-related costs for our pet care centers, distribution centers and corporate support centers; credit card fees; interest under our debt agreements; and marketing expenses. Net cash provided by operating activities is impacted by our net loss adjusted for certain non-cash items, including: depreciation, amortization, impairments and write-offs; amortization of debt discounts and issuance costs; deferred income taxes; equity-based compensation; impairments of goodwill and intangible assets; other non-operating (income) loss; and the effect of changes in operating assets and liabilities.

Net cash provided by operating activities was $61.0 million in the twenty-six weeks ended August 3, 2024 compared with net cash provided by operating activities of $134.3 million in the twenty-six weeks ended July 29,

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2023. The decrease in operating cash flow was driven by lower sales and an increase in cash paid for inventory, which was partially offset by a decrease in cash paid for operating leases and timing differences in accounts payable.

 

Investing Activities

Net cash used in investing activities was $58.1 million and $105.8 million for the twenty-six weeks ended August 3, 2024 and July 29, 2023, respectively. The decrease was primarily driven by reductions in capital spend, reflecting fewer anticipated hospital build-outs and a balanced approach between focused investments and cash flow.

 

Financing Activities

Net cash used in financing activities was $5.9 million for the twenty-six weeks ended August 3, 2024, compared with $65.8 million used in financing activities in the twenty-six weeks ended July 29, 2023.

Financing cash flows in the twenty-six weeks ended August 3, 2024 primarily consisted of borrowings and repayments on the ABL Revolving Credit Facility.

Financing cash flows in the twenty-six weeks ended July 29, 2023 primarily consisted of $60.0 million in principal repayments on the term loan.

Sources of Liquidity

Senior Secured Credit Facilities

On March 4, 2021, the Company completed a refinancing transaction by entering into a $1,700 million secured term loan facility maturing on March 4, 2028 (the “First Lien Term Loan”) and the ABL Revolving Credit Facility, maturing on March 4, 2026 with availability of up to $500.0 million, subject to a borrowing base.

In March 2024, the Company amended the ABL Revolving Credit Facility, which now consists of two tranches, to increase its total availability from $500.0 million to $581.0 million and extend the maturity on a portion of this availability. The first tranche has availability of up to $35.0 million, subject to a borrowing base, maturing on March 4, 2026. The second tranche has availability of up to $546.0 million, subject to a borrowing base, maturing on March 29, 2029. Interest on the ABL Revolving Credit Facility is now based on, at the Company's option, either the base rate subject to a 1% floor, or Term SOFR subject to a floor of 0%, plus an applicable margin. All other key terms of the ABL Revolving Credit Facility remained unchanged.

Interest on the First Lien Term Loan is based on, at the Company’s option, either a base rate or Adjusted Term SOFR, subject to a 0.75% floor, payable upon maturity of the SOFR contract, in either case plus the applicable rate. The base rate is the greater of the bank prime rate, federal funds effective rate plus 0.5% or Adjusted Term SOFR plus 1.0%. The applicable rate is 2.25% per annum for a base rate loan or 3.25% per annum for an Adjusted Term SOFR loan. Principal and interest payments commenced on June 30, 2021. Principal payments are typically $4.25 million quarterly. During the thirteen and twenty-six weeks ended July 29, 2023, the Company repaid $35.0 million and $25.0 million in principal, respectively, of the First Lien Term Loan using existing cash on hand. The repayments were applied to remaining principal payments in order of scheduled payment date.

For more information regarding this indebtedness, refer to Note 3, “Senior Secured Credit Facilities,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Derivative Instruments

In November 2022, the Company entered into a series of interest rate cap agreements to limit the maximum interest on a portion of the Company’s variable-rate debt and decrease its exposure to interest rate variability relating to three-month Term SOFR. The interest rate caps became effective December 30, 2022 and expire on December 31, 2024.

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In March 2023, the Company entered into an interest rate collar agreement to limit the maximum interest on a portion of the Company’s variable-rate debt and decrease its exposure to interest rate variability relating to three-month Term SOFR. The interest rate collar became effective March 31, 2023 and expires on March 31, 2026.

In June 2023, the Company entered into an interest rate collar agreement to limit the maximum interest on a portion of the Company’s variable-rate debt and decrease its exposure to interest rate variability relating to three-month Term SOFR. The interest rate collar became effective September 30, 2023 and expires on December 31, 2026.

In December 2023, the Company entered into an interest rate collar agreement to limit the maximum interest on a portion of the Company’s variable-rate debt and decrease its exposure to interest rate variability relating to three-month Term SOFR. The interest rate collar becomes effective December 31, 2024 and expires on December 31, 2026.

In March 2024, the Company entered into two interest rate collar agreements to limit the maximum interest on a portion of the Company’s variable-rate debt and decrease its exposure to interest rate variability relating to three-month Term SOFR. The interest rate collars become effective on December 31, 2024 and expire on December 31, 2026.

In August 2024, the Company entered into an interest rate swap agreement to fix the interest rate on a portion of the Company’s variable-rate debt and decrease its exposure to interest rate variability relating to three-month Term SOFR. The interest rate swap becomes effective September 30, 2024 and expires on December 31, 2026.

For more information regarding derivative instruments, refer to Note 4, “Derivative Instruments,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires us to make assumptions and estimates about future results and apply judgments that affect the reported amounts of assets, liabilities, net sales, expenses and related disclosures. We base our estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time our consolidated financial statements are prepared. On an ongoing basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Goodwill and Trade Name Intangible Assets

Goodwill

We evaluate goodwill annually in our fourth quarter or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We have identified one reporting unit and selected our fourth fiscal quarter to perform our annual goodwill impairment testing. Goodwill impairment guidance provides entities the option to perform a qualitative assessment to determine whether further impairment testing is necessary. The qualitative assessment requires significant judgments about economic conditions, including the entity’s operating environment, its industry and other market conditions, entity-specific events related to financial performance or loss of key personnel, and other events that could impact the reporting unit. If management concludes, based on assessment of relevant events, facts, and circumstances, that it is more likely than not that a reporting unit’s fair value is greater than its carrying value, no further impairment testing is required.

If management’s assessment of qualitative factors indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative assessment is performed. We also have the option to bypass the qualitative assessment described above and proceed directly to the quantitative assessment, where we compare the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of our net assets assigned to that unit, goodwill is not considered impaired, and we are not required to perform further testing. If the carrying value of net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we would record an impairment loss equal to the difference. If a quantitative assessment is performed, the evaluation includes management estimates of cash flow projections based on internal future

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projections and/or use of a market approach by reviewing transactional and financial data of publicly traded companies. The assumptions used in the impairment analysis are inherently subject to uncertainty and small changes in these assumptions could have a significant impact on the concluded value. The Company's market capitalization is also considered as part of the analysis, in order to further validate the reasonableness of the fair values concluded for the reporting unit. Factors that may trigger an interim impairment test may include, but are not limited to, current economic and market conditions or a significant decline in the Company's share price and market capitalization compared to net book value.

Indefinite-lived trade name

We consider the Petco trade name to be an indefinite-lived intangible asset, as we currently anticipate that this trade name will contribute cash flows to us indefinitely. We perform our annual impairment test during the fourth quarter of each year or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Management has the option to first perform a qualitative assessment of its trade name asset to determine whether it is necessary to perform a quantitative impairment test. We also have the option to bypass the qualitative assessment described above and proceed directly to quantitative assessment.

Factors that may trigger an interim impairment test may include, but are not limited to, a significant decline in the Company's share price and market capitalization compared to net book value, or changes in the pattern of utilization of the intangible asset. Significant assumptions used in the determination of fair value of the trade name generally include prospective financial information, growth rates, discount rates and comparable multiples from publicly traded companies in similar industries. An impairment charge is recorded for the amount by which the carrying amount of the trade name exceeds its fair value.

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in the 2023 Form 10-K.

Recent Accounting Pronouncements

Refer to Note 1, “Summary of Significant Accounting Policies,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for information regarding recently issued accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are subject to market risks arising from transactions in the normal course of our business. These risks are primarily associated with interest rate fluctuations, as well as changes in our credit standing, based on the capital and credit markets, which are not predictable. We do not currently hold any instruments for trading purposes.

Interest Rate Risk

We are subject to interest rate risk in connection with the First Lien Term Loan and the ABL Revolving Credit Facility. As of August 3, 2024, we had $1,595.3 million outstanding under the First Lien Term Loan and no amounts outstanding under the ABL Revolving Credit Facility. The First Lien Term Loan and the ABL Revolving Credit Facility each bear interest at variable rates. An increase of 100 basis points in the variable rates on the First Lien Term Loan and the ABL Revolving Credit Facility as of August 3, 2024 would have increased annual cash interest in the aggregate by approximately $16.2 million. Additionally, we entered into cash flow hedges to limit the maximum interest rate on a portion of our variable-rate debt and limit our exposure to interest rate variability, refer to Note 4, “Derivative Instruments,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

We cannot predict market fluctuations in interest rates and their impact on our debt, nor can there be any assurance that long-term fixed-rate debt will be available at favorable rates, if at all. Consequently, future results may differ materially from estimated results due to adverse changes in interest rates or debt availability.

Credit Risk

As of August 3, 2024, our cash and cash equivalents were maintained at major financial institutions in the United States, and our current deposits are likely in excess of insured limits. We believe these institutions have

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sufficient assets and liquidity to conduct their operations in the ordinary course of business with little or no credit risk to us.

Foreign Currency Risk

Substantially all of our business is currently conducted in U.S. dollars, with a small amount denominated in foreign currencies. Our expenses are generally denominated in the currencies of the jurisdictions in which we conduct our operations. Our results of current and future operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. We do not enter into forward currency contracts to hedge our foreign currency exposure. A hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material effect on our operating results.

Item 4. Controls and Procedures.

Management’s Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.

As of the end of the period covered by this Form 10-Q, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of August 3, 2024.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended August 3, 2024, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

 

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

 

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

See Note 7, “Commitments and Contingencies,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for a description of legal proceedings, which is incorporated herein by reference.

Item 1A. Risk Factors.

Reference is made to Part I, Item 1A, “Risk Factors” included in the 2023 Form 10-K and Part II, Item 1A, “Risk Factors” included in our Quarterly Report on Form 10-Q for the quarter ended May 4, 2024 (the “Q1 Form 10-Q”) for information concerning risk factors. Except as set forth in the Q1 Form 10-Q, there have been no material changes with respect to the risk factors disclosed in the 2023 Form 10-K. You should carefully consider such factors, which could materially and adversely affect our business, financial condition and/or results of operations. The risks described in the Q1 Form 10-Q and the 2023 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

As previously disclosed, on May 13, 2024 the Company issued 1,470,589 shares of Class A Common Stock, par value $0.001 per share, to GSSB Corporation, an Ontario corporation, of which Glenn Murphy, the Company's Executive Chairman, is the sole stockholder, at a price per share equal to $1.70 for a total purchase price of $2,500,001.30. The shares were issued in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None of our directors or Section 16 officers adopted or terminated a Rule 10b5-1 trading arrangement (as defined in Item 408(a) of Regulation S-K) or a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K) during the quarterly period covered by this Form 10-Q.

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Item 6. Exhibits.

 

The following is a list of exhibits filed as part of this Form 10-Q:

 

Exhibit Number		Description
10.1†		Stock Purchase Agreement, dated May 13, 2024, among Petco Health and Wellness Company, Inc., GSSB Corporation and Scooby Aggregator, LP. (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K, filed on May 14, 2024)
10.2†		Offer Letter, dated May 13, 2024, between Glenn Murphy and Petco Health and Wellness Company, Inc. (incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K, filed on May 14, 2024)
10.3†		Offer Letter, dated July 17, 2024, between Joel D. Anderson and Petco Health and Wellness Company, Inc. (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K, filed on July 17, 2024)
10.4†		First Amendment to Restricted Stock Unit Award and Nonqualified Stock Options, effective July 29, 2024, between R. Michael Mohan and Petco Health and Wellness Company, Inc. (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K, filed on August 2, 2024)
10.5†		Transition and Separation Agreement and General Release of Claims between Petco Animal Supplies Stores, Inc. and Amy College dated June 4, 2024
31.1		Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

†	Management contract or compensatory plan or arrangement.

 

* Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		Petco Health and Wellness Company, Inc.
Date: September 10, 2024	By:		/s/ Brian LaRose
			Brian LaRose
			Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

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