美國
證券和交易委員會
華盛頓特區20549
表格
（標記一）
根據1934年證券交易法第13或15(d)節的季度報告 |
截至季度結束日期的財務報告
或者
根據1934年證券交易法第13或15(d)節的轉型報告書 |
過渡期從 到
委託文件編號：001-39866
（依據其憲章指定的註冊名稱）
（國家或其他管轄區的 公司成立或組織） |
（IRS僱主 唯一識別號碼） |
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(主要行政辦公室地址) |
(郵政編碼) |
公司電話號碼，包括區號：（
在法案第12(b)條的規定下注冊的證券：
每個類別的標題 |
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交易 符號: |
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在其上註冊的交易所的名稱 |
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請在以下複選框中打勾，指示註冊人：(1)在前12個月(或註冊人被要求提交這些報告的更短期間內)已經提交了1934年證券交易法第13或15(d)條規定需要提交的所有報告；以及(2)在過去的90天內一直受到了此類文件提交要求的限制。
請通過勾選的方式指示註冊人是否在過去12個月內（或在註冊人被要求提交此類文件的較短期間內）根據S-t法規第405條（本章第232.405條）提交了所有需要提交的互動數據文件。
請勾選標記以說明註冊人是大型快速申報人、加速申報人、非加速申報人、較小的報告公司還是新興成長型公司。請查看《交易所法》第120億.2條中「大型快速申報人」、「加速申報人」、「較小的報告公司」和「新興成長型公司」的定義。
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☒ |
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加速文件提交人 |
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☐ |
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非加速文件提交人 |
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☐ |
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較小的報告公司 |
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新興成長公司 |
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如果是新興成長型企業，請勾選複選標記，表明註冊者已選擇不使用延長過渡期來符合根據證券交易法第13(a)條規定提供的任何新財務會計準則。 ☐
請勾選「是」，如果報告人是外殼公司（定義見證券交易法規則12b-2）。是 ☐ 沒有
截至2024年12月4日，註冊人的A類普通股發行股份數量爲
截至2024年12月4日，註冊人的B-1類普通股已發行股數爲
截至2024年12月4日，註冊人的B-2類普通股的流通股數爲
目錄
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頁 |
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第一部分。 |
4 |
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項目1. |
4 |
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4 |
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5 |
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6 |
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7 |
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8 |
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9 |
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項目2. |
17 |
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項目3。 |
26 |
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項目4。 |
26 |
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第二部分。 |
28 |
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項目1. |
28 |
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項目1A。 |
28 |
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項目2. |
28 |
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項目3。 |
28 |
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項目4。 |
28 |
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第五項。 |
28 |
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第六項。 |
29 |
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30 |
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1
前瞻性聲明
本季度報告表格10-Q（以下簡稱「表格10-Q」）包含根據1995年《私人證券訴訟改革法》的第27A條以及1933年《證券法》及其修正案和1934年《證券交易法》及其修正案中的第21E條的含義所定義的「前瞻性聲明」，涉及對預期、信念、計劃、目標、策略、未來事件或績效及基礎假設和其他非歷史事實聲明的期望，包括但不限於以下方面的聲明：我們對營業收入、費用、盈利能力和其他經營結果的預期；我們的增長計劃；我們在參與市場中有效競爭的能力；我們轉型計劃的執行；以及某些宏觀經濟因素的影響，包括通貨膨脹和利率壓力、消費模式、全球供應鏈限制以及全球經濟和地緣政治發展的影響， 對我們的業務的影響。本表格10-Q中的前瞻性及其他聲明還可能涉及我們在可持續性倡議方面的進展、計劃和目標，這些聲明的加入並不表明這些內容對投資者必然重要或在我們向美國證券交易委員會（「SEC」）的文件中需要披露。此類計劃和目標可能會變化，關於這些計劃和目標的聲明並不保證或承諾它們會被實現。此外，歷史、當前和前瞻性的可持續性相關聲明可能基於仍在發展中的進展衡量標準、持續演變的內部控制和流程，以及未來可能會發生變化的假設。
此類前瞻性聲明通常可以通過使用前瞻性術語來識別，例如「相信」、「期望」、「可能」、「打算」、「將」、「應」、「應該」、「預期」、「機會」、「示例」，或其否定形式或其他變體或類似術語。儘管我們相信這些聲明中反映的期望和假設是合理的，但無法保證這些期望會被證明是正確的，也無法保證任何前瞻性結果會發生或實現。本10-Q表格中所包含的內容，不應作爲對任何未來事項（包括與我們的運營、業務或財務控件相關的任何事項）的承諾、陳述或保證。所有前瞻性聲明都基於對未來可能發生或不發生事件的當前期望和假設，而這些事件本質上受到重大不確定性和偶然性的影響，其中許多因素不在我們的控制之內。
前瞻性陳述受到許多風險、不確定性和其他因素的影響，這些因素可能導致實際結果或事件與這些前瞻性陳述中討論的潛在結果或事件產生重大差異，包括但不限於在此10-Q表格中確定的因素以及以下因素：(i) 競爭加劇（包括來自多渠道零售商、大衆和雜貨零售商及電子商務提供商的競爭）；(ii) 消費對我們產品和/或服務需求的減少；(iii) 我們對關鍵供應商的依賴；(iv) 我們吸引和留住合格員工的能力；(v) 來源於法定、監管和/或法律發展的風險；(vi) 我們運營市場中的宏觀經濟壓力，包括通貨膨脹、當前利率和關稅的影響；(vii) 未能有效管理我們的成本；(viii) 我們對信息技術系統的依賴；(ix) 我們阻止或有效響應數據隱私或安全漏洞的能力；(x) 我們有效管理或整合戰略風險投資、聯盟或收購併實現這些交易預期收益的能力；(xi) 可能影響我們提供具有吸引力的促銷融資能力的經濟或監管發展；(xii) 業務中斷和其他供應鏈問題；(xiii) 災難性事件、政治緊張局勢、衝突和戰爭（例如烏克蘭和中東地區的持續衝突）、健康危機和流行病；(xiv) 我們維持積極品牌形象和知名度的能力；(xv) 產品安全和質量問題；(xvi) 勞動或就業法律或法規的變化；(xvii) 我們有效管理房地產投資組合的能力；(xviii) 資本市場或我們供應商信用條款的限制；(xix) 我們信用評級的變化；(xx) 我們商譽和其他無形資產賬面價值的減值；(xxi) 我們成功實施運營調整、實現成本行動計劃預期收益和推動盈利能力提升的能力；(xxii) 在「風險因素」中提到的其他風險、不確定性和其他因素，以及在此10-Q表格和我們向SEC提交的其他文件中識別的因素。任何這些因素的發生都可能顯著改變這些聲明中列出的結果。
我們提醒您，上述風險、不確定性和其他因素的列表並不完整，前瞻性聲明僅在發表之日有效。除非適用的法律、法規或其他合法權威要求，否則我們沒有責任公開更新任何此類前瞻性聲明，無論是由於新信息、未來事件還是其他原因。
此外，「我們相信」等表述反映了我們對相關主題的信念和觀點。這些表述基於截至本表格10-Q日期可獲得的信息。雖然我們認爲這些信息爲這些陳述提供了合理的基礎，但這些信息可能是有限的或
2
不完整。我們的聲明不應被解讀爲我們對所有相關信息進行了全面的調查或審查。這些聲明本質上是不確定的，投資者應謹慎，不要過度依賴這些聲明。
3
第一部分—財政財務信息
Item 1. Financial Statements.
PETCO HEALTH AND WELLNESS COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
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November 2, |
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February 3, |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Receivables, less allowance for credit losses ($ |
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Merchandise inventories, net |
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Prepaid expenses |
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Other current assets |
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Total current assets |
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Fixed assets |
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Less accumulated depreciation |
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( |
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( |
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Fixed assets, net |
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Operating lease right-of-use assets |
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Goodwill |
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Trade name |
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Other long-term assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable and book overdrafts |
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$ |
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$ |
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Accrued salaries and employee benefits |
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Accrued expenses and other liabilities |
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Current portion of operating lease liabilities |
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Current portion of long-term debt and other lease liabilities |
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Total current liabilities |
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Senior secured credit facilities, net, excluding current portion |
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Operating lease liabilities, excluding current portion |
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Deferred taxes, net |
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Other long-term liabilities |
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Total liabilities |
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Stockholders' equity: |
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Class A common stock, $ |
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Class B-1 common stock, $ |
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Class B-2 common stock, $ |
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Preferred stock, $ |
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Additional paid-in-capital |
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Accumulated deficit |
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( |
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( |
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Accumulated other comprehensive (loss) income |
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( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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See accompanying notes to consolidated financial statements.
4
PETCO HEALTH AND WELLNESS COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts) (Unaudited)
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Thirteen weeks ended |
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Thirty-nine weeks ended |
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November 2, |
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October 28, |
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November 2, |
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October 28, |
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Net sales: |
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Products |
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$ |
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$ |
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$ |
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$ |
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Services and other |
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Total net sales |
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Cost of sales: |
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Products |
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Services and other |
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Total cost of sales |
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Gross profit |
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Selling, general and administrative expenses |
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Goodwill impairment |
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— |
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— |
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Operating income (loss) |
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( |
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( |
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( |
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Interest income |
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( |
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( |
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( |
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Interest expense |
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Loss on partial extinguishment of debt |
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— |
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— |
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Other non-operating income |
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( |
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( |
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( |
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( |
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Loss before income taxes and income |
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( |
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( |
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( |
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( |
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Income tax benefit |
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( |
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( |
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( |
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( |
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Income from equity method investees |
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( |
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( |
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( |
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( |
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Net loss attributable to Class A and B-1 |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Net loss per Class A and B-1 common share: |
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Basic |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Diluted |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Weighted average shares used in computing net |
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Basic |
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Diluted |
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See accompanying notes to consolidated financial statements.
5
PETCO HEALTH AND WELLNESS COMPANY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands) (Unaudited)
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Thirteen weeks ended |
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Thirty-nine weeks ended |
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November 2, |
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October 28, |
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November 2, |
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October 28, |
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Net loss attributable to Class A and B-1 |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Other comprehensive (loss) income, net of tax: |
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Foreign currency translation adjustment |
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( |
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( |
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Unrealized gain on derivatives |
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(Gains) losses on derivatives reclassified to income |
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( |
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( |
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( |
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Total other comprehensive (loss) income, net of tax |
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( |
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( |
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Comprehensive loss attributable to Class A and |
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$ |
( |
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$ |
( |
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$ |
( |
) |
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$ |
( |
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See accompanying notes to consolidated financial statements.
6
PETCO HEALTH AND WELLNESS COMPANY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands) (Unaudited)
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Common stock |
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Class |
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Class |
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Class |
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Amount |
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Additional paid-in capital |
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Accumulated |
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Accumulated |
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Total |
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Balance at February 3, 2024 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Equity-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Foreign currency translation |
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— |
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— |
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— |
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— |
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— |
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— |
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Unrealized gain on derivatives (Note 5), |
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— |
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— |
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— |
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— |
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|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Gains on derivatives reclassified to |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Issuance of common stock, |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
||
Balance at May 4, 2024 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||||
Equity-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Unrealized loss on derivatives (Note 5), |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Gains on derivatives reclassified to |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Issuance of common stock, |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Balance at August 3, 2024 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||||
Equity-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Unrealized gain on derivatives (Note 5), |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Gains on derivatives reclassified to |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Issuance of common stock, |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
||
Balance at November 2, 2024 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||||
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
|
Class |
|
|
Class |
|
|
Class |
|
|
Amount |
|
|
Additional paid-in capital |
|
|
Retained earnings (Accumulated deficit) |
|
|
Accumulated |
|
|
Total |
|
||||||||
Balance at January 28, 2023 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
|
|
|||||||
Equity-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Unrealized loss on derivatives (Note 4), |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Losses on derivatives reclassified to |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Issuance of common stock, |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
||
Balance at April 29, 2023 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||||
Equity-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Unrealized gain on derivatives (Note 4), |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Losses on derivatives reclassified to |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Issuance of common stock, |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
||
Balance at July 29, 2023 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Equity-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Unrealized gain on derivatives (Note 5), |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Gains on derivatives reclassified to |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Issuance of common stock, |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Balance at October 28, 2023 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||||
See accompanying notes to consolidated financial statements.
7
PETCO HEALTH AND WELLNESS COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
|
|
Thirty-nine weeks ended |
|
|||||
|
|
November 2, |
|
|
October 28, |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash provided by operating |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Amortization of debt discounts and issuance costs |
|
|
|
|
|
|
||
Provision for deferred taxes |
|
|
( |
) |
|
|
( |
) |
Equity-based compensation |
|
|
|
|
|
|
||
Impairments, write-offs and losses on sale of fixed and other assets |
|
|
|
|
|
|
||
Loss on partial extinguishment of debt |
|
|
— |
|
|
|
|
|
Income from equity method investees |
|
|
( |
) |
|
|
( |
) |
Amounts reclassified out of accumulated other comprehensive (loss) income |
|
|
( |
) |
|
|
|
|
Goodwill impairment |
|
|
— |
|
|
|
|
|
Non-cash operating lease costs |
|
|
|
|
|
|
||
Other non-operating income |
|
|
( |
) |
|
|
( |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
||
Receivables |
|
|
|
|
|
( |
) |
|
Merchandise inventories |
|
|
( |
) |
|
|
( |
) |
Prepaid expenses and other assets |
|
|
|
|
|
( |
) |
|
Accounts payable and book overdrafts |
|
|
( |
) |
|
|
|
|
Accrued salaries and employee benefits |
|
|
|
|
|
|
||
Accrued expenses and other liabilities |
|
|
( |
) |
|
|
( |
) |
Operating lease liabilities |
|
|
( |
) |
|
|
( |
) |
Other long-term liabilities |
|
|
|
|
|
( |
) |
|
Net cash provided by operating activities |
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
|
||
Cash paid for fixed assets |
|
|
( |
) |
|
|
( |
) |
Cash paid for acquisitions, net of cash acquired |
|
|
( |
) |
|
|
( |
) |
Cash paid for investment |
|
|
( |
) |
|
|
— |
|
Proceeds from investment |
|
|
|
|
|
|
||
Proceeds from sale of assets |
|
|
|
|
|
— |
|
|
Cash received from partial surrender of officers' life insurance |
|
|
|
|
|
— |
|
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
||
Borrowings under long-term debt agreements |
|
|
|
|
|
— |
|
|
Repayments of long-term debt |
|
|
( |
) |
|
|
( |
) |
Debt refinancing costs |
|
|
( |
) |
|
|
— |
|
Payments for finance lease liabilities |
|
|
( |
) |
|
|
( |
) |
Proceeds from employee stock purchase plan and stock option exercises |
|
|
|
|
|
|
||
Tax withholdings on stock-based awards |
|
|
( |
) |
|
|
( |
) |
Proceeds from issuance of common stock |
|
|
|
|
|
— |
|
|
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
Net decrease in cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
( |
) |
Cash, cash equivalents and restricted cash at beginning of period |
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash at end of period |
|
$ |
|
|
$ |
|
||
Supplemental cash flow disclosures: |
|
|
|
|
|
|
||
Interest paid, net |
|
$ |
|
|
$ |
|
||
Income taxes paid |
|
$ |
|
|
$ |
|
||
Supplemental non-cash investing and financing activities disclosure: |
|
|
|
|
|
|
||
Accounts payable and accrued expenses for capital expenditures |
|
$ |
|
|
$ |
|
||
See accompanying notes to consolidated financial statements.
8
PETCO HEALTH AND WELLNESS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
Petco Health and Wellness Company, Inc. (together with its consolidated subsidiaries, the “Company”) is a pet health and wellness company focused on improving the lives of pets, pet parents, and its own partners. The Company manages its business as
In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary for a fair presentation as prescribed by accounting principles generally accepted in the United States (“GAAP”). All adjustments were comprised of normal recurring adjustments, except as noted in these Notes to Consolidated Financial Statements.
There have been no significant changes from the significant accounting policies disclosed in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2024.
The accompanying consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Interim financial results are not necessarily indicative of results anticipated for the full year. The accompanying consolidated financial statements and these Notes to Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2024, from which the prior year balance sheet information herein was derived.
Use of Estimates
The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates are based on information that is currently available and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.
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 the three-month Secured Overnight Financing Rate as published by CME Group ("Term SOFR"). The interest rate caps became effective December 30, 2022 and expire on December 31, 2024. The interest rate caps are accounted for as cash flow hedges, and changes in the fair value of the interest rate caps are reported as a component of accumulated other comprehensive income (loss) ("AOCI").
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.
9
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.
The interest rate collars are accounted for as cash flow hedges, and changes in the fair value of the interest rate collars are reported as a component of AOCI.
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 became effective September 30, 2024 and expires on December 31, 2026. The interest rate swap is accounted for as a cash flow hedge, and changes in the fair value of the interest rate swap are reported as a component of AOCI.
Cash and Cash Equivalents
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the consolidated balance sheets to the total amounts reported in the consolidated statements of cash flows (in thousands):
|
|
November 2, |
|
|
February 3, |
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Restricted cash included in |
|
|
|
|
|
|
||
Total cash, cash equivalents and restricted cash in |
|
$ |
|
|
$ |
|
||
2. Revenue Recognition
Net sales by product type and services were as follows (in thousands):
|
Thirteen weeks ended |
|
|
Thirty-nine weeks ended |
|
||||||||||
|
November 2, |
|
|
October 28, |
|
|
November 2, |
|
|
October 28, |
|
||||
Consumables |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Supplies and companion animals |
|
|
|
|
|
|
|
|
|
|
|
||||
Services and other |
|
|
|
|
|
|
|
|
|
|
|
||||
Net sales |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
3. Goodwill
The changes in the carrying amount of the Company’s goodwill were as follows (in thousands):
|
|
Thirty-nine weeks ended |
|
|||||
|
|
November 2, |
|
|
October 28, |
|
||
Beginning balance |
|
$ |
|
|
$ |
|
||
Activity from acquisitions and divestiture |
|
|
( |
) |
|
|
|
|
Impairment |
|
|
— |
|
|
|
( |
) |
Ending Balance |
|
$ |
|
|
$ |
|
||
10
The Company has
During the third quarter of fiscal 2023, the Company concluded that indicators of impairment existed due to declines in the Company's share price, as well as macroeconomic conditions, and performed an interim impairment test. The fair value of the Company’s reporting unit was estimated by management with the assistance of a third-party valuation specialist. Fair value estimates used in the quantitative impairment test were calculated using a combination of discounted cash flow analysis and a public company analysis. The discounted cash flow analysis measures the value of an asset by the present value of its future estimated cash flows. The Company makes estimates and assumptions about sales, gross margins, selling, general and administrative percentages and profit margins, based on budgets and forecasts, business plans, economic projections, anticipated future cash flows, and marketplace data. The public company analysis analyzes transactional and financial data of publicly traded companies to develop valuation multiples. These multiples are then applied to the Company to develop an indication of fair value.
Significant assumptions used in the determination of fair value of the reporting unit generally include prospective financial information, discount rates, terminal growth rates, and earnings multiples. The discounted cash flow model used to determine the fair value of the reporting unit during the third quarter of fiscal 2023 reflected the Company's most recent cash flow projections, a discount rate of
As a result of the impairment test, the Company concluded that the carrying value of the Company’s reporting unit exceeded its fair value and recorded a pre-tax goodwill impairment charge of $
During the first quarter of fiscal 2024, due to declines in the Company's share price, the Company performed an interim impairment test. As the estimated fair value of the Company's reporting unit was in excess of its carrying value, the Company concluded that goodwill was not impaired during the first quarter of fiscal 2024. The fair value of the Company's reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit.
The discounted cash flow model used to determine the fair value of the reporting unit during the first quarter of fiscal 2024 reflected the Company's most recent cash flow projections, a discount rate of
4. Senior Secured Credit Facilities
On
As of November 2, 2024,
Term Loan Facilities
Interest on the First Lien Term Loan is based on, at the Company’s option, either a base rate or Term SOFR plus the credit spread adjustment recommended by the Alternative Reference Rates Committee ("Adjusted Term SOFR"), subject to a
11
rate. The base rate is the greater of the bank prime rate, federal funds effective rate plus
The Company voluntarily repaid $
As of November 2, 2024, the outstanding principal balance of the First Lien Term Loan was $
Revolving Credit Facilities
In March 2024, the Company amended the ABL Revolving Credit Facility to increase its total availability and extend the maturity on a portion of the availability. Fees of $
As of November 2, 2024 and February 3, 2024,
The ABL Revolving Credit Facility has availability up to $
Prior to the March 2024 amendment, interest on the ABL Revolving Credit Facility was based on, at the Company’s option, either the base rate or Adjusted Term SOFR subject to a floor of
12
The applicable margin is adjusted quarterly based on the average historical excess availability as a percentage of the Line Cap, which represents the lesser of the aggregate ABL Revolving Credit Facility and the borrowing base, as follows:
Average Historical Excess Availability |
|
Applicable |
|
|
Applicable |
|
||
Less than |
|
|
% |
|
|
% |
||
Less than |
|
|
% |
|
|
% |
||
Greater than or equal to |
|
|
% |
|
|
% |
||
The ABL Revolving Credit Facility is subject to an unused commitment fee. If the actual daily utilized portion exceeds 50%, the unused commitment fee is
5. Derivative Instruments
The interest rate swap, caps and collars are accounted for as cash flow hedges because they are expected to be highly effective in hedging variable rate interest payments. Changes in the fair value of the cash flow hedges are reported as a component of AOCI. As of November 2, 2024, AOCI included unrealized losses of $
The cash flow hedges are reflected in the Company’s consolidated balance sheets as follows (in thousands):
Assets (Liabilities) |
|
Balance sheet location |
|
November 2, |
|
|
February 3, |
|
||
Current asset portion of cash flow hedges |
|
|
$ |
|
|
$ |
|
|||
Non-current asset portion of cash flow |
|
|
$ |
|
|
$ |
— |
|
||
Current liability portion of cash flow |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Non-current liability portion of cash flow |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
6. Fair Value Measurements
Assets and Liabilities Measured on a Recurring Basis
The following table presents information about assets and liabilities that are measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value (in thousands):
|
|
November 2, 2024 |
|
|||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||
Assets (liabilities): |
|
|
|
|
|
|
|
|
|
|||
Money market mutual funds |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Investments of officers' life insurance |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Non-qualified deferred compensation plan |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
13
|
|
February 3, 2024 |
|
|||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||
Assets (liabilities): |
|
|
|
|
|
|
|
|
|
|||
Money market mutual funds |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Investments of officers' life insurance |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Non-qualified deferred compensation plan |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
The fair value of money market mutual funds is based on quoted market prices, such as quoted net asset values published by the fund as supported in an active market. Money market mutual funds included in the Company’s cash and cash equivalents were $
The Company maintains a deferred compensation plan for key executives and other members of management, which is funded by investments in officers’ life insurance. The fair value of this obligation is based on participants’ elected investments, which reflect the closing market prices of similar assets.
In February 2022, the Company amended a collaboration agreement with a vendor, and as part of the amendment the Company was granted a right to receive equity and warrants for common shares of the vendor that is subject to certain performance conditions and other contingencies. The warrants were exercised in July 2024, following the satisfaction of the related performance conditions and contingencies. Cash consideration for the exercise of the warrants was de minimis. The Company's interest is accounted for as an investment in an equity security without a readily determinable fair value. When an upward or downward adjustment occurs, the resulting gains or losses are included in other non-operating income in the consolidated statements of operations.
In April 2023, the Company sold its interest in Rover Group, Inc. Class A common stock to a buyer at a price determined based on the daily volume weighted average price, in addition to a premium, over an agreed upon period. The Company's interest in the unsettled cash proceeds were remeasured at fair value at each reporting period, and the resulting gains or losses were included in other non-operating income in the consolidated statements of operations.
Assets Measured on a Non-Recurring Basis
The Company’s non-financial assets, which primarily consist of goodwill, other intangible assets, fixed assets and equity and other investments, are reported at carrying value, or at fair value as of the date of the Company’s acquisition of Petco Holdings, Inc. LLC on January 26, 2016, and are not required to be measured at fair value on a recurring basis. However, on a periodic basis (at least annually for goodwill and indefinite-lived intangibles or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable), non-financial assets are assessed for impairment. If impaired, the carrying values of the assets are written down to fair value using Level 3 inputs.
The Company’s trade name has an indefinite life. The Company performs its annual impairment test during the fourth quarter of each fiscal year, or more frequently when warranted by events or changes in circumstances. During the third quarter of fiscal 2023 and the first quarter of fiscal 2024, the Company performed interim impairment tests of its goodwill and indefinite-lived trade name due to declines in the Company's share price. Refer to Note 3 for further discussion of the results of impairment testing performed on the Company’s goodwill.
During the third quarter of fiscal 2023, the Company concluded that the fair value of its trade name exceeded its carrying value, and therefore
During the first quarter of fiscal 2024, the Company concluded that the fair value of its trade name exceeded its carrying value, and therefore
14
Company's trade name reflected the Company's most recent revenue projections at the time of the analysis, a discount rate of
There were no triggering events identified and no indications of impairment of the Company’s goodwill, indefinite-lived trade name, other intangible assets or equity and other investments during the thirteen week period ended November 2, 2024. There were no indications of impairment of the Company’s other intangible assets or equity and other investments during the thirty-nine week period ended November 2, 2024. There were no indications of impairment of the Company’s other intangible assets or equity and other investments during the thirteen or thirty-nine week periods ended October 28, 2023. During the thirteen and thirty-nine week periods ended November 2, 2024, the Company recorded fixed asset and right-of-use asset impairment charges of $
7. Stockholders’ Equity
Equity-Based Compensation
Equity-based compensation awards under the Company’s current equity incentive plan (as amended, the “2021 Equity Incentive Plan”) include restricted stock units (“RSUs,” which include performance-based stock units), restricted stock awards (“RSAs”), non-qualified stock options, and other equity compensation awards. In addition, the Company has made equity-based compensation awards of RSUs and non-qualified stock options outside of the 2021 Equity Incentive Plan as employment inducement awards (collectively, the “Inducement Awards”). The Company also has an employee stock purchase plan (“ESPP”).
The Company’s controlling parent, Scooby LP, also maintains an incentive plan (the “2016 Incentive Plan”) under which it has awarded partnership unit awards to certain current and former employees, consultants, and non-employee directors of the Company that are restricted profit interests in Scooby LP subject to a distribution threshold (“Series C Units”).
|
|
Thirteen weeks ended |
|
|
Thirty-nine weeks ended |
|
||||||||||
|
|
November 2, |
|
|
October 28, |
|
|
November 2, |
|
|
October 28, |
|
||||
RSUs and RSAs |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Options |
|
|
|
|
|
|
|
|
|
|
|
|
||||
ESPP |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other awards |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total equity-based compensation expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Activity under the 2021 Equity Incentive Plan and the Inducement Awards was as follows (shares and dollars in thousands):
|
|
RSUs and RSAs |
|
|
Options |
|
||
Nonvested/outstanding, February 3, 2024 |
|
|
|
|
|
|
||
Granted |
|
|
|
|
|
|
||
Vested and delivered/exercised |
|
|
( |
) |
|
|
— |
|
Forfeited/expired |
|
|
( |
) |
|
|
( |
) |
Nonvested/outstanding, November 2, 2024 |
|
|
|
|
|
|
||
Unrecognized compensation expense as of November 2, 2024 |
|
$ |
|
|
$ |
|
||
Weighted average remaining expense period as of November 2, 2024 |
|
|
|
|
||||
The ESPP allows eligible employees to contribute up to
15
market value of the stock on the associated lookback date and (ii) the fair market value of the stock on the last day of the related purchase period.
Series C Unit activity under the 2016 Incentive Plan was as follows (in thousands):
|
|
Units |
|
|
Outstanding, February 3, 2024 |
|
|
|
|
Granted |
|
|
|
|
Forfeited |
|
|
( |
) |
Outstanding, November 2, 2024 |
|
|
|
|
Vested, November 2, 2024 |
|
|
|
|
(Loss) Income Per Share
Potentially dilutive securities include potential Class A common shares related to outstanding stock options, unvested RSUs and RSAs, and the ESPP, calculated using the treasury stock method. The calculation of diluted shares outstanding excludes securities where the combination of the exercise or purchase price (in the case of options and the ESPP) and the associated unrecognized compensation expense is greater than the average market price of Class A common shares because the inclusion of these securities would be anti-dilutive.
All outstanding equity awards were excluded from the calculation of diluted loss per Class A and B-1 common share in the thirty-nine weeks ended November 2, 2024 and October 28, 2023, as their effect would be antidilutive in a net loss period.
8. Commitments and Contingencies
The Company is involved in legal proceedings and is subject to other claims and litigation arising in the ordinary course of its business. The Company has made accruals with respect to certain of these matters, where appropriate, which are reflected in the Company’s consolidated financial statements but are not, individually or in the aggregate, considered material. For other matters, the Company has not made accruals because management has not yet determined that a loss is probable or because the amount of loss cannot be reasonably estimated. While the ultimate outcome of the matters cannot be determined, the Company currently does not expect that these matters will have a material adverse effect on its consolidated financial statements. The outcome of any litigation is inherently uncertain, however, and if decided adversely to the Company, or if the Company determines that settlement of particular litigation is appropriate, the Company may be subject to liability that could have a material adverse effect on its consolidated financial statements.
16
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.
17
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 November 2, 2024 with the thirteen weeks ended October 28, 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 |
|
|
Thirty-nine weeks ended |
|
||||||||||
|
|
November 2, |
|
|
October 28, |
|
|
November 2, |
|
|
October 28, |
|
||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Products |
|
$ |
1,263,194 |
|
|
$ |
1,257,803 |
|
|
$ |
3,806,674 |
|
|
$ |
3,852,997 |
|
Services and other |
|
|
248,243 |
|
|
|
236,363 |
|
|
|
757,658 |
|
|
|
727,811 |
|
Total net sales |
|
|
1,511,437 |
|
|
|
1,494,166 |
|
|
|
4,564,332 |
|
|
|
4,580,808 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Products |
|
|
782,240 |
|
|
|
787,994 |
|
|
|
2,362,065 |
|
|
|
2,366,472 |
|
Services and other |
|
|
153,440 |
|
|
|
156,171 |
|
|
|
467,125 |
|
|
|
466,849 |
|
Total cost of sales |
|
|
935,680 |
|
|
|
944,165 |
|
|
|
2,829,190 |
|
|
|
2,833,321 |
|
Gross profit |
|
|
575,757 |
|
|
|
550,001 |
|
|
|
1,735,142 |
|
|
|
1,747,487 |
|
Selling, general and administrative expenses |
|
|
571,780 |
|
|
|
559,611 |
|
|
|
1,745,479 |
|
|
|
1,705,443 |
|
Goodwill impairment |
|
|
— |
|
|
|
1,222,524 |
|
|
|
— |
|
|
|
1,222,524 |
|
Operating income (loss) |
|
|
3,977 |
|
|
|
(1,232,134 |
) |
|
|
(10,337 |
) |
|
|
(1,180,480 |
) |
Interest income |
|
|
(1,346 |
) |
|
|
(1,139 |
) |
|
|
(2,436 |
) |
|
|
(3,079 |
) |
Interest expense |
|
|
35,797 |
|
|
|
36,557 |
|
|
|
109,420 |
|
|
|
111,251 |
|
Loss on partial extinguishment of debt |
|
|
— |
|
|
|
174 |
|
|
|
— |
|
|
|
920 |
|
Other non-operating income |
|
|
(8,465 |
) |
|
|
(113 |
) |
|
|
(5,800 |
) |
|
|
(4,727 |
) |
Loss before income taxes and income |
|
|
(22,009 |
) |
|
|
(1,267,613 |
) |
|
|
(111,521 |
) |
|
|
(1,284,845 |
) |
Income tax benefit |
|
|
(857 |
) |
|
|
(22,902 |
) |
|
|
(9,985 |
) |
|
|
(17,178 |
) |
Income from equity method investees |
|
|
(4,479 |
) |
|
|
(3,574 |
) |
|
|
(13,557 |
) |
|
|
(10,032 |
) |
Net loss attributable to Class A and B-1 |
|
$ |
(16,673 |
) |
|
$ |
(1,241,137 |
) |
|
$ |
(87,979 |
) |
|
$ |
(1,257,635 |
) |
18
|
|
Thirteen weeks ended |
|
|
Thirty-nine weeks ended |
|
||||||||||
|
|
November 2, |
|
|
October 28, |
|
|
November 2, |
|
|
October 28, |
|
||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Products |
|
|
83.6 |
% |
|
|
84.2 |
% |
|
|
83.4 |
% |
|
|
84.1 |
% |
Services and other |
|
|
16.4 |
|
|
|
15.8 |
|
|
|
16.6 |
|
|
|
15.9 |
|
Total net sales |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Products |
|
|
51.8 |
|
|
|
52.7 |
|
|
51.8 |
|
|
|
51.7 |
|
|
Services and other |
|
|
10.1 |
|
|
|
10.5 |
|
|
10.2 |
|
|
10.2 |
|
||
Total cost of sales |
|
|
61.9 |
|
|
|
63.2 |
|
|
|
62.0 |
|
|
61.9 |
|
|
Gross profit |
|
|
38.1 |
|
|
|
36.8 |
|
|
|
38.0 |
|
|
|
38.1 |
|
Selling, general and administrative expenses |
|
|
37.8 |
|
|
|
37.5 |
|
|
38.2 |
|
|
37.2 |
|
||
Goodwill impairment |
|
|
— |
|
|
|
81.8 |
|
|
|
— |
|
|
|
26.7 |
|
Operating income (loss) |
|
|
0.3 |
|
|
|
(82.5 |
) |
|
|
(0.2 |
) |
|
|
(25.8 |
) |
Interest income |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
Interest expense |
|
|
2.5 |
|
|
|
2.4 |
|
|
|
2.4 |
|
|
|
2.5 |
|
Loss on partial extinguishment of debt |
|
|
— |
|
|
|
0.0 |
|
|
|
— |
|
|
|
0.0 |
|
Other non-operating income |
|
|
(0.6 |
) |
|
|
(0.0 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
Loss before income taxes and income |
|
|
(1.5 |
) |
|
|
(84.8 |
) |
|
|
(2.4 |
) |
|
|
(28.0 |
) |
Income tax benefit |
|
|
(0.1 |
) |
|
|
(1.5 |
) |
|
|
(0.2 |
) |
|
|
(0.4 |
) |
Income from equity method investees |
|
|
(0.3 |
) |
|
|
(0.2 |
) |
|
|
(0.3 |
) |
|
|
(0.1 |
) |
Net loss attributable to Class A and B-1 |
|
|
(1.1 |
)% |
|
|
(83.1 |
)% |
|
|
(1.9 |
)% |
|
|
(27.5 |
)% |
|
|
Thirteen weeks ended |
|
|
Thirty-nine weeks ended |
|
||||||||||
|
|
November 2, |
|
|
October 28, |
|
|
November 2, |
|
|
October 28, |
|
||||
Operational Data: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Comparable sales change |
|
|
1.8 |
% |
|
|
0.0 |
% |
|
|
0.3 |
% |
|
|
2.8 |
% |
Total pet care centers at end of period |
|
|
1,413 |
|
|
|
1,429 |
|
|
|
1,413 |
|
|
|
1,429 |
|
Adjusted EBITDA (in thousands) |
|
$ |
81,236 |
|
|
$ |
72,159 |
|
|
$ |
240,403 |
|
|
$ |
295,763 |
|
Thirteen and Thirty-nine Weeks Ended November 2, 2024 Compared with Thirteen and Thirty-nine Weeks Ended October 28, 2023
Net Sales and Comparable Sales
|
Thirteen weeks ended |
|
|
Thirty-nine weeks ended |
|
||||||||||||||||||||||||||
(dollars in thousands) |
November 2, |
|
|
October 28, |
|
|
$ |
|
|
% |
|
|
November 2, |
|
|
October 28, |
|
|
$ |
|
|
% |
|
||||||||
Consumables |
$ |
753,230 |
|
|
$ |
733,277 |
|
|
$ |
19,953 |
|
|
|
2.7 |
% |
|
$ |
2,261,970 |
|
|
$ |
2,230,405 |
|
|
$ |
31,565 |
|
|
|
1.4 |
% |
Supplies and companion animals |
|
509,964 |
|
|
|
524,526 |
|
|
|
(14,562 |
) |
|
|
(2.8 |
%) |
|
|
1,544,704 |
|
|
|
1,622,592 |
|
|
|
(77,888 |
) |
|
|
(4.8 |
%) |
Services and other |
|
248,243 |
|
|
|
236,363 |
|
|
|
11,880 |
|
|
|
5.0 |
% |
|
|
757,658 |
|
|
|
727,811 |
|
|
|
29,847 |
|
|
|
4.1 |
% |
Net sales |
$ |
1,511,437 |
|
|
$ |
1,494,166 |
|
|
$ |
17,271 |
|
|
|
1.2 |
% |
|
$ |
4,564,332 |
|
|
$ |
4,580,808 |
|
|
$ |
(16,476 |
) |
|
|
(0.4 |
%) |
Net sales increased $17.3 million, or 1.2%, to $1.51 billion in the thirteen weeks ended November 2, 2024 compared to net sales of $1.49 billion in the thirteen weeks ended October 28, 2023. Net sales decreased $16.5 million, or 0.4%, to $4.56 billion in the thirty-nine weeks ended November 2, 2024 compared to net sales of $4.58 billion in the thirty-nine weeks ended October 28, 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
19
is primarily due to a decrease in spending on certain non-essential items. The increase in services and other sales was primarily driven by a 8.6% and 9.7% increase in service-related sales during the thirteen and thirty-nine week periods ended November 2, 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 increased $25.8 million, or 4.7%, to $575.8 million in the thirteen weeks ended November 2, 2024 compared to gross profit of $550.0 million for the thirteen weeks ended October 28, 2023. As a percentage of sales, our gross profit rate was 38.1% for the thirteen weeks ended November 2, 2024 compared with 36.8% for the thirteen weeks ended October 28, 2023, reflecting improvement in product mix and continued progress on product cost management. Gross profit decreased $12.3 million, or 0.7%, to $1,735.1 million in the thirty-nine weeks ended November 2, 2024 compared to gross profit of $1,747.5 million for the thirty-nine weeks ended October 28, 2023. As a percentage of sales, our gross profit rate was 38.0% for the thirty-nine weeks ended November 2, 2024 compared with 38.1% for the thirty-nine weeks ended October 28, 2023. The decrease in gross profit rate between the thirty-nine week periods was primarily due to the mix impact of higher consumables and services sales and softer supplies and companion animal sales during the thirty-nine weeks ended November 2, 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 $12.2 million, or 2.2%, to $571.8 million for the thirteen weeks ended November 2, 2024 compared to $559.6 million for the thirteen weeks ended October 28, 2023. As a percentage of net sales, SG&A expenses were 37.8% for the thirteen weeks ended November 2, 2024 compared with 37.5% for the thirteen weeks ended October 28, 2023. The increase in SG&A expenses period-over-period included higher pet care center payroll and fringe benefits and bonuses, which was partially offset by a decrease in stock compensation and advertising expenses.
SG&A expenses increased $40.0 million, or 2.3%, to $1,745.5 million for the thirty-nine weeks ended November 2, 2024 compared to $1,705.4 million for the thirty-nine weeks ended October 28, 2023. As a percentage of net sales, SG&A expenses were 38.2% for the thirty-nine weeks ended November 2, 2024 compared with 37.2% for the thirty-nine weeks ended October 28, 2023. The increase in SG&A expenses included higher pet care center payroll and fringe benefits, bonuses, and store occupancy costs. This increase was partially offset by a decrease in stock compensation and advertising expenses.
Goodwill Impairment
In the thirteen weeks ended October 28, 2023, the Company recorded a pre-tax goodwill impairment charge of $1.22 billion as a result of performing an interim impairment test in the third quarter of fiscal 2023 due to the identification of certain triggering events. For more information on this charge, refer to Note 3, "Goodwill," to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Interest Expense
Interest expense decreased $0.8 million, or 2.1%, to $35.8 million in the thirteen weeks ended November 2, 2024 compared with $36.6 million in the thirteen weeks ended October 28, 2023. Interest expense decreased $1.9 million, or 1.6%, to $109.4 million in the thirty-nine weeks ended November 2, 2024 compared with $111.3 million in the thirty-nine weeks ended October 28, 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 thirty-nine week periods ended November 2, 2024. For more information on derivative instruments, refer to Note 5, “Derivative Instruments,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
20
Loss on Partial Extinguishment of Debt
There was no loss on debt extinguishment and modification for the thirteen and thirty-nine weeks ended November 2, 2024. Loss on partial extinguishment of debt was $0.2 million and $0.9 million for the thirteen and thirty-nine weeks ended October 28, 2023, respectively. This loss was recognized in conjunction with the $35.0 million, $25.0 million and $15.0 million repayments on the First Lien Term Loan in March 2023, May 2023 and August 2023, respectively. For more information regarding these activities, refer to Note 4, “Senior Secured Credit Facilities,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Other Non-Operating Income
Other non-operating income was $8.5 million and $5.8 million for the thirteen and thirty-nine weeks ended November 2, 2024, respectively, and were related to remeasurements of an equity investment without a readily determinable fair value. Other non-operating income was $0.1 million and 4.7 million for the thirteen and thirty-nine weeks ended October 28, 2023. For more information regarding this activity, refer to Note 6, “Fair Value Measurements,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Income Tax Benefit
Our effective tax rates were 4.9% and 10.2%, resulting in income tax benefit of $0.9 million and $10.0 million for the thirteen and thirty-nine weeks ended November 2, 2024, respectively, compared to effective tax rates of 1.8% and 1.3%, resulting in income tax benefit of $22.9 million and $17.2 million for the thirteen and thirty-nine weeks ended October 28, 2023, respectively. The change in effective tax rates for the thirteen and thirty-nine weeks ended November 2, 2024 was primarily driven by non-deductible goodwill impaired during the third quarter ending October 28, 2023, in addition to a shortfall in tax deductions resulting from the exercise and vesting of equity-based compensation awards for the periods.
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.
21
The table below reflects the calculation of Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented:
|
|
Thirteen weeks ended |
|
|
Thirty-nine weeks ended |
|
||||||||||
(dollars in thousands) |
|
November 2, |
|
|
October 28, |
|
|
November 2, |
|
|
October 28, |
|
||||
Net loss attributable to Class A and B-1 |
|
$ |
(16,673 |
) |
|
$ |
(1,241,137 |
) |
|
$ |
(87,979 |
) |
|
$ |
(1,257,635 |
) |
Interest expense, net |
|
|
34,451 |
|
|
|
35,418 |
|
|
|
106,984 |
|
|
|
108,172 |
|
Income tax benefit |
|
|
(857 |
) |
|
|
(22,902 |
) |
|
|
(9,985 |
) |
|
|
(17,178 |
) |
Depreciation and amortization |
|
|
50,109 |
|
|
|
50,674 |
|
|
|
149,414 |
|
|
|
148,593 |
|
Income from equity method investees |
|
|
(4,479 |
) |
|
|
(3,574 |
) |
|
|
(13,557 |
) |
|
|
(10,032 |
) |
Loss on partial extinguishment of debt |
|
|
— |
|
|
|
174 |
|
|
|
— |
|
|
|
920 |
|
Goodwill impairment |
|
|
— |
|
|
|
1,222,524 |
|
|
|
— |
|
|
|
1,222,524 |
|
Asset impairments and write offs |
|
|
1,380 |
|
|
|
1,167 |
|
|
|
8,449 |
|
|
|
2,202 |
|
Equity-based compensation |
|
|
11,357 |
|
|
|
18,183 |
|
|
|
40,705 |
|
|
|
64,431 |
|
Other non-operating income |
|
|
(8,465 |
) |
|
|
(113 |
) |
|
|
(5,800 |
) |
|
|
(4,727 |
) |
Mexico joint venture EBITDA (1) |
|
|
9,984 |
|
|
|
9,189 |
|
|
|
30,382 |
|
|
|
26,467 |
|
Acquisition and divestiture-related costs (2) |
|
|
— |
|
|
|
— |
|
|
|
3,719 |
|
|
|
— |
|
Other costs (3) |
|
|
4,429 |
|
|
|
2,556 |
|
|
|
18,071 |
|
|
|
12,026 |
|
Adjusted EBITDA |
|
$ |
81,236 |
|
|
$ |
72,159 |
|
|
$ |
240,403 |
|
|
$ |
295,763 |
|
Net sales |
|
$ |
1,511,437 |
|
|
$ |
1,494,166 |
|
|
$ |
4,564,332 |
|
|
$ |
4,580,808 |
|
Net margin (4) |
|
|
(1.1 |
)% |
|
|
(83.1 |
)% |
|
|
(1.9 |
)% |
|
|
(27.5 |
)% |
Adjusted EBITDA Margin |
|
|
5.4 |
% |
|
|
4.8 |
% |
|
|
5.3 |
% |
|
|
6.5 |
% |
|
|
Thirteen weeks ended |
|
|
Thirty-nine weeks ended |
|
||||||||||
(dollars in thousands) |
|
November 2, |
|
|
October 28, |
|
|
November 2, |
|
|
October 28, |
|
||||
Net income |
|
$ |
8,958 |
|
|
$ |
7,149 |
|
|
$ |
27,335 |
|
|
$ |
20,064 |
|
Depreciation |
|
|
6,880 |
|
|
|
6,920 |
|
|
|
20,824 |
|
|
|
19,071 |
|
Income tax expense |
|
|
3,637 |
|
|
|
2,470 |
|
|
|
10,996 |
|
|
|
8,908 |
|
Foreign currency (gain) loss |
|
|
(106 |
) |
|
|
441 |
|
|
|
(7 |
) |
|
|
963 |
|
Interest expense, net |
|
|
599 |
|
|
|
1,397 |
|
|
|
1,615 |
|
|
|
3,927 |
|
EBITDA |
|
$ |
19,968 |
|
|
$ |
18,377 |
|
|
$ |
60,763 |
|
|
$ |
52,933 |
|
50% of EBITDA |
|
$ |
9,984 |
|
|
$ |
9,189 |
|
|
$ |
30,382 |
|
|
$ |
26,467 |
|
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.
22
The table below reflects the calculation of Free Cash Flow for the periods presented:
|
|
Thirty-nine weeks ended |
|
|||||
|
|
November 2, |
|
|
October 28, |
|
||
(dollars in thousands) |
|
|
|
|
|
|
||
Net cash provided by operating activities |
|
$ |
81,680 |
|
|
$ |
168,696 |
|
Cash paid for fixed assets |
|
|
(91,041 |
) |
|
|
(176,532 |
) |
Free Cash Flow |
|
$ |
(9,361 |
) |
|
$ |
(7,836 |
) |
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 November 2, 2024 was $644.3 million, inclusive of cash and cash equivalents of $116.7 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:
|
|
Thirty-nine weeks ended |
|
|||||
(dollars in thousands) |
|
November 2, |
|
|
October 28, |
|
||
Total cash provided by (used in): |
|
|
|
|
|
|
||
Operating activities |
|
$ |
81,680 |
|
|
$ |
168,696 |
|
Investing activities |
|
|
(89,506 |
) |
|
|
(156,149 |
) |
Financing activities |
|
|
(7,802 |
) |
|
|
(84,040 |
) |
Net decrease in cash, cash equivalents |
|
$ |
(15,628 |
) |
|
$ |
(71,493 |
) |
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; and the effect of changes in operating assets and liabilities.
Net cash provided by operating activities was $81.7 million in the thirty-nine weeks ended November 2, 2024 compared with net cash provided by operating activities of $168.7 million in the thirty-nine weeks ended October 28, 2023. The decrease in operating cash flow was driven by an increase in cash paid for inventory, which was
23
partially offset by decreases in cash paid for advertising, freight, and operating leases as well as other timing differences in accounts payable.
Investing Activities
Net cash used in investing activities was $89.5 million and $156.1 million for the thirty-nine weeks ended November 2, 2024 and October 28, 2023, respectively. This 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 $7.8 million for the thirty-nine weeks ended November 2, 2024, compared with $84.0 million used in financing activities in the thirty-nine weeks ended October 28, 2023.
Financing cash flows in the thirty-nine weeks ended November 2, 2024 primarily consisted of borrowings and repayments on the ABL Revolving Credit Facility.
Financing cash flows in the thirty-nine weeks ended October 28, 2023 primarily consisted of $75.0 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 thirty-nine weeks ended October 28, 2023, the Company repaid $75.0 million in principal 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 4, “Senior Secured Credit Facilities,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Derivative Instruments
The Company entered into interest rate cap, collar and swap 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. For more information regarding derivative instruments, refer to Note 5, “Derivative Instruments,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
24
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 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.
25
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 November 2, 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 November 2, 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 5, “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 November 2, 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 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
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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 November 2, 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 November 2, 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 8, “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.
None.
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
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Item 6. Exhibits.
The following is a list of exhibits filed as part of this Form 10-Q:
Exhibit Number |
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Description |
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31.1 |
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31.2 |
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32.1* |
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32.2* |
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101.INS |
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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 |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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104 |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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* |
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.
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Petco Health and Wellness Company, Inc. |
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Date: December 6, 2024 |
By: |
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/s/ Brian LaRose |
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Brian LaRose |
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Chief Financial Officer (Principal Financial and Accounting Officer) |
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