That will improve reducing SKUs in certain areas that are lower in velocity. So we’re early in the reset. I do expect inventory on a year-over-year basis at the end of the fourth quarter to be up, but we are doing that tactically and eyes wide open as we continue to build out the value assortment.
Ron Coughlin: Hey, Anna, it’s Ron. I would just add to Brian’s commentary. When we brought in the value brands, obviously, there was a significant lift in terms of the reset. But part of that activity was either taking out brands or reducing SKUs within brands that were slower moving. So this was not a total add. We took out a lot of SKUs. We took out some brands that were slower moving as part of this process, which should make our shelves more productive.
Brian LaRose: And I’m sorry, Anna, the second part of your question?
Anna Andreeva: The real estate portfolio is…
Brian LaRose: Oh, the real estate, yes. So we actually — if I go back and look, I would characterize it as more than a handful down. If you go back, not Q4 last year, but Q4 coming out of the year before that, I think we closed 30 some odd pet care centers in the fourth quarter alone. We’re at 1400 plus, but if I go back three years ago, that number was 50, 75 lower. So it’s more than a handful of stores. We always look at our real estate portfolio. I would tell you, I think that team has done a good job managing both costs and making sure that we are in the right locations with the right profit profile. We have gone through the process of making sure if we have an unprofitable store that we have the right plan for that. And that’s a big part of what you’ve seen in the reduction of pet care centers over the last couple of years [indiscernible].
Operator: Thank you. And the next question comes from Seth Basham with Wedbush Securities.
Seth Basham: Thanks a lot, and good morning. My question is on gross margin. Given the dynamics of adding these value-oriented foods, I assume the expectation is that, your gross margin is going to continue to decline in 2024, even with the fact that some of the pressure recently is related to the transition. First of all, can you confirm that assumption?
Brian LaRose: I’m not going to get into 2024 guidance, Seth, but thanks for the question. The value brands, as I mentioned, have a — on a product-for-product basis have a lower margin rate than the rest of our food — our enterprise food products. However, this is about driving customers through the door and driving incremental profit dollars. It’s about getting more at bat. It’s about getting customers across the ecosystem. We’re taking some pretty bold actions and we believe those actions will help drive that dollar profit growth over time, whether it’s strengthening our competitive positioning with pricing as we talked about last quarter, whether it’s the expanded assortment and the basket associated with that we talked about this quarter, and then the third leg would be the cost actions that we’re taking which are primarily on the cost of sales line and we’ll kick in on that line mostly in the second half 2024 and into 2025.
Ron Coughlin: And again, I would just reinforce. What we’re seeing and what we’ve seen historically is the basket for these value brands is roughly the same as the rest of our food portfolio, which means actually that the supplies and services are larger as a percent of that customer’s basket.
Seth Basham: That’s helpful. And I assume that price competition in value brands is more intense than the premium brands. When you look forward, do you see increasing competition in this macroeconomic environment and who’s driving that? Is it Walmart, Petsmart, Amazon, Chewy?
Ron Coughlin: We see this as incremental for us. Yes, these are mass distributed brands, but we see it as incremental for us. And I would break it down into two buckets. There are existing customers who buy products from us, whether that be litter, whether that be they get groomed with us, whether that be dog food, and go other places to get these value brands for other pets, because there are multiple pets, multiple species types products. We even have companion animal customers that buy companion animal products from us and then go other places for these products. So the first bucket is our existing products who can consolidate their shopping and we’ve seen multiple instances and been communicated multiple instances of that.
The second, are new customers that we can bring through our doors. And if you look at Q3, when we expanded the distribution of Fancy Feast, I would say a tangible portion, a tangible portion of those Fancy Feast customers were new to Petco. So we see this as incremental for us. Is it more of a price centric subcategory? Yes, it is. But it’s incremental for us and then we’re able to add the basket on top of it. And the fact that they’re signing up for Vital Care Premier tells me that they’re actually planning on being a pretty dedicated customers, because otherwise they wouldn’t be signing up for a monthly fee on top of it. So — and again, these are MAP managed products by the vendors. That doesn’t mean it’s a perfect pricing environment, but it is a controlled pricing environment.
Operator: Thank you. And this concludes the question-and-answer session. I would like to turn the call to Ron Coughlin for any closing comments.
Ron Coughlin: Well, thank you everyone for your questions today. As we close, I would like to reiterate that we’re fully focused on controlling our controllables and delivering against the plan that we shared today. We continue to believe that no one can take better care of pets than we can. And these operational changes are laser focused on bringing as many pets as possible into our 360 degree pet care ecosystem and returning our business to long-term growth and profitability. Thank you for your time and have a happy holiday.
Benjamin Thiele-Long: That concludes Petco’s third quarter 2023 earnings conference call. Thank you everyone.
Operator: Thank you. And as mentioned, the conference has now concluded. Thank you for attending today’s presentation and you may now disconnect your lines.
