Petco Health and Wellness Company, Inc. (NASDAQ:WOOF) Q4 2022 Earnings Call Transcript

Corey Grady: Thanks. And then just as a follow-up on the outlook for 50 to 55 vet centers this year. Is that reflective of the tight market? And is that the rate we should think about you adding vet centers going forward? Or do you expect to get back to the long-term 70-year model maybe in 2024? Thanks.

Brian LaRose: Yes, Corey, that’s more reflective of a balance. As we look at our total CapEx spend for the year as I guided $225 million to $250 million. Part of that decrease was the rollover of some one-time high ROI investments we made last year in freezers. The retirement of some technical debt, but we’re taking a balanced approach to CapEx. We have 50 to 55 vet hospitals, we’re still committed to that for long-term growth. It’s one of our number one priorities in terms of long-term strategic growth. We have 10 to 15 of our small town rural build outs on top of the 50 to 55. So in total, when you think about units, you’re still about 70 units roughly if you take that the vets combined with the STRs. And so we feel like the guidance we put out with CapEx, the balanced approach to short-term versus long-term investments is the right approach.

Corey Grady: Not to mention the debt paydown.

Brian LaRose: Not to mention the debt paydown.

Operator: Our next question comes from Anna Andreeva from Needham & Company. Please go ahead.

Anna Andreeva: Great. Thanks so much and good morning, guys. Thanks for taking our question. I wanted to ask about gross margins, I think they’re about 300 basis points below the pre-pandemic levels for the business. Can you talk about what’s implied in the guide for gross margins for the year? Should we expect the declines there to begin to moderate here in the first-half on freight normalizing or is that mostly dependent on the supplies category stabilizing? And then secondly, I’m connected to that. Ron, you had mentioned for a number of quarters now promotional activity in this space being pretty rational. Can you talk about what you saw in the fourth quarter and what are you seeing to start €˜23 so far? Thank you so much.

Brian LaRose: Yes, let me take the first one, Anna. So the vast majority of the margin pressure on the business is driven by that transitory mix shift headwinds. In prior economic cycles, as Ron mentioned, the discretionary categories have been impacted for about five or six quarters. We expect that to follow a somewhat similar pattern. Our guide for the year implied EBITDA down in the first-half, flat to up in the second-half primarily due to that transitory mix shift. Now underneath the businesses, we continue to make operational improvements. If you look at our services business, we grew margin year-over-year. If you look at our digital business, we grew margin year-over-year. That includes a rapid scaling of our ad network. So taking all that in, we’re taking a somewhat cautious view and we’re focused on executing as we navigate through that environment. And I’ll flip it to Ron for the second question.

Ron Coughlin: Yes. Hi, Anna. Thanks for the question. Overall, the pet market does continue to be fairly rational, one of the dynamics in the industry is demand continues to exceed supply. That gap is narrowing, but at the same time, we’re getting cost concessions with some favorability and freight, which gives us more leeway. From our standpoint, we focus on delivering value. That includes great products for great prices, so we’re seeing significant growth in Wholehearted as an example, which is more of a mid-tier price, but great value for a great product. Where we promote, we focus on being strategic in search surgical’s, we’ve talked in the past about leveraging promotions to drive outcomes like BOPUS where we have favorable profitability and loyalty program adoption like Vital Care.