Petco Health and Wellness Company, Inc. (NASDAQ:WOOF) Q3 2022 Earnings Call Transcript

Operator: Our next question comes from Michael Lasser from UBS. Please go ahead.

Michael Lasser: Good morning. Thanks a lot for taking my question. Did traffic get worse from the second to the third quarter? It looks like the consumables growth on a multiyear basis has decelerated a bit. So, why would that be the case or are pet parents paying €“ feeding their animals less or your growth in new customer additions did moderate from 6% in the second quarter to the only being up 0.8% year-over-year in the third quarter? So, is that having an influence on traffic as well?

Ron Coughlin: Thanks for the question, Michael. Traffic was relatively stable and the dynamic that Brian talked about in terms of some trip consolidation happening, which actually makes us more efficient. And as I have said, services traffic continued to grow. If you look at our tools for driving traffic, they are tangible. I talked about the vet piece. The nice thing about getting the growth we are seeing in Vital Care is that the trip frequency visits are up by 60% pre, post on the Vital Care customers. Similarly, on the perks program, visits are up 50% on those. So, while there is a natural in a recessionary or hyperinflationary environment, you have some purchasing cutbacks happen. Those programs are helping us to maintain stability in our traffic trends.

Brian LaRose: And I will just add on consumables, Michael. Look, we were up 33% on a 2-year stack. And just as a refiner consumables customers are the most valuable customers we have from an LTV standpoint. So, we are really happy with that.

Ron Coughlin: Yes. Another contributor to that action you mentioned it is €“ we are selling more mega pack type offers, which inherently then you reduce your number of frequency or number of trips behind those types of products.

Michael Lasser: Thank you very much. My follow-up question is on the benefit you are going to get from the reduction in freight costs. Can you quantify it? And is there a point at which if the discretionary sales remain weak like they have been in the last couple of quarters, will the freight benefit that you see at some point be enough to offset the gross margin drag that you have been experiencing from the shift away from discretionary?

Brian LaRose: Yes. I would say on the mix impact, Michael, that’s much larger than the freight dynamics. And I tried to hit that part. If you look year-over-year, again, 139 basis points gross margin, more than that and the impact from mix. So, the return part of the discretionary categories, which we fully expect to happen, will be the biggest driver in terms of gross margin. In terms of the freight, I am not going to quantify it specifically for you. I would tell you, we will see some benefit in Q4. We will see more of a benefit as we head into €˜23.

Operator: Our next question comes from Chris Bottiglieri from BNP Paribas. Please go ahead.

Chris Bottiglieri: Hi everybody. Thanks for taking the question. Can you speak to the implied Q4 gross margin guide? It looks like it’s probably flat to down slightly, depending on where you were in the EBITDA range. I guess in a normal pre-COVID year, like typically, how much higher is gross margin in Q4 than Q3? And then I guess what are you assuming in terms of mix and promotional environment for Q4? I think in the past, you were, I think being a little bit conservative and taking that maybe the promotional environment picks up a bit in Q4. I just want to see how you are thinking out that today.