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What changed in Petco Health & Wellness Company, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Petco Health & Wellness Company, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+384 added−377 removedSource: 10-K (2023-03-28) vs 10-K (2022-03-24)

Top changes in Petco Health & Wellness Company, Inc.'s 2023 10-K

384 paragraphs added · 377 removed · 301 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

63 edited+19 added−10 removed39 unchanged
Biggest changeThe full value of our health and wellness ecosystem is realized for customers through our Vital Care membership program. From the nutrition and supplies pets need each day, to the services that keep them at optimal health, Vital Care makes it easier and more affordable for pet parents to care for their pet’s whole health all in one place.
Biggest changeSitting at the intersection of value and loyalty, Vital Care Premier makes it easier and more affordable for pet parents to care for their pet’s whole health all in one place, and provides pet parents with a seamless connection to our differentiated merchandise and services offerings, while Vital Care Core continues to provide customers with our historic suite of loyalty offerings.
By integrating these veterinary hospitals into existing pet care centers, we benefit from significant 7 structural advantages compared to stand-alone veterinary care providers , including lower cost of acquisition and additional basket opportunities, driving both incremental service and merchandise sales, and further unlocking the large and growing prescription food and drug total addressable market .
By integrating these veterinary hospitals into existing pet care centers, we benefit from significant structural advantages compared to stand-alone veterinary care providers, including lower cost of acquisition and additional basket opportunities, driving both incremental service and merchandise sales, and further unlocking the large and growing prescription food and drug total addressable market.
We developed a user-friendly, action-focused dashboard (HUB), which enables our managers to track performance across multiple dimensions, identify opportunities, and execute strategies to drive incremental sales. We also simplified the key metrics that we utilize to track performance and align incentives against those metrics by rolling out a revamped incentive structure across our field organization.
We developed a user-friendly, action-focused dashboard, which enables our managers to track performance across multiple dimensions, identify opportunities, and execute strategies to drive incremental sales. We also simplified the key metrics that we utilize to track performance and align incentives against those metrics by rolling out a revamped incentive structure across our field organization.
Our failure to comply with such laws and regulations may result in enforcements, recalls, and other adverse actions that could disrupt our operations and adversely affect our financial results.” The FDA regulates animal feed, including pet food, under the Federal Food, Drug, and Cosmetic Act, (the “FFDCA”), and its implementing regulations.
Our failure to comply with 12 such laws and regulations may result in enforcements, recalls, and other adverse actions that could disrupt our operations and adversely affect our financial results.” The FDA regulates animal feed, including pet food, under the Federal Food, Drug, and Cosmetic Act, (the “FFDCA”), and its implementing regulations.
We have continued to expand our partner resource groups, which enable partners to build connections among themselves and their communities, as well as our diversity, inclusion and belonging programs to encourage partners to bring their “whole selves” to work. Petco currently has seven Partner Resource Groups that are foundational to our culture of inclusion and belonging.
We have continued to expand our partner resource groups, which enable partners to build connections among themselves and their communities, as well as our diversity, inclusion 10 and belonging programs to encourage partners to bring their “whole selves” to work. Petco currently has seven Partner Resource Groups that are foundational to our culture of inclusion and belonging.
For more information, please read “Risk Factors—Risks Related to Legal and Regulatory Matters—Our operations are subject to extensive governmental regulation, and we may incur material liabilities under, or costs in order to comply with, existing or future laws and regulation.
For more information, please read “Risk Factors—Risks Related to Legal and Regulatory Matters—Our operations are subject to extensive governmental regulation, and we may incur material liabilities under, or costs in order to comply with, existing or future laws and regulations.
Petco Love Petco Love, formerly the Petco Foundation, is a nonprofit organization that is changing lives by making communities and pet families healthier, stronger, and closer. It is a separately incorporated 501(c)(3) nonprofit organization supported both by contributions from us and contributions from Petco customers and community partners.
Petco Love Petco Love, formerly the Petco Foundation, is a nonprofit organization changing lives by making communities and pet families healthier, stronger, and closer. It is a separately incorporated 501(c)(3) nonprofit organization supported both by contributions from us and contributions from Petco customers and community partners.
The degree of oversight of the implementation of these regulations varies by state, but typically includes a state review and approval of each product label as a condition of sale in that state. 11 The FDA also regulates the inclusion of specific claims in pet food labeling.
The degree of oversight of the implementation of these regulations varies by state, but typically includes a state review and approval of each product label as a condition of sale in that state. The FDA also regulates the inclusion of specific claims in pet food labeling.
With the tools to capture purchase, search, services utilization, as well as customer and pet demographics and preferences and more, we generate a 360-degree view of customer that serves as the foundation of our data ecosystem.
With the tools to capture purchase, search, and services utilization, as well as customer and pet demographics and preferences, we generate a 360-degree view of customer that serves as the foundation of our data ecosystem.
Through our integrated ecosystem, we provide our over 24 million total active customers with a comprehensive offering of differentiated 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, our digital channel, and our flexible fulfillment options.
Through our integrated ecosystem, we provide our over 25 million total active customers with a comprehensive offering of differentiated 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, our digital channel, and our flexible fulfillment options.
Although pet foods are not required to obtain premarket approval from the FDA, the FFDCA requires that all animal foods are safe for consumption, produced under sanitary conditions, contain no harmful substances, and are truthfully labelled. Most states also require that pet foods distributed in the state be registered or licensed with the appropriate state regulatory agency.
Although pet foods are not required to obtain premarket approval from the FDA, the FFDCA requires that all animal foods are safe for consumption, produced under sanitary conditions, contain no harmful substances, and are truthfully labeled. Most states also require that pet foods distributed in the state be registered or licensed with the appropriate state regulatory agency.
In fiscal 2020 and fiscal 2021, U.S. households welcomed millions of incremental new pets into their homes that will need to be fed, groomed, vaccinated, and treated during their lives. Importantly, the majority of these new pet parents came from Millennial and Gen Z generations, who typically spend more on their pets.
Beginning in fiscal 2020, U.S. households welcomed millions of incremental new pets into their homes that will need to be fed, groomed, vaccinated, and treated during their lives. Importantly, the majority of these new pet parents came from Millennial and Gen Z generations, who typically spend more on their pets.
Our Transformation Our transformation over the past four years into the health and wellness company for pets and pet parents has been driven by the relentless execution of our team of channel and category experts with best-in-class experience from Fortune 100 companies, combined with deep experience in retail led by our CEO and Chairman, Ron Coughlin.
Our Transformation Our transformation over the past five years into the health and wellness company for pets and pet parents has been driven by the relentless execution of our team of channel and category experts with best-in-class experience from Fortune 100 companies, combined with deep experience in retail led by our CEO and Chairman, Ron Coughlin.
By leveraging our extensive physical network of 1,433 pet care centers across the U.S. and Puerto Rico, we are able to offer our comprehensive product and service offering in a localized manner with a meaningful last-mile advantage over much of our competition.
By leveraging our extensive physical network of 1,430 pet care centers across the U.S. and Puerto Rico, we are able to offer our comprehensive product and service offering in a localized manner with a meaningful last-mile advantage over much of our competition.
Since its founding in 1999, Petco Love has inspired and empowered animal welfare organizations to make a difference, investing more than $330 million in adoption and medical care programs, spay/neuter services, pet cancer research, service and therapy animals, and numerous other lifesaving initiatives.
Since its founding in 1999, Petco Love has inspired and empowered animal welfare organizations to make a difference, investing more than $346 million in adoption and medical care programs, spay/neuter services, pet cancer research, service and therapy animals, and numerous other lifesaving initiatives.
Securities and Exchange Commission (“SEC”), corporate governance information (including our Code of Business Conduct and Ethics and Principles of Corporate Governance) and select press releases.
Securities 13 and Exchange Commission (“SEC”), corporate governance information (including our Code of Business Conduct and Ethics and Principles of Corporate Governance) and select press releases.
In addition, all Petco leaders participate in diversity, equity, and inclusion training aimed at building respect in the workplace . Partner Communities We believe that building and supporting connections between our employees and our communities creates a more fulfilling and enjoyable workplace experience.
In addition, all Petco leaders participate in diversity, equity, and inclusion training aimed at building respect in the workplace. Partner Communities We believe that building and supporting connections between our partners and our communities creates a more fulfilling and enjoyable workplace experience.
Our Company Building on more than 55 years of service focused on providing solutions for pets and the people who love and care for them, in recent years, we have transformed our business from a successful yet traditional retailer to a disruptive, fully-integrated, omnichannel provider of holistic pet health and wellness offerings, including premium products, services, and veterinary care.
Building on more than 55 years of providing solutions for pets and the people who love and care for them, in recent years, we have transformed our business from a successful yet traditional retailer to a disruptive, fully-integrated, omnichannel provider of holistic pet health and wellness offerings, including premium products, services, and veterinary care.
Our terms and conditions do not have a set term but allow us to terminate the relationship for convenience at any time upon written notice to the vendor. Our vendors may terminate the relationship on 90-days’ written notice but are obligated to fulfill or perform any purchase order accepted prior to such notice.
Our terms and conditions do not have a set term, but instead allow us to terminate the relationship for convenience at any time upon written notice to the vendor. Our vendors 11 generally may terminate the relationship on 90-days’ written notice but are obligated to fulfill or perform any purchase order accepted prior to such notice.
We focused on optimizing site merchandising, dynamic pricing capabilities, and leveraging advanced analytics and precision marketing to drive customer acquisition, monetization, and retention. Further differentiating our business and creating scale advantages, we leverage our physical footprint as micro-distribution centers for our digital orders, including BOPUS, curbside pickup, same day delivery, and ship from store.
We focused on optimizing site merchandising, dynamic pricing capabilities, and leveraging advanced analytics and precision marketing to drive customer acquisition, monetization, and retention. 8 Further differentiating our business and creating scale advantages, we leverage our physical footprint of pet care centers as micro-distribution centers for our digital orders, including BOPUS, curbside pickup, same day delivery, and ship from store.
By investing in talent and data analytics capabilities, over the past two years, we’ve turned analytics and data science into a competitive advantage, including advanced capabilities in dynamic pricing, inventory optimization, merchandising, personalization, and precision marketing.
By investing in talent and data analytics capabilities, over the past three years we’ve turned analytics and data science into a competitive advantage, including advanced capabilities in dynamic pricing, inventory optimization, 9 merchandising, personalization, and precision marketing.
We are focused on protecting and supporting our partners, as well as the people and pets in our pet care centers and the communities we serve. The Petco Partner Assistance Fund has provided over $1.8 million in financial support to nearly 1,700 Petco partners who suffered a hardship, including related to COVID-19, severe weather events, and natural disasters.
We are focused on protecting and supporting our partners, as well as the people and pets in our pet care centers and the communities we serve. The Petco Partner Assistance Fund has provided over $2 million in financial support to nearly 2,000 Petco partners who suffered a hardship, including related to COVID-19, severe weather events, and natural disasters.
Our implementation of Retail 3.0 was catalyzed by the COVID-19 pandemic as pet parents became increasingly comfortable with digital interaction, coupled with a tangible return of retail traffic in early 2021 as consumers demonstrated that physical interaction was a critical way in which they want to interact with their retailer too .
Our transformation was catalyzed by the COVID-19 pandemic as pet parents became increasingly comfortable with digital interaction, coupled with a tangible return of retail traffic in 2021 as consumers demonstrated that physical interaction was a critical way in which they want to interact with their retailer too.
These trademarks include Bond & Co., EveryYay, Good 2 Go, Good Lovin’, Harmony, Imagitarium, Leaps & Bounds, Pals Rewards, Petco, Petco Love, PetCoach, PupBox, Reddy, Ruff & Mews, So Phresh, Vetco, Well & Good, WholeHearted, You & Me, and Youly.
These trademarks include Bond & Co., EveryYay, Good 2 Go, Good Lovin’, Harmony, Imagitarium, Leaps & Bounds, Pals Rewards, Petco, Petco Love, PetCoach, PupBox, Reddy, Ruff & Mews, So Phresh, Vetco, Well & Good, WholeHearted, You & Me, Youly, Vital Care Core, and Vital Care Premier.
We strive for our partners to grow and develop in their careers, and offer competitive compensation and benefits programs, inventive compensation, as well as a range of health and wellness offerings. None of our employees are represented by labor unions or covered by collective bargaining agreements. We consider our relationship with our employees to be good.
We strive for our partners to grow and develop in their careers, and offer competitive compensation and benefits programs, incentive compensation, and a range of health and wellness offerings. None of our partners are represented by labor unions or covered by collective bargaining agreements. We consider our relationship with our partners to be good.
This commitment begins at the top, where our CEO sets annual people goals related to achieving long term workforce diversity, equity, and inclusion outcomes. Progress on our people goals is tracked and reviewed regularly with our executive team and our board of directors.
This commitment begins at the top, where our CEO sets annual people goals related to achieving long term workforce diversity, equity, and inclusion outcomes. Progress on our people goals is tracked and reviewed regularly with our executive team and our board of directors, and serves as a component of our CEO’s compensation.
In recent years, we have streamlined methods for setting executional priorities, provided comprehensive sales training, and developed store-level sales marketing capabilities. In fiscal 2021, we are proud to have provided more than 500,000 hours of training across our pet care center partners. In addition, approximately 47% of open General Manager and District General Managers positions were filled with internal promotions.
In recent years, we have streamlined methods for setting executional priorities, provided comprehensive sales training, and developed store-level sales marketing capabilities. In fiscal 2022, we are proud to have provided more than 400,000 hours of training across our pet care center partners. In addition, nearly 50% of open General Manager and District General Managers positions were filled with internal promotions.
In fiscal 2021, our top 10 vendors represented approximately 30% of our annual sales, and no single vendor accounted for more than 6% of our sales. In addition, we only sell the products we carry directly to consumers and primarily purchase our products directly from our vendors rather than through third-party distributors.
Our top 10 vendors represented approximately 40% of our annual sales, and no single vendor accounted for more than 8% of our sales. In addition, we only sell the products we carry directly to consumers and primarily purchase our products directly from our vendors rather than through third-party distributors.
As consumer expectations around customer experience, convenience, and technology evolve, we believe that we have a competitive advantage versus our competition given the integrated digital experience that we provide our customers, including online booking and customized care reminders.
As consumer expectations around customer experience, convenience, and technology evolve, we believe that we have a competitive advantage versus our competition given the integrated digital experience that we provide our customers, including online booking and customized care reminders, as well as our value offerings like Vital Care Premier.
Through the Think Adoption First program, Petco Love partners with our pet care centers and animal welfare organizations across the country to increase pet adoptions helping more than 6.5 million pets to date find their new loving families.
Through the Think Adoption First program, Petco Love partners with our pet care centers and animal welfare organizations across the country to increase pet adoptions, helping nearly 7 million pets to date find their new loving families.
The majority of relationships we have with third-party domestic transportation and logistics providers are governed by non-exclusive agreements that do not obligate us to minimum volume or fees, and such agreements may generally be terminated by either party on 45 days’ prior written notice. Vendor Arrangements We purchase merchandise from over 750 vendors.
The majority of relationships we have with third-party domestic transportation and logistics providers are governed by non-exclusive agreements that do not obligate us to minimum volume or fees, and such agreements may generally be terminated by either party on 45 days’ prior written notice. Vendor Arrangements In fiscal 2022, we purchased merchandise from approximately 640 vendors.
Our e-commerce site and personalized 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.
Petco.com, our e-commerce site, and the Petco app, our personalized mobile app, together serve as hubs for pet parents to book appointments and manage their pets’ health, wellness, and merchandise needs, while enabling them to shop wherever, whenever, and however they want.
We integrate this differentiated product offering with our services business in order to build on the foundation of treating the whole pet, including their physical, mental and social well-being. Our service offering includes a broad suite of pet health services, including veterinary care, grooming, and training.
We integrate our product offering with our services business, building on the foundation of treating the whole pet, including their physical, mental and social well-being. Our service offering includes a broad suite of pet health services, including veterinary care, grooming, and training.
We believe t his veterinary model enhances customer lifetime value , drives retention , and delivers long-term value to our stakeholders . In grooming, we have invested in digital integration, marketing, staff compensation, and other operational improvements, which have resulted in the acquisition of new customers and an increase in groomer retention.
We believe this veterinary model enhances customer lifetime value, drives retention, attracts talent, and delivers long-term value to our stakeholders. In grooming, we have invested in digital integration, marketing, staff compensation, and other operational improvements, which have resulted in the acquisition of new customers, continued strong sales, and an increase in both groomer hires and retention.
In fiscal 2017, we embarked on one of the fastest veterinary hospital build-outs in the industry to address the growing need for high quality, accessible pet healthcare consistent with our mission to improve the lives of pets and pet parents. As of the end of fiscal 2021, we offered full-service veterinary care in 197 pet care centers.
In fiscal 2017, we embarked on one of the fastest veterinary hospital build-outs in the industry to address the growing need for high quality, accessible pet healthcare consistent with our mission to improve the lives of pets and pet parents.
Industry Dynamics The U.S. pet care industry is large and growing, serving millions of households with pets, and represented a total addressable market of $119 billion in 2021. Since 2008, the industry has exhibited steady growth driven by an increase in the underlying pet population coupled with strong tailwinds associated with pet humanization.
Industry Dynamics The U.S. pet care industry is large and growing, serving millions of households with pets, and represented a total addressable market of approximately $133 billion in 2022. Since 2008, the industry has exhibited steady growth driven by an increase in the underlying pet population coupled with tailwinds associated with trends in pet humanization and a mix-shift towards premiumization.
We believe that we have built deep competitive “moats” through the breadth and depth of assortment of premium health and wellness products, services, and veterinary care that we offer across an integrated omnichannel platform, though we do compete with various peers in individual categories, including both large and small pet specialty retailers, as well as mass and grocery retailers to a lesser extent.
We believe that we have built competitive advantages through the breadth and depth of assortment of premium health and wellness products, owned brands, services, and veterinary care that we offer across an integrated omnichannel platform, though we do compete with various peers in individual categories, including both large and small pet specialty retailers, e-commerce retailers, and mass and grocery retailers.
Our owned and exclusive merchandise is unique relative to other large players in the category , driving competitive insulation and focusing on the highest growth categories within the p et industry , like f resh and f rozen , as well as premium nutrition and supplies more broadly. The services categories we participate in within the U.S. are highly fragmented.
Our owned and exclusive merchandise is unique relative to other large players in the category, driving competitive insulation and focusing on long-term growth categories within the pet industry, like fresh and frozen food, as well as premium nutrition and supplies more broadly. The services categories we participate in within the U.S. are highly fragmented.
Through strategic investments, we’ve rebuilt our digital experience from the ground up beginning with relaunching our e-commerce platform and building an app with one of the highest utilization rates in the category, driving increasing spend per pet. We invested in improving the speed, navigation, personalization, and services access of our website and app to drive traffic and engagement.
Through strategic investments, we’ve rebuilt our digital experience from the ground up beginning with relaunching our e-commerce platform and building an app to integrate with our ecosystem. We invested in improving the speed, navigation, personalization, and services access of our website and app to drive traffic and engagement.
We utilized a best brands strategy to form new partnerships with some of the most highly regarded premium food brands in the industry, such as JustFoodForDogs, with whom we expanded our partnership with in March 2022.
We utilized a best brands strategy to form new partnerships with some of the most highly regarded premium food brands in the industry, such as JustFoodForDogs, with whom we expanded our partnership with in March 2022 and created an exclusive owned brand WholeHearted line of frozen meals.
Marketing and Advertising Over the last two years, we have significantly elevated our marketing and media strategy as we established ourselves as the health and wellness company in the pet category.
Marketing and Advertising Over the last three years, we have significantly elevated our marketing and media strategy, establishing ourselves as a health and wellness leader in the pet category.
Our ship-from-store, BOPUS, and curbside programs enhance our distribution network, affording us the opportunity to more quickly and cost effectively serve our customers. During fiscal 2021, over 82% of our digital orders (including BOPUS, same day delivery and ship-from-store) were fulfilled by pet care centers.
Our ship-from-store, BOPUS, and curbside programs enhance our distribution network, affording us the opportunity to utilize our pet care centers as micro-distribution centers to more quickly and cost effectively serve our customers with a last-mile advantage. During fiscal 2022, 74% of our digital orders (including BOPUS, same day delivery, and ship-from-store) were fulfilled by pet care centers.
Following decades of the rise of mega retailers and digital migration, we’ve entered a new era of retail, what we call “Retail 3.0”, with consumers seeking fully integrated physical retail and omnichannel digital offerings, brought together with sticky services and enhanced by continuous innovation and an exceptional customer experience.
Specifically, we have: Built Leading Omnichannel Capabilities that Leverage our Physical Network . Following decades of the rise of mega retailers and digital migration, we’ve entered a new era of retail, with consumers seeking fully integrated physical retail and omnichannel digital offerings, brought together with sticky services and enhanced by continuous innovation and an exceptional customer experience.
Our product offering leverages a broad, carefully curated assortment of owned and exclusive merchandise and partnerships with premium third-party brands to provide customers with high quality nutrition without artificial ingredients, complemented by a wide variety of premium pet care supplies and companion animals.
Our product offering leverages a broad, carefully curated assortment of owned and exclusive merchandise, providing customers with high quality and health-focused nutrition free from artificial ingredients, complemented by a wide variety of premium pet care supplies and companion animals.
For more information regarding our transformative investments, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Innovation and Transformation.” 8 Human Capital Our Partners Our Petco partners are our most significant assets, critical to the delivery of our transformation and our continued progress.
For more information regarding our transformative investments, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Innovation and Transformation.” Human Capital Our Partners Our employees, who we call Petco partners, are our most significant assets, critical to the delivery of our transformation and our continued progress. As of January 28, 2023, we had approximately 29,000 total partners.
Our pet care center partners offer a level of customer engagement and content that is differentiated in retail and based on a true passion for pets. As of January 29, 2022, we had a total count of approximately 28,495 employees. Our partners are primarily employed on an at-will basis and are compensated through base salary and incentive programs.
Our over 26,000 pet care center partners offer a level of customer engagement and content that is differentiated in retail and based on a true passion for pets. Our partners are primarily employed on an at-will basis and are compensated through base salary and incentive programs.
While we offer pet parents a full spectrum of product choices within our high standards of nutrition and quality, our assortment is weighted towards premium products to address the needs of the growing number of health-conscious pet parents.
While we offer pet parents a full spectrum of product choices within our high standards of nutrition and quality, our assortment is weighted towards premium products to address ongoing humanization and premiumization trends in the market.
Pet services represent the most personalized, sticky, high-touch part of the pet market. In addition to acting as a profitable driver of new customer acquisition, we believe our differentiated service platform helps deepen our competitive moats by promoting customer retention, driving physical visit frequency and digital engagement, increasing share of wallet, and building long-term loyalty.
In addition to acting as a profitable driver of new customer acquisition, we believe our differentiated service platform helps strengthen our position by promoting customer retention, driving physical visit frequency and digital engagement, increasing share of wallet, and building long-term loyalty.
Nearly all of our 1,433 pet care centers in the U.S. and Puerto Rico offer grooming and training services, while approximately 1,000 offer Vetco mobile clinics, and 197 offer full-service veterinary hospitals. We also operate 108 locations in Mexico through our joint venture with Grupo Gigante. Launched a Full-Service Veterinary Hospital Network, and Reinvented Grooming and Training .
Nearly all of our 1,430 pet care centers in the U.S. and Puerto Rico offer grooming and training services, in addition to our 247 full-service veterinary hospitals and the approximately 1,200 Vetco mobile clinics operated at our pet care centers on a weekly basis. We also operate 120 locations in Mexico through our joint venture with Grupo Gigante.
As of January 29, 2022, we operated 197 full service veterinary hospitals with planned expansion to approximately 900 hospitals over time. Our multichannel, go-to-market strategy integrates our strong digital assets with our nationwide physical footprint to meet the needs of pet parents who are looking for a single source for all their pet’s needs.
Our multichannel, go-to-market strategy integrates our strong digital assets with our nationwide physical footprint to meet the needs of pet parents who are looking for a single source for all their pet’s needs.
Petco Love is working with community-based animal welfare partners across the country to distribute these much-needed vaccinations in under-resourced communities, something we believe gives all pets the best chance to live long and healthy lives.
Distributing these much-needed vaccinations in under-resourced communities is something Petco Love believes gives all pets the best chance to live long and healthy lives.
Due to the essential, repeat nature of pet care, the industry has demonstrated resilience across economic cycles, as evidenced by the strong industry performance during the Great Recession from 2008 to 2010.
Due to the essential, repeat nature of pet care, the industry has demonstrated resilience and continued growth across economic cycles, as evidenced by the strong industry performance during the Great Recession from 2008 to 2010. In addition, as a result of the COVID-19 pandemic, the pet care industry experienced a significant increase in household pets and therefore demand.
Our singular view of the customer across products, services, and channels, in combination with insights from our loyalty programs, online purchasing and more, provides us with access to some of the richest data in the pet category.
Implemented a Performance Culture Led by Data Analytics . Our singular view of the customer across products and services channels, in combination with insights from our Vital Care membership program, online purchasing, surveys, and third party data, provides us with access to some of the richest data in the pet category.
We have continued to evolve our practices in line with applicable regulations and guidance . 9 Compensation and Benefits We provide competitive compensation and benefits programs to help meet the needs of our partners and their families.
Compensation and Benefits We provide competitive compensation and benefits programs to help meet the needs of our partners and their families.
Through our connected platform, we serve our customers in a differentiated manner by offering the convenience of buy online and pick up in store (“BOPUS”), curbside pick-up, same day delivery and ship from store. In addition to providing differentiated products and services, our over 24,000 knowledgeable, passionate partners provide important high-quality advice to our customers in our pet care centers.
Through our connected platform, we serve our customers in a differentiated manner by offering the convenience of repeat delivery, buy online and pick up in store (“BOPUS”), curbside pick-up, same day delivery, and ship from store.
Distribution We currently operate six primary and two regional distribution centers located in various parts of the United States that handle almost all distribution for our company, and we plan to include at least one more primary distribution center in fiscal 2022.
Distribution We currently have seven primary and two regional distribution centers in our network, which are located in various parts of the United States, that handle almost all distribution for our company.
With respect to our business, we are strategically focused on growing our presence in three of the fastest-growing areas of the market: veterinary care; e-commerce; and services. 6 As pet care demand continues to grow, we believe we are well-positioned to expand our total addressable market through new offerings, and to capture an outsized portion of the growing market as a fully-integrated, comprehensive pet care provider.
As pet care demand continues to grow, over the long-term we believe we are well-positioned to expand our total addressable market through new offerings, and to capture share of the growing market as a fully-integrated, comprehensive pet care provider.
This repositioning started with making our offering more health and wellness-focused by eliminating certain food and treats with artificial ingredients, the removal of human-operated and bark-activated shock collars from our shelves in favor of free introductory positive reinforcement dog training classes, and the removal of traditional rawhide products from our shelves.
This repositioning started with bold commitments to pet health and wellness, from eliminating certain food and treats with artificial ingredients, and the removal of human-operated and bark-activated shock collars and traditional rawhide products from our shelves, to becoming the first national pet retailer to be certified by American Humane.
The combination of our food and supplies strategy, including owned and exclusive brands, has enabled us to offer a premium assortment of products, many of which are not available via online, mass or grocery competitors. Implemented a Performance Culture Led by Data Analytics .
This not only enhances our merchandise mix, but also helps the Petco ecosystem attract and retain customers, and offers an enhanced margin profile. The combination of our food and supplies strategy, including owned and exclusive brands, has enabled us to offer a differentiated assortment of products, many of which are not available via online, mass, or grocery competitors.
To date, nearly 2,000 animal welfare organizations and pet industry partners across the U.S. have adopted the platform, and Petco Love Lost has helped return approximately 4,000 pets to their loving homes. 10 In August 2021, Petco Love announced a significant partnership with Merck to make over one million lifesaving vaccines available to pets for free, and over 500,000 were distributed by the end of fiscal 2021.
To date, nearly 2,500 animal welfare organizations and pet industry partners across the U.S. have adopted the platform, and Petco Love Lost has helped return over 17,000 pets to their loving homes.
This offering is further enhanced by a rapidly expanding, high quality, accessible, comprehensive veterinary care platform. Leveraging our decade of experience in Vetco mobile clinics, which we operate approximately 1,000 of on a weekly basis, we are rapidly expanding our full service, general practice veterinary hospitals complemented by tele-health capabilities.
Leveraging our decade of experience in Vetco mobile clinics, which we operate approximately 1,200 of on a weekly basis, we are growing our network of full service, general practice veterinary hospitals complemented by tele-health, prescription and insurance. As of January 28, 2023, we operated 247 full service veterinary hospitals.
In 2019, we leveraged our established owned brand platform and capabilities to launch Reddy, a fashion-driven supplies brand, to complement WholeHearted, our premium food brand. We have grown our owned brand sales at a double digit CAGR between fiscal 2018 and fiscal 2021.
In 2019, we leveraged our established owned brand platform and capabilities to launch Reddy, a fashion-driven supplies brand, to complement WholeHearted, our owned food brand. In fiscal 2022, we generated approximately 27% of our product sales from owned brands—such as WholeHearted, Reddy, and Well & Good.
Partners experienced no increase in their 2020, 2021 or 2022 healthcare benefit premiums. In addition, we offer a range of webinars, trainings, and subscriptions to support our partners’ total wellbeing. Finally, in 2021, our Pet Care Center partners average wages grew by over 7%. Talent Development We invest significant resources to attract, develop, and retain top talent.
Partners have experienced no increase in their healthcare benefit premiums since 2020, and investments in fertility care, medical travel, and mental health benefits were announced in 2022. In addition, we offer a range of webinars, trainings, and subscriptions to support our partners’ total wellbeing.
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Vital Care memberships are at the top of our integrated loyalty programs, followed by our perks program that provides rewards for frequent purchasing, and our Pals Rewards loyalty program, whose members accounted for approximately 80% of transactions in fiscal 2021.
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Item 1. B usiness . Our Company Founded in 1965, Petco is a category-defining health and wellness company focused on improving the lives of pets, pet parents, and our own Petco partners.
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In addition, as a result of the COVID-19 pandemic, the industry experienced a significant increase in household pets and therefore demand, which is expected to be a tailwind for years to come.
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As a result, we’ve consistently set new standards in pet care while delivering comprehensive pet wellness products, services, and solutions, and creating communities that deepen the pet-pet parent bond.
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Given the larger pet population and expected continued pet humanization and premiumization trends, pet category growth in the U.S is expected to maintain a 7% compound annual growth rate (“CAGR”) through 2024, slightly down from the unusually elevated 9% growth levels during the pandemic, according to Packaged Facts and company internal estimates.
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To further enhance the reach of our product offering and expand our customer base, we’ve implemented partnerships with Lowe’s Companies, Inc. and Canadian Tire Corporation to develop innovative store-in-store concepts at select Lowe’s and Canadian Tire locations that offer a curated assortment of our products.
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Specifically, we have: Built Leading Omnichannel Capabilities that Leverage our Physical Network .
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Additionally, in 2022, we launched our expansion into rural markets with the opening of our first Neighborhood Farm & Pet Supply pet care centers, which serve as one-stop shops for health and wellness solutions for pets and farm animals in rural communities.
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In fiscal 2021, we generated approximately 27% of our product sales from owned brands—such as WholeHearted, Reddy, and Well & Good. This not only enhances our merchandise mix, but also helps the Petco ecosystem attract and retain customers, and offers an enhanced margin profile.
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These brand-new, stand-alone retail locations are strategically and conveniently situated at the heart of rapidly growing communities, providing us with an opportunity to capture significant incremental market share and share of wallet gains. As of January 28, 2023, we had 5 total Neighborhood Farm & Pet Supply pet care centers across Texas, North Carolina, and Kentucky.
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With our new brand positioning and 360-degree data ecosystem, we use precision marketing to drive customer acquisition, monetization and retention across our business. This has enabled market share gains across brick and mortar and digital.
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In addition to providing differentiated products and services, our over 26,000 knowledgeable, passionate partners in our pet care centers provide important high-quality advice to our customers. The full value of our health and wellness omnichannel ecosystem is realized for customers through our Vital Care membership program.
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We have also provided additional days of paid time off to all partners to support those directly affected by COVID-19 for reasons such as partner infections, self-quarantines, living with or caring for someone at high risk or related dependent care challenges, and wellness days.
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In January 2023, we unified our over 25 million active customers within a two-tiered offering under Vital Care—Vital Care Core, our free membership tier, and Vital Care Premier, our paid membership tier—to provide for an integrated omnichannel experience.
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Once vaccines became available, all partners who provided confirmation of vaccination received a one-time $75 payment, along with a $25 donation made to the Petco Partner Assistance Fund by us . We have also offered weekly $1,000 raffles to promote vaccination, and support scheduling flexibility for vaccination appointments.
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Former members of our Pals Rewards loyalty program, who accounted for over 85% of transactions in fiscal 2022, were transitioned to Vital Care Core, while members of our existing Vital Care program were transitioned to Vital Care Premier, with both tiers retaining the same benefits, and paid members, the same fee.
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Throughout the pandemic, we have taken proactive, precautionary steps to ensure we continue to meet or exceed local, state, and federal regulations as well as recommended health and safety guidelines from the CDC.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

148 edited+32 added−30 removed270 unchanged
Biggest changeOur quarterly operating results are likely to fluctuate in the future. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market, or political conditions, could subject the market price of our shares to wide price fluctuations regardless of our operating performance.
Biggest changeGeneral Risk Factors Our operating results and share price may be volatile, and the market price of our Class A common stock may drop. Our quarterly operating results are likely to fluctuate in the future. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations.
For example, it could: • make it more difficult for us to satisfy our obligations with respect to our existing indebtedness; • increase our vulnerability to general adverse economic and industry conditions; • require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital and capital expenditures, and for other general corporate purposes; • limit our flexibility in planning for, or reacting to, changes in our business and industry, which may place us at a competitive disadvantage compared to our competitors that have less debt; • restrict us from making strategic acquisitions or other investments or cause us to make non-strategic divestitures; and • limit, along with the financial and other restrictive covenants in the documents governing our indebtedness, among other things, our ability to obtain additional financing for working capital and capital expenditures, and for other general corporate purposes.
For example, it could: • make it more difficult for us to satisfy our obligations with respect to our existing indebtedness; • increase our vulnerability to general adverse economic and industry conditions; • require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital and capital expenditures, and for other general corporate purposes; • limit our flexibility in planning for, or reacting to, changes in our business and industry, which may place us at a competitive disadvantage compared to our competitors that have less debt; 33 • restrict us from making strategic acquisitions or other investments or cause us to make non-strategic divestitures; and • limit, along with the financial and other restrictive covenants in the documents governing our indebtedness, among other things, our ability to obtain additional financing for working capital and capital expenditures, and for other general corporate purposes.
Our certificate of incorporation and bylaws include provisions that: • provide that, except with regard to directors nominated by our Principal Stockholder, vacancies on our board of directors shall be filled only by a majority of directors then in office, even though less than a quorum, or by a sole remaining director; • establish that our board of directors is divided into three classes, with each class serving three-year staggered terms; • provide that our directors can be removed for cause only, once our Principal Stockholder (including its permitted transferees under the stockholder’s agreement with our Principal Stockholder (the “stockholder’s agreement”)) no longer beneficially owns 50% or more of our outstanding Class A common stock and Class B-1 common stock; • provide that, once our Principal Stockholder (including its permitted transferees under the stockholder’s agreement) no longer beneficially owns 50% or more of our outstanding Class A common stock and Class B-1 common stock, any action required or permitted to be taken by the stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing in lieu of a meeting of such stockholders; • specify that, once our Principal Stockholder (including its permitted transferees under the stockholder’s agreement) no longer beneficially owns 50% or more of our outstanding Class A common stock and Class B-1 common stock, special meetings of our stockholders can be called only by our board of directors, or the Chairman of our board of directors (prior to such time, special meetings of the stockholders of our company shall be called by the Chairman of our board of directors or our Secretary at the request of our Principal Stockholder, in addition to being able to be called by the Chairman of our board of directors and by our board of directors); • require the approval of the holders of at least two-thirds of the voting power of all outstanding stock entitled to vote thereon, voting together as a single class, to amend or repeal our bylaws and certain articles of our certificate of incorporation once our Principal Stockholder (including its permitted transferees under the stockholder’s agreement) ceases to beneficially own at least 50% of the Class A common stock and Class B-1 common stock; • establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors; • authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock; and 35 • reflect three classes of common stock.
Our certificate of incorporation and bylaws include provisions that: • provide that, except with regard to directors nominated by our Principal Stockholder, vacancies on our board of directors shall be filled only by a majority of directors then in office, even though less than a quorum, or by a sole remaining director; • establish that our board of directors is divided into three classes, with each class serving three-year staggered terms; • provide that our directors can be removed for cause only, once our Principal Stockholder (including its permitted transferees under the stockholder’s agreement with our Principal Stockholder (the “stockholder’s agreement”)) no longer beneficially owns 50% or more of our outstanding Class A common stock and Class B-1 common stock; • provide that, once our Principal Stockholder (including its permitted transferees under the stockholder’s agreement) no longer beneficially owns 50% or more of our outstanding Class A common stock and Class B-1 common stock, any action required or permitted to be taken by the stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing in lieu of a meeting of such stockholders; • specify that, once our Principal Stockholder (including its permitted transferees under the stockholder’s agreement) no longer beneficially owns 50% or more of our outstanding Class A common stock and Class B-1 common stock, special meetings of our stockholders can be called only by our board of directors, or the Chairman of our board of directors (prior to such time, special meetings of the 37 stockholders of our company shall be called by the Chairman of our board of directors or our Secretary at the request of our Principal Stockholder, in addition to being able to be called by the Chairman of our board of directors and by our board of directors); • require the approval of the holders of at least two-thirds of the voting power of all outstanding stock entitled to vote thereon, voting together as a single class, to amend or repeal our bylaws and certain articles of our certificate of incorporation once our Principal Stockholder (including its permitted transferees under the stockholder’s agreement) ceases to beneficially own at least 50% of the Class A common stock and Class B-1 common stock; • establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors; • authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock; and • reflect three classes of common stock.
These restrictions, subject in certain cases to ordinary course of business and other exceptions, may limit our ability to engage in some transactions, including the following: 31 • incurring additional debt; • paying dividends, redeeming capital stock, or making other restricted payments or investments; • selling assets, properties, or licenses; • creating liens on assets; • entering into sale and lease-back transactions; • undergoing a change in control; • merging, consolidating, or disposing of substantially all assets; • entering into new lines of business; • entering into transactions with affiliates; and • placing restrictions on the ability of subsidiaries to pay dividends or make other payments.
These restrictions, subject in certain cases to ordinary course of business and other exceptions, may limit our ability to engage in some transactions, including the following: • incurring additional debt; • paying dividends, redeeming capital stock, or making other restricted payments or investments; • selling assets, properties, or licenses; • creating liens on assets; • entering into sale and lease-back transactions; • undergoing a change in control; • merging, consolidating, or disposing of substantially all assets; • entering into new lines of business; • entering into transactions with affiliates; and • placing restrictions on the ability of subsidiaries to pay dividends or make other payments.
Any unauthorized access into our customers’ sensitive information, or other data handled by or on behalf of us, even if we are compliant with industry security standards, could put us at a competitive disadvantage, result in deterioration of our customers’ confidence in us, and subject us to potential litigation, liability, fines, and penalties and consent decrees, which could require us to expend significant resources related to remediation or result in a disruption of our operations, any of which could have a material adverse effect on our business, financial condition, and results of operations.
Any unauthorized access into our customers’ or employees’ sensitive information, or other data handled by or on behalf of us, even if we are compliant with industry security standards, could put us at a competitive disadvantage, result in deterioration of our customers’ or employees’ confidence in us, and subject us to potential litigation, liability, fines, and penalties and consent decrees, which could require us to expend significant resources related to remediation or result in a disruption of our operations, any of which could have a material adverse effect on our business, financial condition, and results of operations.
If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock would likely decline and we could be subject to lawsuits, sanctions or investigations by regulatory authorities, which would require additional financial and 39 management resources.
If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock would likely decline and we could be subject to lawsuits, sanctions or investigations by regulatory authorities, which would require additional financial and management resources.
Concern about sustainability and climate change might cause consumer preferences to switch away from products or ingredients considered to have high climate change impact and towards products that are more sustainably grown and made, and we may incur additional costs as we potentially evolve our portfolio and engage in due diligence, verification and reporting in connection with our environmental, social and governance and sustainability initiatives.
Concern about sustainability and climate change might cause consumer preferences to switch away from products or ingredients considered to have high climate change impact and towards products that are more sustainably grown and made, and 14 we may incur additional costs as we potentially evolve our portfolio and engage in due diligence, verification, and reporting in connection with our environmental, social, and governance and sustainability initiatives.
The U.S. government and various states have enacted, have considered, or are considering legislation or regulations that could significantly restrict the ability of companies and individuals to engage in these activities, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools or the use of data gathered with such tools.
The U.S. government and various states have enacted, have considered, or are considering legislation or regulations that significantly restrict the ability of companies and individuals to engage in these activities, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools or the use of data gathered with such tools.
If consumer preferences change and thereby decrease the attractiveness of what we believe to be our competitive advantages, including our extensive product assortment, premium product offerings, omnichannel capabilities, competitive pricing, high-quality service offerings, and a unique customer experience, or if we fail to otherwise positively differentiate our customer experience from that of our competitors, our business and results of operations could be adversely affected.
If consumer preferences change and thereby decrease the attractiveness of what we believe to be our competitive advantages, including our extensive product assortment, premium product offerings, omnichannel capabilities, high-quality service offerings, and a unique customer experience, or if we fail to otherwise positively differentiate our customer experience from that of our competitors, our business and results of operations could be adversely affected.
Particularly, in light of current support for changes to federal and state labor laws, we cannot provide any assurance that we will not experience additional and more successful union organization activity in the future. Any labor disruptions could have an adverse effect on our business or results of operations and could cause us to lose customers.
Particularly, in light of current support for changes to federal and state labor laws, we cannot provide any assurance that we will not experience additional and/or successful union organization activity in the future. Any labor disruptions could have an adverse effect on our business or results of operations and could cause us to lose customers.
Disruption to shipping and transportation channels due to slowdowns or work stoppages at ports on the West Coast of the United States have occurred in the past, and to the extent they occur in the future, could cause us to rely more heavily on airfreight to achieve timely delivery to our customers, resulting in significantly higher freight costs.
Disruption to shipping and transportation channels due to slowdowns or work stoppages at ports on the West Coast of the United States have occurred in the past, and to the extent they occur in the future, could cause us to rely more heavily on airfreight to achieve timely delivery to our customers, resulting in 18 significantly higher freight costs.
Item 1A. Risk Factors. Investing in our securities involves uncertainty and risk due to a variety of factors. You should carefully consider the risks described below with all of the other information included in this Annual Report on Form 10-K. Further, the risks and uncertainties described below are not the only ones we face.
Item 1A. Ris k Factors. Investing in our securities involves uncertainty and risk due to a variety of factors. You should carefully consider the risks described below with all of the other information included in this Annual Report on Form 10-K. Further, the risks and uncertainties described below are not the only ones we face.
These factors could also cause consumer confidence and spending to decrease or result in increased volatility in the United States and global financial markets and economy. These or other occurrences could significantly impact our operating results and financial performance. 23 A potential result of climate change is more frequent or more severe weather events or natural disasters.
These factors could also cause consumer confidence and spending to decrease or result in increased volatility in the United States and global financial markets and economy. These or other occurrences could significantly impact our operating results and financial performance. A potential result of climate change is more frequent or more severe weather events or natural disasters.
Once we register 38 these shares, they can be freely resold in the public market, subject to legal or contractual restrictions, such as lock-up agreements. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them.
Once we register these shares, they can be freely resold in the public market, subject to legal or contractual restrictions, such as lock-up agreements. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them.
Moreover, any material weaknesses could result in a material misstatement of our annual or quarterly consolidated financial statements or disclosures that may not be prevented or detected. Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our financial condition and results of operations.
Moreover, any material weaknesses could result in a material misstatement of our annual or quarterly consolidated financial statements or disclosures that may not be prevented or detected. 41 Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our financial condition and results of operations.
We rely on trademark, copyright, trade secret, patent, and other intellectual property laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our trademarks, trade names, proprietary information, technologies, and processes. We might not be able to obtain broad protection in the United States for all 28 of our intellectual property.
We rely on trademark, copyright, trade secret, patent, and other intellectual property laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our trademarks, trade names, proprietary information, technologies, and processes. We might not be able to obtain broad protection in the United States for all of our intellectual property.
Compliance with these laws and regulations has increased our legal and financial compliance costs and makes some activities more difficult, time-consuming, or costly. For example, the Exchange Act requires us, among other things, to file annual, quarterly, and current reports with respect to our business and operating results.
Compliance with these laws and regulations has increased our legal and financial compliance costs and makes some activities more difficult, time-consuming, and/or costly. For example, the Exchange Act requires us, among other things, to 32 file annual, quarterly, and current reports with respect to our business and operating results.
To the extent that we are unable to execute on our growth strategies in accordance with our 14 expectations, our sales growth would come primarily from the organic growth of existing product and service offerings. We may experience difficulties recruiting and retaining skilled veterinarians due to shortages that could disrupt our business.
To the extent that we are unable to execute on our growth strategies in accordance with our expectations, our sales growth would come primarily from the organic growth of existing product and service offerings. We may experience difficulties recruiting and retaining skilled veterinarians due to shortages that could disrupt our business.
If we are not successful in generating or obtaining sufficient capital, we may be unable to invest in our growth, which may adversely affect our results of operations. 15 We depend on key personnel, and if we lose the services of any of our executive officers, we may not be able to run our business effectively.
If we are not successful in generating or obtaining sufficient capital, we may be unable to invest in our growth, which may adversely affect our results of operations. We depend on key personnel, and if we lose the services of any of our executive officers, we may not be able to run our business effectively.
Enhancement to or replacement of our major financial or operational information systems could have a significant impact on our ability to conduct our 19 business operations and increase our risk of loss resulting from disruptions of normal operating processes and procedures that may occur during the implementation of new information systems.
Enhancement to or replacement of our major financial or operational information systems could have a significant impact on our ability to conduct our business operations and increase our risk of loss resulting from disruptions of normal operating processes and procedures that may occur during the implementation of new information systems.
If the number of veterinarians who refuse to authorize prescriptions to the pharmacy staff of our fulfillment vendor increases, or if veterinarians are successful in discouraging pet owners from purchasing from us, our sales could decrease and our financial condition and results of operations may be materially adversely affected.
If the number of veterinarians who refuse to authorize prescriptions to the pharmacy staff of our fulfillment vendor increases, or if veterinarians are successful in 24 discouraging pet owners from purchasing from us, our sales could decrease and our financial condition and results of operations may be materially adversely affected.
Payments to us by our subsidiaries will be contingent upon their respective earnings and subject to any limitations on the ability of such entities to make payments or other distributions to us. The multi-class structure of our common stock may adversely affect the trading market for our Class A common stock.
Payments to us by our subsidiaries will be contingent upon their respective earnings and subject to any limitations on the ability of such entities to make payments or other distributions to us. 38 The multi-class structure of our common stock may adversely affect the trading market for our Class A common stock.
Any such claim, proceeding, or action could hurt our reputation, brand and business, force us to incur significant expenses in defending such proceedings, distract our management, increase our costs of doing business, result in a loss of customers and vendors, and may result in the 25 imposition of monetary liability.
Any such claim, proceeding, or action could hurt our reputation, brand and business, force us to incur significant expenses in defending such proceedings, distract our management, increase our costs of doing business, result in a loss of customers and vendors, and may result in the imposition of monetary liability.
These additional requirements impose significant additional costs on us and require a significant amount of our management’s attention, and could affect our ability to attract and retain qualified board members. 30 Our aspirations, goals, and initiatives related to sustainability, and our public statements and disclosures regarding them, expose us to numerous risks.
These additional requirements impose significant additional costs on us and require a significant amount of our management’s attention, and could affect our ability to attract and retain qualified board members. Our aspirations, goals, and initiatives related to sustainability, and our public statements and disclosures regarding them, expose us to numerous risks.
In addition, data and security breaches could also occur as a result of non-technical issues, including intentional or inadvertent breach by our employees or by persons with whom we have commercial relationships, that result in the unauthorized release of personal or confidential information.
In addition, data and security breaches could also occur as a result of non-technical issues, including intentional or inadvertent breaches by our employees or by persons with whom we have commercial relationships, that result in the unauthorized release of personal or confidential information.
If we are unable to successfully recruit and retain personnel to staff our distribution centers, we may face labor shortages or be forced to 17 increase wages and enhance benefits for such personnel, which may have an adverse effect on our results of operations.
If we are unable to successfully recruit and retain personnel to staff our distribution centers, we may face labor shortages or be forced to increase wages and enhance benefits for such personnel, which may have an adverse effect on our results of operations.
If any of these risks materialize, they could have an adverse effect on our business. Additionally, customer expectations about the methods by which they purchase and receive products or services are also becoming more demanding.
If any of these risks materialize, they could have an adverse effect on our business. 16 Additionally, customer expectations about the methods by which they purchase and receive products or services are also becoming more demanding.
Moreover, failure to achieve and maintain a diverse workforce and leadership team, maintain a safe and inclusive environment or promote the well-being of our employees could affect our reputation and also 22 result in lower performance and an inability to retain valuable employees.
Moreover, failure to achieve and maintain a diverse workforce and leadership team, maintain a safe and inclusive environment or promote the well-being of our employees could affect our reputation and also result in lower performance and an inability to retain valuable employees.
If our sustainability practices do not meet investor or other stakeholder expectations and standards, which continue to evolve, our reputation, our ability to attract or retain employees, and our attractiveness as an investment, business partner, or as an acquiror could be negatively impacted.
If our sustainability practices do not meet investor or other stakeholder expectations and standards, which continue to evolve, our reputation, our ability to attract or retain employees and customers, and our attractiveness as an investment, business partner, or as an acquiror could be negatively impacted.
We are experiencing inflationary pressures in certain areas of our business, including with respect to employee wages and the cost of merchandise, although, to date, we have been able to mitigate such pressures through price increases and other measures.
We are experiencing inflationary pressures in certain areas of our business, including with respect to employee wages and the cost of merchandise, although, to date, we have largely been able to mitigate such pressures through price increases and other measures.
We currently accept payments using a variety of methods, including credit cards, debit cards, Paypal, and gift cards. As we offer new payment options to consumers, we may be subject to additional regulations, compliance requirements, fraud, and other risks.
We currently accept payments using a variety of methods, including credit cards, debit cards, Paypal, Klarna, and gift cards. As we offer new payment options to consumers, we may be subject to additional regulations, compliance requirements, fraud, and other risks.
Our current and future marketing programs depend on our ability to collect, maintain, use, and share this information with service providers and other third-party vendors, and our ability to do so depends on the trust that our customers place in us and our ability to maintain that trust.
Our current and future marketing programs depend on our ability to collect, maintain, use, and share this personal information with service providers and other third-party vendors, and our ability to do so depends on the trust that our customers place in us and our ability to maintain that trust.
Further, we cannot assure you that we will be able to 32 refinance any of our indebtedness, including the First Lien Term Loan and the ABL Revolving Credit Facility, on commercially reasonable terms, or at all.
Further, we cannot assure you that we will be able to refinance any of our indebtedness, including the First Lien Term Loan and the ABL Revolving Credit Facility, on commercially reasonable terms, or at all.
In addition, our Principal Stockholder has demand registration rights that will require us to file registration statements in connection with future sales of our stock by our Principal Stockholder, including in connection with the note purchase agreement described below. Sales by our Principal Stockholder could be significant.
In addition, our Principal Stockholder has demand registration rights that will require us to file registration statements in 40 connection with future sales of our stock by our Principal Stockholder, including in connection with the note purchase agreement described below. Sales by our Principal Stockholder could be significant.
In addition, changes in the laws and regulations to which we are subject could impose significant limitations and require changes 24 to our business, which may increase our compliance expenses, make our business costlier and less efficient to conduct, and compromise our growth strategy.
In addition, changes in the laws and regulations to which we are subject could impose significant limitations and require changes to our business, which may increase our compliance expenses, make our business costlier and less efficient to conduct, and compromise our growth strategy.
Additionally, our use of consumer data is subject to the terms of our privacy 26 policies and certain contractual restrictions in third-party contracts as well as evolving federal, state, and international laws and enforcement trends.
Additionally, our use of consumer data is subject to the terms of our privacy policies and certain contractual restrictions in third-party contracts as well as evolving federal, state, and international laws and enforcement trends.
The failure of our information systems or those of our vendors to perform as designed, the loss of data, or any interruption of our information systems or those of our vendors for a significant period of time could disrupt our business.
The failure of our 20 information systems or those of our vendors to perform as designed, the loss of data, or any interruption of our information systems or those of our vendors for a significant period of time could disrupt our business.
Our testing, or the subsequent testing by our independent public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses.
Our testing, or the testing by our independent public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses.
Additional trade restrictions, including tariffs, quotas, embargoes, safeguards, border shutdowns, and customs restrictions, could increase the cost or reduce the supply of products available to us and to our vendors based in the United States and may require us to modify our supply chain organization or other current 20 business practices or raise prices , any of which could harm our business, financial condition, and results of operations.
Additional trade restrictions, including sanctions, tariffs, quotas, embargoes, safeguards, border shutdowns, and customs restrictions, could increase the cost or reduce the supply of products available to us and to our vendors based in the United States and may require us to modify our supply chain organization or other current business practices or raise prices, any of which could harm our business, financial condition, and results of operations.
Changes in consumer shopping habits and patterns, reduced customer traffic in the shopping centers where our pet care centers are located, financial difficulties of our landlords, anchor tenants, or a significant number of other retailers, and shopping center vacancies or closures could impact the profitability of our pet care centers and increase the likelihood that our landlords fail to fulfill their obligations and conditions under our lease agreements.
Changes in consumer shopping habits and patterns, reduced customer traffic in the commercial areas where our pet care centers are located, financial difficulties of our landlords, anchor tenants, or a significant number of other retailers, and shopping center vacancies or closures could impact the profitability of our pet care centers and increase the likelihood that our landlords fail to fulfill their obligations and conditions under our lease agreements.
Our operating results and the trading price of our shares may fluctuate in response to various factors, including: • market conditions in the broader stock market; • actual or anticipated fluctuations in our quarterly financial and operating results; • introduction of new products or services by us or our competitors; • issuance of new or changed securities analysts’ reports or recommendations; • changes in debt ratings; 37 • results of operations that vary from expectations of securities analysts and investors; • guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance; • strategic actions by us or our competitors; • announcement by us, our competitors, or our vendors of significant contracts or acquisitions; • sales, or anticipated sales, of large blocks of our stock; • additions or departures of key personnel; • regulatory, legal, or political developments; • public response to press releases or other public announcements by us or third parties, including our filings with the SEC; • litigation and governmental investigations; • changing economic conditions; • changes in accounting principles; • default under agreements governing our indebtedness; and • other events or factors, including those from severe weather events (including as a result of climate change), natural disasters, pandemic, pet disease, war, acts of terrorism, or responses to these events.
Our operating results and the trading price of our shares may fluctuate in response to various factors, including: • market conditions in the broader stock market; • actual or anticipated fluctuations in our quarterly financial and operating results; • introduction of new products or services by us or our competitors; • issuance of new or changed securities analysts’ reports or recommendations; 39 • changes in debt ratings; • results of operations that vary from expectations of securities analysts and investors; • guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance; • strategic actions by us or our competitors; • announcement by us, our competitors, or our vendors of significant contracts or acquisitions; • sales, or anticipated sales, of large blocks of our stock; • additions or departures of key personnel; • regulatory, legal, or political developments; • public response to press releases or other public announcements by us or third parties, including our filings with the SEC; • litigation and governmental investigations; • changing economic conditions, including interest rates and financial market uncertainty; • changes in accounting principles; • default under agreements governing our indebtedness; and • other events or factors, including those from severe weather events (including as a result of climate change), natural disasters, pandemic, pet disease, war, acts of terrorism, or responses to these events.
Accordingly, we are subject to the risks associated with leasing real estate, which could have a material adverse effect on our operating results. Further, the success of our pet care centers depends on a number of factors, including the sustained success of the shopping center where the pet care center is located, consumer demographics, and consumer shopping habits and patterns.
Accordingly, we are subject to the risks associated with leasing real estate, which could have a material adverse effect on our operating results. Further, the success of our pet care centers depends on a number of factors, including the sustained success of the commercial area where the pet care center is located, consumer demographics, and consumer shopping habits and patterns.
Although we routinely obtain broad indemnities from our vendors in respect of their products, we could be adversely affected if we were found not to be in compliance with applicable regulations and we were not made whole by our vendors. Among other regulatory requirements, the FDA regulates the inclusion of specific claims in pet food labeling.
Although we routinely obtain broad indemnities from our vendors in respect of their products, we could be adversely affected if we were found not to be in compliance with applicable regulations and we were not made whole by our vendors. Among other regulatory requirements, the FDA regulates the inclusion of specific claims in pet product labeling.
Reputational value is based in large part on perceptions of subjective qualities, and even isolated incidents that erode trust and confidence, particularly if they result in adverse publicity or widespread reaction on 13 social media, governmental investigations, or litigation, can have an adverse impact on these perceptions and lead to adverse effects on our business, including decreased comparable sales, consumer boycotts, loss of new pet care center development opportunities, lower partner morale and productivity, or partner recruiting and retention difficulties.
Reputational value is based in large part on perceptions of subjective qualities, and even isolated incidents (even if based on rumor or misunderstanding) that erode trust and confidence, particularly if they result in adverse publicity or widespread reaction on social media, governmental investigations, or litigation, can have an adverse impact on these perceptions and lead to adverse effects on our business, including decreased comparable sales, consumer boycotts, loss of new pet care center development opportunities, lower partner morale and productivity, or partner recruiting and retention difficulties.
Additionally, the development and introduction of innovative new products and services and expansion into new offerings involves considerable costs. Any new product, service or offering may not generate sufficient customer interest and sales to become profitable or to cover the costs of its development and promotion and, as a result, may adversely impact our results of operations.
Additionally, the development and introduction of innovative new products and services and expansion into new offerings involves considerable costs. Any new product, service, or offering may not generate sufficient customer interest and sales to become profitable or to cover the costs of its development and promotion and, as a result, may adversely impact our results of operations, including our profitability.
While 21 our supply chain was not disrupted, similar disruptions in the future due to COVID-19 or other outbreaks could potentially limit the supply of or increase prices for certain of meat proteins used in our pet food products, adversely affecting our business and results of operations.
While our supply chain was not disrupted, similar disruptions in the future due to COVID-19 variants or other outbreaks could potentially limit the supply of, or increase prices for, certain of meat proteins used in our pet food products, adversely affecting our business and results of operations.
Our business operations are conducted primarily out of our indirect operating subsidiary, Petco Animal Supplies Stores, Inc. and its subsidiaries.
Our business operations are conducted primarily out of our indirect operating subsidiary, Petco Animal Supplies Stores, Inc. and certain of its subsidiaries.
Although we do not materially rely on any particular vendor, the loss of any of our significant vendors of pet food, particularly premium pet food, or pet supplies that we offer could have a negative impact on our business, financial condition, and results of operations.
Although we do not materially rely on any particular vendor, the loss of any of our significant vendors of pet food, particularly premium or owned brand pet food, or pet supplies that we offer could have a negative impact on our business, financial condition, and results of operations.
Environmental Protection Agency, the National Labor Relations Board, and by various other federal, state, local, and foreign authorities.
Environmental Protection Agency, the EEOC, the National Labor Relations Board, and by various other federal, state, local, and foreign authorities.
If our vendors fail to manufacture or import merchandise that adheres to our quality control standards, product safety requirements, or applicable governmental regulations, our reputation and brands could be damaged, potentially leading to increases in customer litigation against us.
If our vendors fail to manufacture or import merchandise that adheres to our quality control standards, product safety requirements, or applicable governmental regulations, our reputation and brands could be damaged, potentially leading to decreased sales or increases in customer litigation against us.
Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means to make it easier for internet users to prevent the placement of cookies or to block other tracking technologies, which could, if widely adopted, result in the use of third-party cookies and other methods of online tracking becoming significantly less effective.
Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means to make it easier for internet users to prevent the placement of cookies or to block other tracking technologies, which could, if widely adopted, result in the use of third-party cookies and other methods of online tracking becoming significantly less effective, including for recruiting purposes.
The pet food and supplies industry is subject to risks related to increases in the price of and the availability of certain commodities used in the production of certain pet food and other pet-related products, specifically seed, wheat, and rice, as well as other materials that are used in the production of certain pet accessories.
The pet food and supplies industry is subject to risks related to increases in the prices and availability of certain commodities used in the production of certain pet food and other pet-related products, specifically seed, wheat, and rice, as well as other materials that are used in the production of certain pet accessories.
The regulation of the use of these cookies and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ such technologies could increase our costs of operations and limit our ability to acquire new customers on cost-effective terms and, consequently, materially and adversely affect our business, financial condition, and results of operations.
The regulation of the use of these cookies and other current online tracking, recruiting, and advertising practices or a loss in our ability to make effective use of services that employ such technologies could increase our costs of operations and/or recruitment, and limit our ability to acquire new customers and/or staff on cost-effective terms and, consequently, materially and adversely affect our business, financial condition, and results of operations.
Failure by us or our vendors to comply with data security requirements, including the CCPA’s “reasonable security” requirement in light of the private right of action, or rectify a security issue may result in class action litigation, fines, and the imposition of restrictions on our ability to accept payment cards, which could adversely affect our operations.
Failure by us or our vendors to comply with data security requirements, including the CCPA’s (as modified by the CPRA) “reasonable security” requirement in light of the private right of action, or rectify a security issue may result in class action litigation, fines, and the imposition of restrictions on our ability to accept payment cards, which could adversely affect our operations.
We have also faced increased wage competition and costs across our business in recruiting and retaining top talent. Recently, various legislative movements have sought to increase the federal minimum wage in the United States and the minimum wage in a number of individual states, some of which have been successful at the state level.
We have also faced, and could continue to face, increased wage competition and costs across our business in recruiting and retaining top talent. Recently, various legislative movements have sought to increase the federal minimum wage in the United States and the minimum wage in a number of individual states, some of which have been successful at the state level.
As a result of the disruptions resulting from COVID-19, as well as recent surges in consumer demand, shortages of raw materials and disruptions to the global supply chain resulting from, among other things, lack of carrier capacity, labor shortages, port congestion and /or closures, and rising fuel prices, some of our existing vendors have not been able to supply us with products in a timely or cost-effective manner.
As a result of the disruptions resulting from COVID-19, as well as surges in consumer demand for certain products, shortages of raw materials and disruptions to the global supply chain resulting from, among other things, lack of carrier capacity, labor shortages, port congestion and /or closures, and rising fuel prices, some of our existing vendors have not been able to supply us with products in a timely or 17 cost-effective manner.
We use a combination of insurance and self-insurance plans to provide for potential liabilities for workers’ compensation, general liability, business interruption, property and directors’ and officers’ liability insurance, vehicle liability, and employee health-care benefits. Our insurance coverage may not be sufficient, and any insurance proceeds may not be timely paid to us.
We use a combination of insurance and self-insurance plans to provide coverage for potential liabilities for workers’ compensation, general liability, business interruption, property damage, directors’ and officers’ liability, vehicle liability, cybersecurity incidents, and employee health-care benefits. Our insurance coverage may not be sufficient, and any insurance proceeds may not be timely paid to us.
Examples of such factors include evolving regulatory requirements affecting sustainability standards or disclosures or imposing different requirements, evolving disclosure standards and/or policies established by standards organizations, stockholders and proxy advisory firms, the pace of changes in technology, the availability of requisite financing, and the availability of suppliers that can meet our sustainability and other standards.
Examples of such factors include evolving regulatory requirements affecting sustainability standards or disclosures or imposing different requirements, evolving disclosure standards and/or policies established by regulators and standards organizations, stockholders, ratings agencies, and proxy advisory firms, the pace of changes in technology, the availability of requisite financing, and the availability of suppliers that can meet our sustainability and other standards.
Such measures could subject us and our vendors to additional costs and restrictions and require significant operating and capital expenditures, including with respect to waste and energy reduction, compliance costs, and workforce initiatives, which could adversely impact our business, financial condition, results of operations and cash flows.
Such measures have subjected us, and may subject our vendors, to additional costs and restrictions and require significant operating and capital expenditures, including with respect to waste and energy reduction, compliance costs, and workforce initiatives, which could adversely impact our business, financial condition, results of operations and cash flows.
In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes brought securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit.
In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes brought securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending and/or settling the lawsuit.
This amount is net of $61.8 million of outstanding letters of credit issued in the normal course of business and no borrowing base reduction for a shortfall in qualifying assets. If new debt is added to our debt levels, or any debt is incurred by our subsidiaries, the related risks that we and our subsidiaries now face could increase.
This amount is net of $56.1 million of outstanding letters of credit issued in the normal course of business and no borrowing base reduction for a shortfall in qualifying assets. If new debt is added to our debt levels, or any debt is incurred by our subsidiaries, the related risks that we and our subsidiaries now face could increase.
In that case, the trading price of our Class A common stock could decline, and you could lose all or part of 12 your investment. For a summary of these risks, please read “Risk Factor s Summary,” which immediately precedes Part I, Item 1 of this Annual Report on Form 10-K.
In that case, the trading price of our Class A common stock could decline, and you could lose all or part of your investment. For a summary of these risks, please read “Risk Factors Summary,” which immediately precedes Part I, Item 1 of this Annual Report on Form 10-K.
At January 29, 2022, we had outstanding a (i) $1,700 million secured term loan facility maturing on March 4, 2028 (the “First Lien Term Loan”) and (ii) secured asset-based revolving credit facility providing for senior secured financing of up to $500 million, subject to a borrowing base, maturing on March 4, 2026 (the “ABL Revolving Credit Facility”).
At January 28, 2023, we had outstanding a (i) $1,700 million secured term loan facility maturing on March 4, 2028 (the “First Lien Term Loan”) and (ii) secured asset-based revolving credit facility providing for senior secured financing of up to $500 million, subject to a borrowing base, maturing on March 4, 2026 (the “ABL Revolving Credit Facility”).
The actual or perceived sale of contaminated pet food products by our vendors or us could result in product liability claims against our vendors or us and a loss of consumer confidence, which could have an adverse effect on our sales and operations.
The actual or perceived sale of contaminated pet consumables by our vendors or us could result in product liability claims against our vendors or us and a loss of consumer confidence, which could have an adverse effect on our sales and operations.
In some circumstances, increased transactions through our website may result in reduced customer traffic in our pet care centers, particularly as customers take advantage of curbside pickup and home delivery services available for online orders when making certain types of purchases, such as for bulk orders or heavy pet products.
In some circumstances, increased transactions through our website may result in reduced customer traffic in our pet care centers, particularly as customers take advantage of buy online and pick up in store, curbside pickup, and home delivery services available for online orders when making certain types of purchases, such as for bulk orders or heavy pet products.
We are involved in litigation arising in the ordinary course of business, including claims related to federal or state wage and hour laws, working conditions, product liability, consumer protection, advertising, employment, intellectual property, tort, privacy and data protection, disputes with landlords and vendors, claims from customers or employees alleging failure to maintain safe premises, including with respect to protocols relating to COVID-19, and other matters.
We are involved in litigation arising in the ordinary course of business, including claims related to federal or state wage and hour laws, working conditions, product liability, consumer protection, advertising, employment, intellectual property, tort, privacy and data protection, disputes with landlords and vendors, claims from customers or employees alleging failure to maintain safe premises, and other matters.
We send short message service, or SMS, text messages to customers. The actual or perceived improper sending of text messages may subject us to potential risks, including liabilities or claims relating to consumer protection laws.
We send short message service, or SMS, text messages to customers and job candidates. The actual or perceived improper sending of text messages may subject us to potential risks, including liabilities or claims relating to consumer protection laws.
Pet food safety, quality, and health concerns could adversely affect our business. We could be adversely affected if consumers lose confidence in the safety and quality of our owned brand or vendor-supplied pet food products and supplies.
Pet consumables safety, quality, and health concerns could adversely affect our business. We could be adversely affected if consumers lose confidence in the safety and quality of our owned brand or vendor-supplied consumable pet products and supplies.
Our trademarks, such as Bond & Co., EveryYay, Good 2 Go, Good Lovin’, Harmony, Imagitarium, Leaps & Bounds, Pals Rewards, Petco, Petco Love, PetCoach, PupBox, Reddy, Ruff & Mews, So Phresh, Vetco, Well & Good, WholeHearted, You & Me, and Youly are valuable assets that support our brand and consumers’ perception of our products.
Our trademarks, such as Bond & Co., EveryYay, Good 2 Go, Good Lovin’, Harmony, Imagitarium, Leaps & Bounds, Pals Rewards, Petco, Petco Love, PetCoach, PupBox, Reddy, Ruff & Mews, So Phresh, Vetco, Well & Good, WholeHearted, You & Me, Youly, Vital Care Core, and Vital Care Premier, are valuable assets that support 30 our brand and consumers’ perception of our products.
We believe Petco Pay will generate incremental revenue from customers who prefer the financing terms to other available forms of payment or otherwise need access to financing in order to make purchases. In addition, we earn profit- share income and share in any losses from certain of our banking partners based on the performance of the programs.
Petco Pay has generated incremental revenue from customers who prefer the financing terms to other available forms of payment or otherwise need access to financing in order to make purchases. In addition, we earn profit share income and share in any losses from certain of our banking partners based on the performance of the programs.
Our ability to execute on these strategies depends on a number of factors, including: • whether we have adequate capital resources to expand our offerings and build out our digital and data capabilities; • our ability to include veterinary services in our existing pet care centers or in our remodeled or relocated pet care centers; • our ability to relocate our pet care centers and obtain favorable sites and negotiate acceptable lease terms; • our ability to hire, train, and retain skilled managers and personnel, including veterinarians, information technology professionals, owned brand merchants, and groomers and trainers; and • our ability to continue to upgrade our information and other operating systems and to make use of the data that we collect through these systems to offer better products and services to our customers.
Our ability to execute on these strategies depends on a number of factors, including: • whether we have adequate capital resources to expand our offerings and build out our digital and data capabilities; • our ability to include veterinary services in our existing pet care centers or in our remodeled or relocated pet care centers; • our ability to relocate our pet care centers and obtain favorable sites and negotiate acceptable lease terms; • our ability to hire, train, and retain skilled personnel, including veterinarians, information technology professionals, owned brand merchants, and groomers and trainers; • our acceptance in new markets, as well as our ability to withstand competition in such markets; and • our ability to continue to upgrade our information and other operating systems and to make use of the data that we collect through these systems to offer better products and services to our customers.
The inability to borrow under the ABL Revolving Credit Facility may adversely affect our liquidity, results of operations, and financial position. Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.
The inability to borrow under the ABL Revolving Credit Facility may adversely affect our liquidity, results of operations, and financial position. Our variable rate indebtedness subjects us to interest rate risk, which has caused, and may continue to cause, our indebtedness service obligations to increase significantly.
Our sales depend on consumer spending, which is influenced by factors beyond our control, including general economic conditions, disruption or volatility in global financial markets, changes in interest rates, inflation, the availability of discretionary income and credit, weather, consumer confidence, unemployment levels, and government orders restricting freedom of movement.
Our sales depend on consumer spending, which is influenced by factors beyond our control, including general economic conditions, disruption or volatility in global financial markets, changes in interest rates, inflation, the availability of discretionary income and credit, weather, consumer confidence, and unemployment levels.
Our results may be increasingly affected by the risks of our international activities, including: • challenges anticipating or responding to the impact that local culture and market forces may have on local consumer preferences and trends; • fluctuations in currency exchanges rates; • changes in international staffing and employment issues; • the imposition of taxes, duties, tariffs, or other trade barriers; • shipping or customs delays; • greater difficulty in utilizing and enforcing our intellectual property rights; • the burden of complying with foreign laws, including regulatory regimes, tax laws, privacy laws, and financial accounting standards; • political and economic instability and developments; • issues or disputes arising with our joint venture partners, if any, in such operations; and • the risk that COVID-19 causes disruptions in any country where we have significant employee presence, facilities, or critical operations, thereby impairing our ability to manage day-to-day operations and service our customers, increasing our costs of operations, and resulting in potential losses in revenue.
Our results may be increasingly affected by the risks of our international activities, including: • challenges anticipating or responding to the impact that local culture and market forces may have on local consumer preferences and trends; • fluctuations in currency exchanges rates; • changes in international staffing and employment issues; • the imposition of taxes, duties, tariffs, or other trade barriers; • shipping or customs delays; • greater difficulty in utilizing and enforcing our intellectual property rights; • the burden of complying with foreign laws, including regulatory regimes, tax laws, privacy laws, and financial accounting standards; • political and economic instability and developments; • issues or disputes arising with our joint venture partners, if any, in such operations; and 21 • the risk that a health epidemic, pandemic or similar outbreak, or natural disaster or extreme weather event causes disruptions in any country where we have significant employee presence, facilities, or critical operations, thereby impairing our ability to manage day-to-day operations and service our customers, increasing our costs of operations, and resulting in potential losses in revenue.
Under these rules, a company of which more than 50% of the voting power with respect to director elections is held by an individual, group, or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including: • the requirement that a majority of the board of directors consist of independent directors; • the requirement that our nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and 34 • the requirement that our compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.
Under these rules, a company of which more than 50% of the voting power with respect to director elections is held by an individual, group, or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including: • the requirement that a majority of the board of directors consist of independent directors; • the requirement that our nominating and corporate governance committee be composed entirely of independent directors; and • the requirement that our compensation committee be composed entirely of independent directors.
The pandemic may continue to adversely affect our business, financial position, results of operations, and cash flows, including by resulting in (i) significant volatility in demand for our products and services, (ii) changes in consumer behavior and preferences, (iii) disruptions of our manufacturing and supply chain operations, (iv) disruption of our cost saving programs and restructuring initiatives, (v) limitations on our employees’ ability to work and travel, and (vi) changes to economic or political conditions in markets in which we operate.
Health epidemics, pandemics, and similar outbreaks may adversely affect our business, financial position, results of operations, and cash flows, including by resulting in (i) significant volatility in demand for our products and services, (ii) changes in consumer behavior and preferences, (iii) disruptions of our manufacturing and supply chain operations, (iv) disruption of our cost saving programs and restructuring initiatives, (v) limitations on our employees’ ability to work and travel, and (vi) changes to economic or political conditions in markets in which we operate.
In addition, the U.S. government has previously raised tariffs, and imposed new tariffs, on a wide range of imports of Chinese products.
In addition, the U.S. government has previously issued sanctions on Chinese companies, raised tariffs, and imposed new tariffs on a wide range of imports of Chinese products.
To the extent such weather events or natural disasters do become more frequent or severe, disruptions to our business and costs to repair damaged facilities or maintain or resume operations could increase.
To the extent such weather events or natural disasters do become more frequent or severe, disruptions to our business, including store closures, and our vendors and costs to repair damaged facilities or maintain or resume operations could increase.
The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain sales of personal information, and receive detailed information about what personal information is collected, how their personal information is used, and how that personal information is shared.
The CCPA gave California residents expanded rights to access and delete their personal information, opt out of certain uses of personal information, and receive detailed information about what personal information is collected, how their personal information is used, and how that personal information is shared.
Moreover, we cannot be certain that insurance will continue to be available to us on economically reasonable terms, or at all.
Moreover, as insurance premiums continue to increase, we cannot be certain that insurance will continue to be available to us on economically reasonable terms, or at all.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. Properties. We have co-headquartered facilities, located in San Diego, California, and San Antonio, Texas. Our San Diego, California location was completed in the summer of fiscal 2015, comprising a total of approximately 257,000 square feet, and is under a long-term lease.
Biggest changeItem 2. Pr operties. We have co-headquartered facilities, located in San Diego, California, and San Antonio, Texas. Our San Diego, California location was completed in the summer of fiscal 2015, comprising a total of approximately 257,000 square feet, and is under a long-term lease.
Our San Antonio location consists of a sub-divided leased facility, comprising a total of approximately 73,000 square feet. We lease all of our distribution center locations and all of our 1,433 pet care centers in the U.S. and Puerto Rico.
Our San Antonio location consists of a sub-divided leased facility, comprising a total of approximately 73,000 square feet. We lease all of our distribution center locations and all of our 1,430 pet care centers in the U.S. and Puerto Rico.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeWe believe that there are no pending lawsuits or claims that, individually or in the aggregate, may have a material effect on our business, financial condition or results of operations. Item 4. Mine Safety Disclosures. Not applicable. 40 PART II
Biggest changeWe believe that there are no pending lawsuits or claims that, individually or in the aggregate, may have a material effect on our business, financial condition or results of operations. Item 4. Mine Saf ety Disclosures. Not applicable. 42 PART II
Item 3. Legal Proceedings. We are involved in the legal proceedings described in Note 16, Commitments and Contingencies, in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and we are subject to other claims and litigation arising in the ordinary course of business.
Item 3. Legal Proceedings. We are involved in the legal proceedings described in Note 15, Commitments and Contingencies, in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and we are subject to other claims and litigation arising in the ordinary course of business.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our Class A common stock. 41 1/14/21 1/21 2/21 3/21 4/21 5/21 6/21 7/21 8/21 9/21 10/21 Petco Health and Wellness Company Inc. 100.00 88.54 67.79 75.37 80.34 77.04 76.22 70.17 73.23 71.77 84.12 NASDAQ Composite 100.00 101.44 102.47 102.95 108.55 106.98 112.92 114.26 118.92 112.66 120.88 S&P Retail Index 100.00 99.27 97.20 101.76 111.17 105.99 111.38 110.21 113.41 108.62 114.93 11/21 12/21 1/22 65.20 67.31 62.24 121.28 122.18 111.23 119.06 117.30 105.55 The above performance graph shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or incorporated by reference into any filing of Petco Health and Wellness Company, Inc. under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
Biggest changeThe comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our Class A common stock. 43 1/14/21 1/21 4/21 7/21 10/21 1/22 4/22 7/22 10/22 1/23 Petco Health and Wellness Company Inc. 100.00 88.54 80.34 70.17 84.12 62.24 65.51 47.35 35.82 39.93 NASDAQ Composite 100.00 101.44 108.55 114.26 120.88 111.23 96.52 97.17 86.35 91.27 S&P Retail 100.00 99.36 112.41 111.83 117.11 105.22 93.07 96.00 84.47 87.14 The above performance graph shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or incorporated by reference into any filing of Petco Health and Wellness Company, Inc. under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our Class A common stock is currently listed on The Nasdaq Global Select Market under the ticker “WOOF” and began trading on January 14, 2021. Prior to that date, there was no public trading market for our Class A common stock.
Item 5. Market for Registrant’s Common Equity, Related Stock holder Matters and Issuer Purchases of Equity Securities. Market Information Our Class A common stock is currently listed on The Nasdaq Global Select Market under the ticker “WOOF” and began trading on January 14, 2021. Prior to that date, there was no public trading market for our Class A common stock.
Performance Graph The graph below compares the cumulative total return on our Class A common stock with the cumulative total returns of the Nasdaq Composite index and S&P Retail index from January14, 2021 (the initial day of trading for our Class A common stock) through January 29, 2022.
Performance Graph The graph below compares the cumulative total return on our Class A common stock with the cumulative total returns of the Nasdaq Composite index and S&P Retail index from January14, 2021 (the initial day of trading for our Class A common stock) through January 28, 2023.
The graph assumes that the value of the investment in our Class A common stock, in each index, and in the peer group (including reinvestment of dividends) was $100 on January 14, 2021 and tracks it through January 29, 2022.
The graph assumes that the value of the investment in our Class A common stock, in each index, and in the peer group (including reinvestment of dividends) was $100 on January 14, 2021 and tracks it through January 28, 2023.
Holders As of March 22, 2022, there were thirty-eight shareholders of record of our Class A common stock, one shareholder of record of our Class B-1 common stock, and two shareholders of record of our Class B-2 common stock.
Holders As of March 23, 2023, there were sixty-four shareholders of record of our Class A common stock, one shareholder of record of our Class B-1 common stock, and two shareholders of record of our Class B-2 common stock.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeResults 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): Fiscal years ended January 29, 2022 January 30, 2021 February 1, 2020 (52 weeks) (52 weeks) (52 weeks) Net sales $ 5,807,149 $ 4,920,202 $ 4,434,514 Cost of sales 3,380,539 2,813,464 2,527,995 Gross profit 2,426,610 2,106,738 1,906,519 Selling, general and administrative expenses 2,160,539 1,912,314 1,776,919 Indefinite-lived intangible impairment — — 19,000 Operating income 266,071 194,424 110,600 Interest income (62 ) (653 ) (335 ) Interest expense 77,397 219,083 253,018 Loss on extinguishment and modification of debt 20,838 17,549 — Other non-operating income (34,497 ) — — Income (loss) before income taxes and income from equity method investees 202,395 (41,555 ) (142,083 ) Income tax expense (benefit) 53,473 (3,337 ) (35,658 ) Income from equity method investees (10,883 ) (6,482 ) (2,441 ) Net income (loss) 159,805 (31,736 ) (103,984 ) Net loss attributable to noncontrolling interest (4,612 ) (5,253 ) (8,111 ) Net income (loss) attributable to Class A and B-1 common stockholders $ 164,417 $ (26,483 ) $ (95,873 ) Fiscal years ended January 29, 2022 January 30, 2021 February 1, 2020 (52 weeks) (52 weeks) (52 weeks) Net sales 100.0 % 100.0 % 100.0 % Cost of sales 58.2 57.2 57.0 Gross profit 41.8 42.8 43.0 Selling, general and administrative expenses 37.2 38.9 40.1 Indefinite-lived intangible impairment — — 0.4 Operating income 4.6 3.9 2.5 Interest income (0.0 ) (0.0 ) (0.0 ) Interest expense 1.3 4.4 5.7 Loss on extinguishment and modification of debt 0.4 0.3 — Other non-operating income (0.6 ) — — Income (loss) before income taxes and income from equity method investees 3.5 (0.8 ) (3.2 ) Income tax expense (benefit) 0.9 (0.1 ) (0.8 ) Income from equity method investees (0.2 ) (0.1 ) (0.1 ) Net income (loss) 2.8 (0.6 ) (2.3 ) Net loss attributable to noncontrolling interest (0.0 ) (0.1 ) (0.1 ) Net income (loss) attributable to Class A and B-1 common stockholders 2.8 % (0.5 )% (2.2 )% 48 Fiscal years ended January 29, 2022 January 30, 2021 February 1, 2020 (52 weeks) (52 weeks) (52 weeks) Operational Data: Comparable sales increase 18.9 % 11.4 % 3.9 % Total pet care centers (U.S. and Puerto Rico) at end of period 1,433 1,454 1,478 Total veterinarian practices at end of period 197 125 81 Adjusted EBITDA (in thousands) $ 591,478 $ 484,348 $ 424,547 Fiscal 2021 (52 weeks) Compared with Fiscal 2020 (52 weeks) Net Sales and Comparable Sales Fiscal years ended (dollars in thousands) January 29, 2022 January 30, 2021 $ Change % Change Consumables $ 2,533,755 $ 2,123,499 $ 410,256 19.3 % Supplies and companion animals 2,603,104 2,328,663 274,441 11.8 % Services and other 670,290 468,040 202,250 43.2 % Net sales $ 5,807,149 $ 4,920,202 $ 886,947 18.0 % Net sales increased $886.9 million, or 18.0%, to $5.81 billion in fiscal 2021 compared to net sales of $4.92 billion in fiscal 2020, driven by a 18.9% increase in our comparable sales.
Biggest changeComparing fiscal 2022 and fiscal 2021, our results included the following: • an increase in net sales from $5.81 billion to $6.04 billion, representing period-over-period growth of 3.9%; • comparable sales growth of 4.5%; • net income attributable to Class A and B-1 common stockholders of $90.8 million, compared to net income attributable to Class A and B-1 common stockholders of $164.4 million in the prior year; and • Net cash flows provided by operating activities decreased from $358.2 million in fiscal 2021 to $346.0 million in fiscal 2022. 49 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): Fiscal years ended January 28, 2023 January 29, 2022 January 30, 2021 (52 weeks) (52 weeks) (52 weeks) Net sales $ 6,035,967 $ 5,807,149 $ 4,920,202 Cost of sales 3,608,860 3,380,539 2,813,464 Gross profit 2,427,107 2,426,610 2,106,738 Selling, general and administrative expenses 2,201,548 2,160,539 1,912,314 Operating income 225,559 266,071 194,424 Interest income (1,032 ) (62 ) (653 ) Interest expense 101,643 77,397 219,083 Loss on extinguishment and modification of debt — 20,838 17,549 Other non-operating loss (income) 12,667 (34,497 ) — Income (loss) before income taxes and income from equity method investees 112,281 202,395 (41,555 ) Income tax expense (benefit) 35,347 53,473 (3,337 ) Income from equity method investees (12,976 ) (10,883 ) (6,482 ) Net income (loss) 89,910 159,805 (31,736 ) Net loss attributable to noncontrolling interest (891 ) (4,612 ) (5,253 ) Net income (loss) attributable to Class A and B-1 common stockholders $ 90,801 $ 164,417 $ (26,483 ) Fiscal years ended January 28, 2023 January 29, 2022 January 30, 2021 (52 weeks) (52 weeks) (52 weeks) Net sales 100.0 % 100.0 % 100.0 % Cost of sales 59.8 58.2 57.2 Gross profit 40.2 41.8 42.8 Selling, general and administrative expenses 36.5 37.2 38.9 Operating income 3.7 4.6 3.9 Interest income (0.0 ) (0.0 ) (0.0 ) Interest expense 1.6 1.3 4.4 Loss on extinguishment and modification of debt — 0.4 0.3 Other non-operating loss (income) 0.2 (0.6 ) — Income (loss) before income taxes and income from equity method investees 1.9 3.5 (0.8 ) Income tax expense (benefit) 0.6 0.9 (0.1 ) Income from equity method investees (0.2 ) (0.2 ) (0.1 ) Net income (loss) 1.5 2.8 (0.6 ) Net loss attributable to noncontrolling interest 0.0 0.0 (0.1 ) Net income (loss) attributable to Class A and B-1 common stockholders 1.5 % 2.8 % (0.5 )% Fiscal years ended January 28, 2023 January 29, 2022 January 30, 2021 (52 weeks) (52 weeks) (52 weeks) Operational Data: Comparable sales increase 4.5 % 18.9 % 11.4 % Total pet care centers (U.S. and Puerto Rico) at end of period 1,430 1,433 1,454 Total veterinarian practices at end of period 247 197 125 50 Fiscal 2022 (52 weeks) Compared with Fiscal 2021 (52 weeks) Net Sales and Comparable Sales Fiscal years ended (dollars in thousands) January 28, 2023 January 29, 2022 $ Change % Change Consumables $ 2,859,602 $ 2,533,755 $ 325,847 12.9 % Supplies and companion animals 2,370,913 2,603,104 (232,191 ) (8.9 %) Services and other 805,452 670,290 135,162 20.2 % Net sales $ 6,035,967 $ 5,807,149 $ 228,818 3.9 % Net sales increased $228.8 million, or 3.9%, to $6.04 billion in fiscal 2022 compared to net sales of $5.81 billion in fiscal 2021, driven by a 4.5% increase in our comparable sales.
Our business will be impacted by our ability to continue to understand and react to changing customer purchase trends 44 Customer Acquisition, Retention, and Spend Our business is impacted by our ability to successfully attract new customers to any one of our channels, build their loyalty to encourage return visits, and expand their spend with Petco across multiple purchase channels (e.g., pet care centers, e-commerce, and services) and categories (e.g., pet food, supplies, and companion animal).
Our business will be impacted by our ability to continue to understand and react to changing customer purchase trends Customer Acquisition, Retention, and Spend Our business is impacted by our ability to successfully attract new customers to any one of our channels, build their loyalty to encourage return visits, and expand their spend with Petco across multiple purchase channels (e.g., pet care centers, e-commerce, and services) and categories (e.g., pet food, supplies, and companion animal).
Selling, General, and Administrative Expense The following types of expenses are included in our selling, general, and administrative costs (“SG&A”): • payroll and benefit costs of pet care center employees and corporate employees; • occupancy and operating costs of pet care centers and corporate facilities; • depreciation and amortization related to pet care centers and corporate assets; • credit card fees; • store pre-opening and remodeling costs; • advertising costs; and 46 • other selling and administrative costs.
Selling, General, and Administrative Expense The following types of expenses are included in our selling, general, and administrative costs (“SG&A”): • payroll and benefit costs of pet care center employees and corporate employees; • occupancy and operating costs of pet care centers and corporate facilities; • depreciation and amortization related to pet care centers and corporate assets; • credit card fees; • store pre-opening and remodeling costs; • advertising costs; and • other selling and administrative costs.
Please read the discussion of these assets under “Critical Accounting Policies and Estimates.” Interest Expense Our interest expense in fiscal 2019, fiscal 2020, and a portion of fiscal 2021 was primarily associated with a term loan facility, a revolving credit facility, the Floating Rate Senior Notes (as defined herein), the 3.00% Senior Notes (as defined herein), and interest rate caps.
Please read the discussion of these assets under “Critical Accounting Policies and Estimates.” Interest Expense Our interest expense in fiscal 2020 and a portion of fiscal 2021 was primarily associated with a term loan facility, a revolving credit facility, the Floating Rate Senior Notes (as defined herein), the 3.00% Senior Notes (as defined herein), and interest rate caps.
For more information regarding these activities, refer to Note 8 , “ Senior Secured Credit Facilities ,” and Note 9, “ Senior Notes ,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
For more information regarding these activities, refer to Note 7, “ Senior Secured Credit Facilities ,” and Note 9, “ Senior Notes ,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Recent Accounting Pronouncements Refer to Note 1, “ Summary of Significant Accounting Policies ,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for information regarding recently issued accounting pronouncements. 58
Recent Accounting Pronouncements Refer to Note 1, “ Summary of Significant Accounting Policies ,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for information regarding recently issued accounting pronouncements.
As we saw the major purchase trend shift and growth into areas like e-commerce, services, and veterinary care, we actively invested to build capabilities and offerings to effectively capitalize on the opportunity.
As we saw the major purchase trend shift and growth into areas like 46 e-commerce, services, and veterinary care, we actively invested to build capabilities and offerings to effectively capitalize on the opportunity.
We also enter certain short-term lease commitments, letters of credit and purchase obligations in the 53 normal course of business.
We also enter certain short-term lease commitments, letters of credit and purchase obligations in the normal course of business.
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, Free Cash Flow, and Net Debt, to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital.
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.
Our sales growth period-over-period was driven by our strong execution and differentiated product model across digital and in our pet care centers, coupled with an increase in new pet ownership and a resulting increase in sales to meet the needs of these pet parents.
Our sales growth period-over-period was driven by our strong execution and differentiated product model across digital and in our pet care centers, an increase in new pet ownership and a resulting increase in sales to meet the needs of these pet parents.
In the financial statements, this joint venture is accounted for as an equity method investment and reported net of depreciation and income taxes. Because such a presentation would not reflect the adjustments made in our calculation of Adjusted EBITDA, we include our 50% interest in our Mexico joint venture on an Adjusted EBITDA basis to ensure consistency.
In the financial statements, this joint venture is accounted for as an equity method investment and reported net of depreciation and income taxes. Because such a presentation would not reflect the adjustments made in the calculation of Adjusted EBITDA, we include the 50 percent interest in the company’s Mexico joint venture on an Adjusted EBITDA basis to ensure consistency.
Our multichannel, go-to-market strategy integrates our strong digital assets with our nationwide physical footprint to meet the needs of pet parents who are looking for a single source for all their pet’s needs.
Our multicategory, go-to-market strategy integrates our strong digital assets with our nationwide physical footprint to meet the needs of pet parents who are looking for a single source for all their pet’s needs.
From the nutrition and supplies pets need each day, to the services that keep them at optimal heath, Vital Care makes it easier and more affordable for pet parents to care for their pet’s health all in one place.
From the nutrition and supplies pets need each day, to the services that keep them at optimal health, Vital Care Premier makes it easier and more affordable for pet parents to care for their pet’s whole health all in one place.
Interest under the First Lien Term Loan is based on, at the Company’s option, either a base rate or Adjusted LIBOR, subject to a 0.75% floor, payable upon maturity of the LIBOR contract, in either case plus the applicable rate.
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.
Pet Industry Trends The U.S. pet care industry is large and growing, serving millions of households with pets, and represented a total addressable market of $119 billion in 2021. Since 2008, the industry has exhibited steady growth driven by an increase in the underlying pet population coupled with strong tailwinds associated with pet humanization.
Pet Industry Trends The U.S. pet care industry is large and growing, serving millions of households with pets, and represented a total addressable market of $133 billion in 2022. Since 2008, the industry has exhibited steady growth driven by an increase in the underlying pet population coupled with strong tailwinds associated with pet humanization.
These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the consolidated balance sheet as of January 29, 2022, while others are considered future obligations. Our contractual obligations primarily consist of operating leases and long-term debt and related interest payments.
These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the consolidated balance sheet as of January 28, 2023, while others are considered future obligations. Our contractual obligations primarily consist of operating leases and long-term debt and related interest payments.
A 10% difference in our actual valuation reserve at January 29, 2022 would have an insignificant effect on pre-tax loss in fiscal 2021. Additionally, we do not believe there is a 56 reasonable likelihood that there will be a material change in future estimates or assumptions we use to calculate our shrink reserve.
A 10% difference in our actual valuation reserve at January 28, 2023 would have an insignificant effect on pre-tax income in fiscal 2022. Additionally, we do not believe there is a reasonable likelihood that there will be a material change in future estimates or assumptions we use to calculate our shrink reserve.
In tandem with Petco Love (formerly the Petco Foundation), an 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 more than 6.5 million animals.
In tandem with Petco Love (formerly the Petco Foundation), an 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.
The base rate is the greater of the bank prime rate, federal funds effective rate plus 0.5% or Adjusted LIBOR plus 1.0%. The applicable rate is 2.25% per annum for a base rate loan or 3.25% per annum for an Adjusted LIBOR loan. Principal payments are $4.25 million quarterly and commence d on June 30, 2021.
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 $4.25 million quarterly.
Prior Year Discussion of Results and Comparisons For information on fiscal 2019 results and similar comparisons, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our previous Annual Report on Form 10-K filed with the SEC on April 5, 2021.
Prior Year Discussion of Results and Comparisons For information on fiscal 2021 results and similar comparisons, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our previous Annual Report on Form 10-K filed with the SEC on March 24, 2022.
Historically, adjustments to our vendor income deferral have not been material. A 10% difference in our vendor income deferred at January 29, 2022 would have affected pre-tax loss by $2.7 million in fiscal 2021. We have not made any material changes in the accounting methodology we use to assess valuation allowances during the past three fiscal years.
Historically, adjustments to our vendor income deferral have not been material. A 10% difference in our vendor income deferred at January 28, 2023 would have affected pre-tax income by $3.1 million in fiscal 2022. We have not made any material changes in the accounting methodology we use to assess valuation allowances during the past three fiscal years.
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.
The non-GAAP financial measures presented may differ from similarly-titled measures used by other companies. 52 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.
Investing Activities Net cash used in investing activities was $237.1 million, $157.2 million, and $139.0 million for fiscal 2021, fiscal 2020, and fiscal 2019, respectively, and consisted primarily of capital expenditures supporting our growth and initiatives.
Investing Activities Net cash used in investing activities was $320.3 million, $237.1 million, and $157.2 million for fiscal 2022, fiscal 2021, and fiscal 2020, respectively, and consisted primarily of capital expenditures supporting our growth and initiatives.
Vendor Allowances We receive various forms of consideration from our merchandise vendors (vendor allowances). We receive vendor allowances, primarily in the form of cooperative advertising reimbursements, rebate incentives, prompt purchase discounts, and vendor compliance charges pursuant to agreements with certain vendors.
We receive vendor allowances, primarily in the form of cooperative advertising reimbursements, rebate incentives, prompt purchase discounts, and vendor compliance charges pursuant to agreements with certain vendors.
We are increasingly linking our offerings with membership programs such as Vital Care and pet health insurance that create deeper engagement with our customers, and with our Pals Rewards loyalty program members specifically, which members accounted for over 80% of transactions in fiscal 2021.
We are increasingly linking our offerings with membership programs such as Vital Care Premier and pet health insurance that create deeper engagement with our customers, and with our Vital Care Core loyalty program members specifically, which members accounted for over 85% of transactions in fiscal 2022.
In recent years, our world-class leadership team and our dedicated and passionate partners have transformed our business from a successful yet traditional retailer to a disruptive, fully integrated, omnichannel provider of holistic pet health and wellness offerings, including premium products, services, and veterinary care.
In recent years, we have transformed our business from a successful yet traditional retailer to a disruptive, fully integrated, omnichannel provider of holistic pet health and wellness offerings, including premium products, services, and veterinary care.
As a result, the method used by the Company’s management to calculate our Net Debt may differ from the methods used by other companies to calculate their net debt.
As a result, the method used by the Company’s management to calculate our Free Cash Flow may differ from the methods used by other companies to calculate their free cash flow.
Net Income (Loss) Attributable to Class A and B-1 Common Stockholders Net income attributable to Class A and B-1 common stockholders was $164.4 million for fiscal 2021 compared with a net loss attributable to Class A and B-1 common stockholders of $26.5 million for fiscal 2020.
Net Income (Loss) Attributable to Class A and B-1 Common Stockholders Net income attributable to Class A and B-1 common stockholders was $90.8 million for fiscal 2022 compared with a net income attributable to Class A and B-1 common stockholders of $164.4 million for fiscal 2021.
A 10% change in our self-insurance reserves at January 29, 2022 would have affected pre-tax loss by $8.5 million in fiscal 2021.
A 10% change in our self-insurance reserves at January 28, 2023 would have affected pre-tax loss by $8.6 million in fiscal 2022.
Cash Flows The following table summarizes our consolidated cash flows: Fiscal years ended (dollars in thousands) January 29, 2022 January 30, 2021 February 1, 2020 (52 weeks) (52 weeks) (52 weeks) Total cash provided by (used in): Operating activities $ 358,215 $ 268,615 $ 110,337 Investing activities (237,083 ) (157,185 ) (139,041 ) Financing activities (18,782 ) (146,608 ) (3,071 ) Net increase (decrease) in cash, cash equivalents and restricted cash $ 102,350 $ (35,178 ) $ (31,775 ) 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.
Cash Flows The following table summarizes our consolidated cash flows: Fiscal years ended (dollars in thousands) January 28, 2023 January 29, 2022 January 30, 2021 (52 weeks) (52 weeks) (52 weeks) Total cash provided by (used in): Operating activities $ 346,003 $ 358,215 $ 268,615 Investing activities (320,324 ) (237,083 ) (157,185 ) Financing activities (33,842 ) (18,782 ) (146,608 ) Net (decrease) increase in cash, cash equivalents and restricted cash $ (8,163 ) $ 102,350 $ (35,178 ) 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.
Income Tax Expense (Benefit) Our effective tax rate was 24.5% for fiscal 2021, resulting in income tax expense of $53.5 million, compared to an effective tax rate of 11.2% and income tax benefit of $3.3 million for fiscal 2020.
Income Tax Expense (Benefit) Our effective tax rate was 28.0% for fiscal 2022, resulting in income tax expense of $35.3 million, compared to an effective tax rate of 24.5% and income tax expense of $53.5 million for fiscal 2021.
The Company paid an additional $18.9 million of term loan principal payments in fiscal 2020. For more information regarding these activities, refer to Note 8 and Note 9 to the historical consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
The Company paid an additional $18.9 million of term loan principal payments in fiscal 2020. For more information regarding these activities, refer to Note 7, “ Senior Secured Credit Facilities ,” and Note 8, “ Senior Notes ,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
The terms under the ABL Revolving Credit Facility are substantially similar to those of the Amended Revolving Credit Facility . For more information regarding this indebtedness, refer to Note 8, “ Senior Secured Credit Facilities ,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
For more information regarding this indebtedness, refer to Note 7, “ Senior Secured Credit Facilities ,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
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. 57 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.
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.
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.
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 increase in capital expenditures between the periods was primarily due to the build-out of our veterinary hospitals, innovation, capital expenditures for our new distribution center and enhanced supply chain capacity in response to our sales growth. In fiscal 2022, we expect to spend approximately $275 million to $325 million in capital expenditures.
The increase in capital expenditures between the periods was primarily due to the build-out of our veterinary hospitals, innovation, capital expenditures for our new distribution centers and enhanced supply chain capacity in response to our sales growth.
Sources of Liquidity Senior Secured Credit Facilities As of January 30, 2021, the Company had $1,678.1 million outstanding on the Amended Term Loan Facility and no balance on the Amended Revolving Credit Facility, which provided for senior secured financing of up to $500.0 million, subject to a borrowing base. 55 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, which matures on March 4, 2026 and has availability of up to $500.0 million, subject to a borrowing base.
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, which matures on March 4, 2026 and has availability of up to $500.0 million, subject to a borrowing base.
Capital expenditures by category during the periods set forth below are as follows: Fiscal years ended (dollars in thousands) January 29, 2022 January 30, 2021 February 1, 2020 New and existing pet care center locations $ 140,721 $ 80,776 $ 100,394 Digital and information technology 57,319 68,232 51,358 Supply chain and other 41,070 10,552 5,154 Total capital expenditures $ 239,110 $ 159,560 $ 156,906 Financing Activities Net cash used in financing activities was $18.8 million for fiscal 2021, compared with $146.6 million used in financing activities in fiscal 2020 and $3.1 million used in financing activities in fiscal 2019.
In fiscal 2023, we expect to spend approximately $225 million to $250 million in capital expenditures. 56 Capital expenditures by category during the periods set forth below are as follows: Fiscal years ended (dollars in thousands) January 28, 2023 January 29, 2022 January 30, 2021 New and existing pet care center locations $ 146,432 $ 140,721 $ 80,776 Digital and information technology 78,611 57,319 68,232 Supply chain and other 52,977 41,070 10,552 Total capital expenditures $ 278,020 $ 239,110 $ 159,560 Financing Activities Net cash used in financing activities was $33.8 million for fiscal 2022, compared with $18.8 million used in financing activities in fiscal 2021 and $146.6 million used in financing activities in fiscal 2020.
Significant assumptions inherent in the valuation methodology are employed and include, but are not limited to, prospective financial information, royalty rates and discount rates. An impairment charge is recorded for the amount by which the carrying amount of the trade name exceeds its fair value.
Significant assumptions inherent in the valuation methodologies employed by the third party valuation firm could include, but are not limited to, 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.
These investments include: digital and e-commerce integration and expansion; enhanced supply chain capacity; data analytical capabilities; veterinary services; marketing and advertising; and our owned brands.
These investments include: expansion of our veterinary footprint, digital and e-commerce integration and expansion; enhanced supply chain capacity including additional distribution centers; data analytical capabilities; and marketing and advertising.
There was no other non-operating income or loss recognized during fiscal 2020. For more information regarding this activity, refer to Note 11 , “Fair Value Measurements,” to the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
For more information regarding this activity, refer to Note 10, “Fair Value Measurements,” to the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
This offering is further enhanced by a rapidly expanding, high quality, accessible, comprehensive veterinary care platform, which includes full-service veterinary hospitals, Vetco mobile clinics, and tele-health services. The full value of our health and wellness ecosystem is realized for customers through our Vital Care membership program.
This offering is further enhanced by a rapidly expanding, high quality, accessible, comprehensive veterinary care platform, which includes full-service veterinary hospitals, Vetco mobile clinics, and tele-health services.
Financing cash flows in fiscal 2021 primarily consisted of borrowings and repayments of debt in connection with the March 4, 2021 debt refinancing transaction discussed under “Sources of Liquidity” below. Financing cash flows in fiscal 2020 primarily consisted of repayments of debt in connection with the initial public offering that occurred on January 19, 2021.
Financing cash flows in fiscal 2020 primarily consisted of repayments of debt in connection with the initial public offering that occurred on January 19, 2021.
Other Non-Operating Income Other non-operating income was $34.5 million for fiscal 2021 and related to non-cash gains from the remeasurement of the fair value of our investment in Rover Group, Inc which began after the consummation of its merger with a publicly traded special purpose acquisition company in fiscal 2021.
These losses and gains relate to non-cash remeasurements of the fair value of our investment in Rover Group, Inc. which began after the consummation of its merger with a publicly traded special purpose acquisition company in fiscal 2021.
Gross Profit Gross profit increased $319.9 million, or 15.2%, to $2.43 billion in fiscal 2021 compared to gross profit of $2.11 billion for fiscal 2020. As a percentage of sales, our gross profit rate was 41.8% for fiscal 2021 compared to 42.8% for fiscal 2020. The increase in gross profit was due to the overall increase in net sales.
As a percentage of sales, our gross profit rate was 40.2% for fiscal 2022 compared to 41.8% for fiscal 2021. The increase in gross profit was due to the overall increase in net sales.
Prior to fiscal 2019, the veterinary joint venture was accounted for as an equity method investment. Executive Summary Our business transformation initiatives, accelerated by an increase in pet ownership and a shift in customer discretionary spend toward the pet category, have driven strong top-and bottom-line growth in our business.
Executive Summary Our business transformation initiatives, accelerated by an increase in pet ownership and a shift in customer discretionary spend toward the pet category, have driven strong top-and bottom-line results in our business.
The table below presents a reconciliation of Mexico joint venture net income to Mexico joint venture EBITDA: Fiscal years ended January 29, 2022 January 30, 2021 February 1, 2020 (dollars in thousands) (52 weeks) (52 weeks) (52 weeks) Net income $ 21,773 $ 14,225 $ 8,662 Depreciation 15,679 12,249 11,298 Income tax expense 11,390 6,229 4,107 Foreign currency (gain) loss (431 ) 704 (406 ) Interest expense (income), net 5,263 4,740 4,793 EBITDA $ 53,674 $ 38,147 $ 28,454 50% of EBITDA $ 26,837 $ 19,074 $ 14,227 ( 2 ) Non-cash occupancy-related costs include the difference between cash and straight-line rent for all periods.
The table below presents a reconciliation of Mexico joint venture net income to Mexico joint venture EBITDA: Fiscal years ended January 28, 2023 January 29, 2022 January 30, 2021 (dollars in thousands) (52 weeks) (52 weeks) (52 weeks) Net income $ 24,757 $ 21,773 $ 14,225 Depreciation 19,820 15,679 12,249 Income tax expense 9,409 11,390 6,229 Foreign currency (gain) loss (268 ) (431 ) 704 Interest expense, net 5,449 5,263 4,740 EBITDA $ 59,167 $ 53,674 $ 38,147 50% of EBITDA $ 29,584 $ 26,837 $ 19,074 (2) Store pre-opening and closing expenses were adjusted for periods prior to fiscal 2023.
However, if estimates of losses are inaccurate, we may be exposed to losses or gains that could be material. A 10% difference in our actual shrink reserve at January 29 , 202 2 would have affected pre-tax loss by $ 2.8 million in fiscal 202 1 .
However, if estimates of losses are inaccurate, we may be exposed to losses or gains that could be material. A 10% difference in our actual shrink reserve at January 28, 2023 would have affected pre-tax income by $3.5 million in fiscal 2022. 58 Vendor Allowances We receive various forms of consideration from our merchandise vendors (vendor allowances).
By leveraging our extensive physical network of 1,433 pet care centers across the U.S. and Puerto Rico, we are able to offer our comprehensive product and service offering in a localized manner with a meaningful last-mile advantage over much of our competition.
By leveraging our extensive physical network of pet care centers, we are able to offer our comprehensive product and service offering in a localized manner with a meaningful last-mile advantage over much of our competition. The full value of our health and wellness ecosystem is realized for customers through our Vital Care Premier membership program.
In addition, other companies in our industry may define Adjusted EBITDA differently, limiting its usefulness as a comparative measure. 51 The table below reflects the calculation of Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented: Fiscal years ended January 29, 2022 January 30, 2021 February 1, 2020 (dollars in thousands) (52 weeks) (52 weeks) (52 weeks) Net income (loss) attributable to Class A and B-1 common stockholders $ 164,417 $ (26,483 ) $ (95,873 ) Interest expense, net 77,335 218,430 252,683 Income tax expense (benefit) 53,473 (3,337 ) (35,658 ) Depreciation and amortization 172,431 174,836 173,544 Income from equity method investees (10,883 ) (6,482 ) (2,441 ) Loss on extinguishment and modification of debt 20,838 17,549 — Indefinite-lived intangible impairment — — 19,000 Asset impairments and write offs 10,918 15,606 11,871 Equity-based compensation 49,265 12,915 9,489 Other non-operating income (34,497 ) — — Mexico joint venture EBITDA (1) 26,837 19,074 14,227 Store pre-opening expenses 14,765 9,228 10,325 Store closing expenses 5,028 7,782 4,068 Non-cash occupancy-related costs (2) 8,114 19,240 32,763 Non-recurring costs (3) 33,437 25,990 30,549 Adjusted EBITDA $ 591,478 $ 484,348 $ 424,547 Net sales $ 5,807,149 $ 4,920,202 $ 4,434,514 Net margin (4) 2.8 % (0.5 )% (2.2 )% Adjusted EBITDA Margin (4) 10.2 % 9.8 % 9.6 % ( 1 ) Mexico joint venture EBITDA represents 50% of the entity’s operating results for the periods presented, as adjusted to reflect the results on a basis comparable to our Adjusted EBITDA.
Details of these changes and a reconciliation of the definitions prior to fiscal 2023 to the go-forward definition is presented in the tables and related footnotes below. 53 The table below reflects the calculation of Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented: Fiscal years ended January 28, 2023 January 29, 2022 January 30, 2021 (dollars in thousands) (52 weeks) (52 weeks) (52 weeks) Net income (loss) attributable to Class A and B-1 common stockholders $ 90,801 $ 164,417 $ (26,483 ) Interest expense, net 100,611 77,335 218,430 Income tax expense (benefit) 35,347 53,473 (3,337 ) Depreciation and amortization 193,828 172,431 174,836 Income from equity method investees (12,976 ) (10,883 ) (6,482 ) Loss on extinguishment and modification of debt — 20,838 17,549 Asset impairments and write offs 1,992 10,918 15,606 Equity-based compensation 60,784 49,265 12,915 Other non-operating loss (income) 12,667 (34,497 ) — Mexico joint venture EBITDA (1) 29,584 26,837 19,074 Store pre-opening expenses (2) 14,993 14,765 9,228 Store closing expenses (2) 5,168 5,028 7,782 Non-cash occupancy-related costs (3) 8,432 8,114 19,240 Acquisition-related integration costs (4) 15,314 — — Other costs (5) 25,790 33,437 25,990 Adjusted EBITDA, as defined through fiscal 2022 $ 582,335 $ 591,478 $ 484,348 Store pre-opening expenses (2) (14,993 ) (14,765 ) (9,228 ) Store closing expenses (2) (5,168 ) (5,028 ) (7,782 ) Non-cash occupancy-related costs (3) (8,432 ) (8,114 ) (19,240 ) Other costs (5) (22,973 ) (15,202 ) (20,535 ) Adjusted EBITDA, as defined beginning fiscal 2023 $ 530,769 $ 548,369 $ 427,563 Net sales $ 6,035,967 $ 5,807,149 $ 4,920,202 Net margin (6) 1.5 % 2.8 % (0.5 )% Adjusted EBITDA Margin, as defined through fiscal 2022 (6) 9.6 % 10.2 % 9.8 % Adjusted EBITDA Margin, as defined beginning fiscal 2023 (6) 8.8 % 9.4 % 8.7 % (1) Mexico Joint Venture EBITDA represents 50 percent of the entity’s operating results for all periods, as adjusted to reflect the results on a basis comparable to Adjusted EBITDA.
Loss on Extinguishment and Modification of Debt In fiscal 2021, the Company recognized $20.8 million of losses on the March 2021 refinancing of the Amended Term Loan Facility and Amended Revolving Credit Facility. In fiscal 2020, the Company recognized $17.5 million of losses on the partial extinguishment of debt in conjunction with the Company’s initial public offering.
Loss on Extinguishment and Modification of Debt In fiscal 2022, the Company did not recognize any losses on extinguishment or modification of debt. In fiscal 2021, the Company recognized $20.8 million of losses on the March 2021 refinancing of the Amended Term Loan Facility and Amended Revolving Credit Facility.
Cost of Sales and Gross Profit Gross profit is equal to our net sales minus our cost of sales. Gross profit rate measures gross profit as a percentage of net sales.
Net sales are driven by comparable sales, new pet center locations, and expanded offerings. 47 Cost of Sales and Gross Profit Gross profit is equal to our net sales minus our cost of sales. Gross profit rate measures gross profit as a percentage of net sales.
We cannot predict the duration or ultimate severity of COVID-19 or its ultimate long-term impact on the broader economy or our operations and liquidity. Please refer to the risk factors in Part I, Item 1A of this Annual Report on Form 10-K.
We cannot predict the duration or ultimate severity of these macroeconomic factors or the ultimate impact on our operations and liquidity. For more information regarding certain risks associated with these macroeconomic factors, please refer to the risk factors in Part I, Item 1A, "Risk Factors" of this Form 10-K.
Our liquidity as of January 29, 2022 was $649.8 million inclusive of cash and cash equivalents of $211.6 million and $438.2 million of availability on the ABL Revolving Credit Facility.
Our liquidity as of January 28, 2023 was $645.8 million inclusive of cash and cash equivalents of $201.9 million and $443.9 million of availability on the ABL Revolving Credit Facility.
Significant Components of Results of Operations Net Sales Our net sales comprise gross sales of products and services, net of sales tax and certain discounts and promotions offered to our customers, including those offered under our customer loyalty programs. Net sales are driven by comparable sales, new pet center locations, and expanded offerings.
Our partners represent the strength of our brand every day and are key to our ongoing growth. Significant Components of Results of Operations Net Sales Our net sales comprise gross sales of products and services, net of sales tax and certain discounts and promotions offered to our customers, including those offered under our customer loyalty programs.
Segment We operate under one reportable segment and support and serve pets and their parents through our integrated ecosystem of pet care centers, services, and e-commerce. Seasonality Our financial performance is not significantly impacted by seasonality, as the majority of our sales are generated by pet parents caring for their pets year-round.
Seasonality Our financial performance is not significantly impacted by seasonality, as the majority of our sales are generated by pet parents caring for their pets year-round.
The increase in consumables and supplies and companion animals sales between the periods was driven by the increase in new pets, our strategic investments in customer acquisition along with continued expansion of our product assortment.
The increase in consumables sales between the periods was driven in part by the increase in new pets, our strategic investments in customer acquisition and retention, continued expansion of our product assortment and a mix shift to more premium consumables, including fresh and frozen food.
The increase in SG&A expenses period-over-period was to support our growth as we continue to invest in marketing, infrastructure, and people.
As a percentage of net sales, SG&A expenses decreased from 37.2% in fiscal 2021 to 36.5% in fiscal 2022 reflecting operating leverage from net sales growth. The increase in SG&A expenses period-over-period was to support our growth as we continue to invest in people, infrastructure and marketing.
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 the carrying value of net assets assigned to the reporting unit exceeds the fair value of the 59 reporting unit, then we would record an impairment loss equal to the difference. In cases where a quantitative test is performed, the fair value of our reporting unit is estimated using the assistance of a third-party valuation firm.
In addition, as a result of the COVID-19 pandemic, the industry experienced a significant increase in household pets and therefore demand, which is expected to be a tailwind for years to come.
In addition, as a result of the COVID-19 pandemic, the industry experienced a significant increase in household pets and therefore demand, which is expected to be a tailwind for years to come. Beginning in fiscal 2020, U.S. households welcomed millions of incremental new pets into their homes that will need to be fed, groomed, vaccinated, and treated during their lives.
(“Petco”, the “Company”, “we”, “our” and “us”) is a category-defining health and wellness company focused on improving the lives of pets, pet parents, and our own partners.
(“Petco”, the “Company”, “we”, “our” and “us”) is a category-defining health and wellness company focused on improving the lives of pets, pet parents, and our own partners. We have consistently set new standards in pet care while delivering comprehensive pet wellness products, services and solutions, and creating communities that deepen the pet-pet parent bond.
Purchase obligations and commitments consist of open purchase orders, non-cancellable commitments for information technology, marketing and other products and services used in the normal course of business as well as our commitment for naming rights to the baseball stadium. As of January 29, 2022, our purchase obligations and commitments were $507.5 million of which $454.4 million is considered short-term.
Refer also to further discussion on our debt refinancing transaction in “Sources of Liquidity” below. Purchase obligations and commitments consist of open purchase orders, non-cancellable commitments for information technology, marketing and other products and services used in the normal course of business as well as 55 our commitment for naming rights to the baseball stadium.
Net cash provided by operating activities was $358.2 million in fiscal 2021 compared with net cash provided by operating activities of $268.6 million in fiscal 2020.
This was partially offset by lower cash paid for advertising and lower cash payments on operating leases due to the timing of rent payments. Net cash provided by operating activities was $358.2 million in fiscal 2021 compared with $268.6 million in fiscal 2020.
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 52 generate additional cash from our business operations, is an important financial measure for use in evaluating the C ompany’s financial performance.
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. Although other companies report their free cash flow, numerous methods exist for calculating a company’s free cash flow.
( 4 ) We define net margin as net income (loss) attributable to Class A and B-1 common stockholders divided by net sales and Adjusted EBITDA margin as Adjusted EBITDA divided by net sales.
(6) We define net margin as net income (loss) attributable to Class A and B-1 common stockholders divided by net sales and Adjusted EBITDA margin as Adjusted EBITDA divided by net sales. 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.
Net sales during fiscal 2021 were impacted by inflation, as we have taken pricing actions to offset cost increases on some vendor-supplied product. Where possible, we have worked with our merchant partners to help offset cost input increases. In the aggregate, we have not experienced a material impact on units as a result of these actions.
Net sales during fiscal 2022 and fiscal 2021 were impacted by inflation and, where possible, we have worked with our merchant partners to help offset cost input increases.
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.
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 quantitative assessment of its trade name asset to determine whether it is necessary to perform a quantitative impairment test.
In cases where a quantitative test is performed, the fair value of our trade name is estimated using the assistance of a third-party valuation firm using the relief from royalty valuation method, a variation of the discounted cash flow approach.
We also have the option to bypass the qualitative assessment described above and proceed directly to quantitative assessment. In cases where a quantitative test is performed, the fair value of our trade name is estimated using the assistance of a third-party valuation firm.
In fiscal 2021, pet care center merchandise delivered growth of 15.4% with higher retail traffic and strong growth in all major categories, including consumables, supplies, and companion animals. Our e-commerce and digital sales increased 21.1% from fiscal 2020 to fiscal 2021, reflecting our expanded brand assortment, enhanced personalization and extended fulfillment options.
In fiscal 2022, pet care center merchandise delivered growth of 1.4% with higher retail traffic and strong growth. Strength in consumables continues to offset the impact of discretionary purchasing in supplies and companion animals. Our e-commerce and digital sales increased 10.5% from fiscal 2021 to fiscal 2022, driven by strength in our digital pharmacy and repeat customers.
Refer to Note 6 and Note 8 to the historical consolidated financial statements included elsewhere in this Annual Report on Form 10-K for amounts outstanding as of January 29 , 202 2 related t o operating leases and debt , respectively . Refer also to further discussion on our debt refinancing transaction in “S ources of L iquidity ” below.
Refer to Note 5, “ Leases ,” and Note 7, “ Senior Secured Credit Facilities ,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for amounts outstanding as of January 28, 2023 related to operating leases and debt, respectively.
Significant assumptions inherent in these valuation methodologies are employed and include, but are not limited to, prospective financial information, growth rates, discount rates, and comparable multiples from publicly traded companies in similar industries. We have not made any material changes in the accounting methodology we use to assess goodwill impairment losses during the past three fiscal years.
Significant assumptions inherent in the valuation methodologies employed by the third party valuation firm could include, but are not limited to, 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 goodwill exceeds its fair value.
The table below reflects the calculation of net debt for the periods presented: (dollars in thousands) January 29, 2022 January 30, 2021 Total debt: Senior secured credit facilities, net, including current portion $ 1,657,390 $ 1,646,281 Finance leases, including current portion 29,816 13,639 Total debt $ 1,687,206 $ 1,659,920 Less: cash and cash equivalents (211,602 ) (111,402 ) Net Debt $ 1,475,604 $ 1,548,518 Liquidity and Capital Resources Overview Our primary sources of liquidity are funds generated by operating activities and available capacity for borrowings on our $500 million secured asset-based revolving credit facility maturing March 4, 2026 (the “ABL Revolving Credit Facility”).
The table below reflects the calculation of Free Cash Flow for the periods presented: Fiscal years ended January 28, 2023 January 29, 2022 January 30, 2021 (dollars in thousands) (52 weeks) (52 weeks) (52 weeks) Net cash provided by operating activities $ 346,003 $ 358,215 $ 268,615 Cash paid for fixed assets (278,020 ) (239,110 ) (159,560 ) Free Cash Flow $ 67,983 $ 119,105 $ 109,055 Liquidity and Capital Resources Overview Our primary sources of liquidity are funds generated by operating activities and available capacity for borrowings on our $500 million secured asset-based revolving credit facility maturing March 4, 2026 (the “ABL Revolving Credit Facility”).
( 3 ) Non-recurring costs include: severance; legal reserves and related fees; one-time consulting and other costs associated with the Company’s strategic transformation initiatives; discontinuation and liquidation costs; and costs related to our initial public offering and refinancing.
In fiscal 2022, approximately $8.2 million of these integration costs was recorded in cost of sales, and $7.1 million of these integration costs was recorded in selling, general and administrative expenses. 54 (5) Other costs prior to fiscal 2023 included: severance; legal reserves and related fees; one-time consulting and other costs associated with our strategic transformation initiatives; discontinuation and liquidation costs; and costs related to our initial public offering and refinancing.
In fiscal 2020 and fiscal 2021, U.S. households welcomed millions of incremental new pets into their homes that will need to be fed, groomed, vaccinated, and treated during their lives. Customer Pet Purchase Trends Our multi-channel integrated ecosystem is designed to support our customers regardless of how customers choose to shop for their pet care needs.
Importantly, the majority of these new pet parents came from Millennial and Gen Z generations, who typically spend more on their pets. Customer Pet Purchase Trends Our multi-channel integrated ecosystem is designed to support our customers regardless of how customers choose to shop for their pet care needs.
Sales channel impacts driven by strength in our digital, services and vet business, and moderate increases in distribution costs also contributed to the decrease in gross profit rate during fiscal 2021 as compared to fiscal 2020.
The decrease in gross profit rate in fiscal 2022 as compared to fiscal 2021 was primarily driven by the mix impact of strength in consumables sales and lower supplies and companion animal sales combined with elevated supply chain costs.
Removed
Since our founding in 1965, we have been striving to set new standards in pet care, delivering comprehensive wellness solutions through our products and services, and creating communities that deepen the pet-pet parent bond.
Added
Through our integrated ecosystem, we provide our over 25 million total active customers with a comprehensive offering of differentiated 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 growing network of 247 in-store veterinary hospitals, our digital channel, and our flexible fulfillment options.
Removed
We operate more than 1,500 Petco locations across the U.S., Mexico, and Puerto Rico, including a growing network of nearly 200 in-store veterinary hospitals, and offer a complete online resource for pet health and wellness at petco.com and on the Petco app.
Added
Vital Care Premier memberships are at the top of our integrated loyalty programs, followed by Vital Care Core and our other perks programs that provide rewards for frequent purchasing.
Removed
In addition to providing differentiated products and services, our over 24,000 knowledgeable, passionate partners provide important high-quality advice to our customers in our pet care centers. 43 .

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

6 edited+1 added−0 removed1 unchanged
Biggest changeAs of January 29, 2022, the underlying interest rates on the First Lien Term Loan and the ABL Revolving Credit Facility were at the floor in the applicable agreements.
Biggest changeAs of January 28, 2023, we had $1,670.3 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.
Foreign Currency Risk Substantially all of our business is currently conducted in U.S. dollars. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar as compared to other currencies would have a material effect on our operating results. 59
Foreign Currency Risk Substantially all of our business is currently conducted in U.S. dollars. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar as compared to other currencies would have a material effect on our operating results. 61
Item 7A. 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.
Item 7A. Quantitative and Qualitati ve 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.
Credit Risk As of January 29, 2022, 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.
Credit Risk As of January 28, 2023, 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.
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 January 29, 2022 would have increased annual cash interest in the aggregate by approximately $17.1 million.
An increase of 100 basis points in the variable rates on the First Lien Term Loan and the ABL Revolving Credit Facility as of January 28, 2023 would have increased annual cash interest in the aggregate by approximately $16.9 million.
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 January 29, 2022, we had $1,687.3 million outstanding under the First Lien Term Loan and no amounts outstanding under the ABL Revolving Credit Facility.
We do not currently hold any instruments for trading purposes. Interest Rate Risk 60 We are subject to interest rate risk in connection with the First Lien Term Loan and the ABL Revolving Credit Facility.
Added
For information regarding the interest rate cap agreements that we entered into in December 2022 to limit the maximum interest rate on a portion of our variable-rate debt and limit our exposure to interest rate variability, please refer to the section defined within Liquidity and Capital Resources in Part II, Item 7, "Derivative Instruments" of this Form 10-K.

Other WOOF 10-K year-over-year comparisons