10q10k10q10k.net

What changed in Petco Health & Wellness Company, Inc.'s 10-K — 2023 vs 2024

vs

Paragraph-level year-over-year comparison of Petco Health & Wellness Company, Inc.'s 2023 and 2024 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 2024 report.

+333 added−378 removedSource: 10-K (2024-04-03) vs 10-K (2023-03-28)

Top changes in Petco Health & Wellness Company, Inc.'s 2024 10-K

333 paragraphs added · 378 removed · 269 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

38 edited+8 added−54 removed29 unchanged
Biggest changeWe 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.
Biggest changeThough we do face competition from both large and small pet specialty retailers, e-commerce retailers, and mass and grocery retailers, among others, we believe that we have built an ecosystem that appeals to a broad base of consumers through the breadth and depth of our assortment and services capabilities, including veterinary care, that we offer across an integrated omnichannel platform. 7 Marketing and Advertising In fiscal 2023, we continued to evolve our marketing and media strategy, creating an in-house retail media network to enable advertising activities across paid and owned channels.
The FDA has issued guidance regarding products that provide nutrients in support of an animal’s daily nutrient needs but which are also labeled as being intended for use to diagnose, cure, mitigate, treat, or prevent disease, thereby meeting the statutory definitions of both a food and a drug.
The FDA has issued guidance regarding products that provide nutrients in support of an animal’s daily nutrient needs but which are also labeled as being 10 intended for use to diagnose, cure, mitigate, treat, or prevent disease, thereby meeting the statutory definitions of both a food and a drug.
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.
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 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.
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.
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.
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.
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.
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.
These trademarks include Bond & Co., EveryYay, Good 2 Go, Good Lovin’, Harmony, Imagitarium, Leaps & Bounds, Pals Rewards, Petco, Petco Love, PetCoach, Reddy, Ruff & Mews, So Phresh, Vetco, Well & Good, WholeHearted, You & Me, Youly, Vital Care Core, and Vital Care Premier.
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 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.
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.
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.
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.
Item 1. B usiness . Our Company Founded in 1965, Petco is a pet health and wellness company focused on improving the lives of pets, pet parents, and our own Petco partners.
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.
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 2023, we purchased merchandise from approximately 680 vendors.
Diversity and Inclusion Our employees are our partners and we strive to create an environment that embraces diverse backgrounds and perspectives. Our commitment to fostering a diverse, equitable, and inclusive environment is key to our mission of improving the lives of pets, pet parents, and the Petco partners who work for us.
Diversity and Inclusion Our employees are our partners and we strive to create an environment that embraces diverse backgrounds and perspectives. Our commitment to fostering equal employment opportunities and a diverse, equitable, and inclusive environment is key to our mission of improving the lives of pets, pet parents, and the Petco partners who work for us.
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.
Petco Love Petco Love 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.
Our current partner-led Partner Resource Groups are: Ability at Petco; Black at Petco; LGBTQ+ at Petco; Pan Asian American at Petco; Petcontigo (Latinx) at Petco; Military and Veterans at Petco; and Women at Petco.
Our current partner-led Partner Resource Groups are: Ability at Petco; Black at Petco; LGBTQIA+ at Petco; Pan Asian American at Petco; Petcontigo (Latinx) at Petco; Military and Veterans at Petco; and Women at Petco.
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.
Our top 10 vendors represented approximately 42% of our annual sales, and no single vendor accounted for more than 9% 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.
Department of Agriculture (the “USDA”), the Drug Enforcement Administration (the “DEA”), and by various other federal, state, local, and foreign authorities regarding the processing, packaging, storage, distribution, advertising, labeling, and import of our products, including food safety standards.
Food and Drug Administration (the “FDA”), the U.S. Department of Agriculture (the “USDA”), the Drug Enforcement Administration (the “DEA”), and by various other federal, state, local, and foreign authorities regarding the sale, processing, packaging, storage, distribution, advertising, labeling, and import of our products, including food safety standards.
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.
Since its founding in 1999, Petco Love has inspired and empowered animal welfare organizations to make a difference, investing nearly $380 million in adoption and medical care programs, spay/neuter services, pet cancer research, service and therapy animals, and numerous other lifesaving initiatives.
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.
To date, nearly 3,000 animal welfare organizations and pet industry partners across the U.S. have adopted the platform, and Petco Love Lost has helped return over 34,000 pets to their loving homes.
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.
As of February 3, 2024, we had over 29,000 total partners. 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.
Launched in August 2021, Petco Love’s Vaccinated and Loved initiative marked a significant milestone when it reached its one millionth free pet vaccine distribution in September 2022, and subsequently committed to distributing another one million free pet vaccines.
Launched in August 2021, Petco Love’s Vaccinated and Loved initiative marked a significant milestone when it reached its two millionth free pet vaccine in November 2023, and subsequently committed to distributing another one million free pet vaccines.
In addition to base cash compensation, we offer our partners a mix of annual bonuses, restricted stock units, various incentive plans, an Employee Stock Purchase Plan, a 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, and a range of employee assistance programs.
In addition to base cash compensation, we offer our partners a mix of annual bonuses, restricted stock units, various incentive plans, an Employee Stock Purchase Plan, a 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, and a range of employee assistance programs, including investments in fertility care, medical travel, and mental health benefits that were implemented in fiscal 2023.
In April 2021, Petco Love launched Petco Love Lost, a searchable database that uses facial recognition technology to help reunite lost pets with their families should they ever go missing.
In April 2021, Petco Love launched Petco Love Lost, a national lost and found pet database that uses image recognition technology to help reunite lost pets with their families should they ever go missing.
Sitting 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.
Sitting 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 and links pet parents with our merchandise and services offerings, while Vital Care Core provides pet parents with a suite of loyalty offerings.
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.
Our product offering leverages a broad assortment of national, owned brand, and exclusive merchandise, providing customers with a wide variety of nutritional options, including health-focused options free from artificial ingredients, complemented by a wide variety of pet care supplies and companion animals.
Since that milestone, Petco Love has distributed an additional 430,000 free pet vaccines to its partners, bringing the total number of free pet vaccines distributed as part of its Vaccinated and Loved initiative to more than 1.3 million to date.
Since that milestone, Petco Love continued the distribution of free pet vaccines to its partners, bringing the total number of vaccines distributed as part of its Vaccinated and Loved initiative to more than 2.2 million to date.
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.
Through our ecosystem, we provide our customers with a comprehensive offering of products and services to fulfill their pets’ health and wellness needs through our 1,423 pet care centers in the U.S. and Puerto Rico, our digital channel, and our flexible fulfillment options. We also operate 131 pet care centers in Mexico and 2 in Chile through a joint venture.
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.
While we offer pet parents a full spectrum of product choices, we maintain a number of premium products to address ongoing humanization and premiumization trends in the 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.
By integrating our veterinary hospitals into existing pet care centers, we benefit from certain structural advantages compared to stand-alone veterinary care providers, such as lower cost of acquisition and additional basket opportunities (including further tapping into the prescription food and drug market).
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.
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. In addition, 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.
In partnership with our Diversity, Equity, and Inclusion team, these seven groups facilitate engagement activities to increase cultural competencies, educate partners on issues facing affinity group members, and deepen our workplace connections. Health and Safety The health, safety, and overall well-being of our partners is a top priority.
In partnership with our Diversity, Equity, and Inclusion team, these seven groups facilitate engagement activities to increase cultural competencies, educate partners on issues facing affinity group members, and deepen our workplace connections. Compensation and Benefits We provide competitive compensation and benefits programs to help meet the needs of our partners and their families.
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 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 veterinary care, grooming, and training. Leveraging our experience in Vetco mobile clinics, we operate a network of full service, general practice veterinary hospitals complemented by prescription and insurance offerings.
Finally, in 2022, we announced that every non-trainee partner at Petco will be paid a base wage of at least $15 an hour. This change, along with other adjustments, resulted in approximately 15% average wage increases for our pet care center partners. Talent Development We invest significant resources to attract, develop, and retain top talent.
This change, along with other adjustments, resulted in approximately 15% average wage increases for our pet care center partners. 8 Talent Development We invest significant resources to attract, develop, and retain top talent.
Our Trademarks and Other Intellectual Property We believe that our rights in our intellectual property, including trademarks and domain names, as well as contractual provisions and restrictions on access to our proprietary technology, are important to our marketing efforts to develop brand recognition and differentiate our brand from our competitors.
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. 9 Our Trademarks and Other Intellectual Property We believe that our rights in our intellectual property, including trademarks and domain names, as well as contractual provisions and restrictions on access to our proprietary technology, are important to our marketing efforts to develop brand recognition and differentiate our brand from our competitors.
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.
Building on nearly 60 years of providing solutions for pets and the people who love and care for them, we serve our customers as a fully-integrated, omnichannel provider of pet health and wellness products, services, and solutions.
We further control the use of our proprietary technology and intellectual property through provisions in both our customer terms of use on our website and in our vendor terms and conditions. Government Regulation We are subject to a broad range of federal, state, local, and foreign laws and regulations intended to protect public health, natural resources, and the environment.
We further control the use of our proprietary technology and intellectual property through provisions in both our customer terms of use on our website and in our vendor terms and conditions.
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.
Vital Care is the foundation of our customer-centric model, serving as a driver of repeat visits and engagement. Industry Dynamics The U.S. pet care industry is large, serving millions of households with pets, and has exhibited steady growth driven by an increase in the pet population and trends in pet humanization and premiumization.
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 2023, we are proud to have provided nearly 650,000 hours of training across our pet care center partners. In addition, nearly 40% of open General Manager and District General Managers positions were filled by internal candidates, either through lateral moves or promotions.
Our operations, including our owned brand manufacturing outsourcing partners, are subject to regulation by the Occupational Safety and Health Administration (“OSHA”), the U.S. Food and Drug Administration (the “FDA”), the U.S.
Government Regulation We are subject to a broad range of federal, state, local, and foreign laws and regulations intended to protect public health, animal welfare, natural resources, and the environment. Our operations, including our owned brand manufacturing outsourcing partners, are subject to regulation by the Occupational Safety and Health Administration (“OSHA”), the U.S.
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.
Through our connected platform, we offer our customers the convenience of repeat delivery, buy online and pick up in store (“BOPUS”), curbside pick-up, same day delivery, and ship from store. Further enhancing the customer experience, our over 26,000 knowledgeable, passionate partners in our pet care centers provide important high-quality advice to our customers.
Removed
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.
Added
In addition, our owned product assortment, such as WholeHearted, Reddy, and Well & Good, serves as a significant driver of sales, customer loyalty, and repeat purchasing and was a meaningful contributor to enterprise sales in fiscal 2023.
Removed
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.
Added
As of February 3, 2024, we operated 288 full service veterinary hospitals, and 1,400 Vetco clinics on a weekly basis.
Removed
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.
Added
The full value of our ecosystem can be realized through our Vital Care membership program, which has a two-tiered offering—Vital Care Core, our free membership tier, and Vital Care Premier, our paid membership tier.
Removed
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.
Added
Due to the essential, repeat nature of pet care, the industry has demonstrated resilience across economic cycles. However, during fiscal 2023, we observed a softening in discretionary spend and shifting consumer preferences for more value-centric products associated with the current inflationary macroeconomic environment.
Removed
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.
Added
In response to this shifting demand, during fiscal 2023, we broadened our assortment to include more national brands and implemented strategic pricing actions to offer more balanced price points in an effort to appeal to a broader base of consumers. We are strategically focused on growing our presence in veterinary care, e-commerce, and services.
Removed
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.
Added
Our marketing efforts leverage our integrated ecosystem and health & wellness positioning to drive customer acquisition, monetization, and retention. We also utilize personalization technology to provide relevant content to our first-party customers. 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.
Removed
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.
Added
In addition, we offer a range of webinars, trainings, and subscriptions to support our partners’ total wellbeing. Finally, in fiscal 2023 we completed the implementation of an increase in every non-trainee partner's base wage to at least $15 an hour.
Removed
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.
Added
In recent years, we have introduced foundational leadership development training for all new General Managers and above, provided comprehensive pet health and wellness certifications in select pet care centers (with plans to expand to all pet care centers in fiscal 2024), and continuous development of sales and customer engagement skills.
Removed
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.
Removed
Vital Care memberships are the keystone of our 7 customer-centric model, serving as a driver of repeat visits and engagement among our customers, and we believe the unification of our loyalty and membership programs will enhance the overall customer experience by allowing us to better view and serve our customers through a singular lens.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
Our highly qualified leadership team has implemented significant operational and cultural changes in our business, including a substantial acceleration of our digital capabilities, optimizing the effectiveness of pet care center partners through training, enhanced analytics tools and communications, step changing marketing and customer engagement return on investment, launching an owned veterinary hospital network, and scaling our pet health and wellness offerings.
Removed
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.
Removed
Through that lens, we have developed a data-driven go-to-market platform consisting of robust digital capabilities and a strategic physical network of pet care centers woven together by a singular view of the customer.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
Launched a Full-Service Veterinary Hospital Network, and Reinvented Grooming and Training . Pet services represent the most personalized, sticky, high-touch part of the pet market.
Removed
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.
Removed
In veterinary services, we are creating a new paradigm in the industry with integrated owned hospitals under the Vetco Total Care brand.
Removed
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.
Removed
In March 2022, we announced our acquisition of Thrive Pet Healthcare’s 50% stake in our pet hospital joint venture (the “Acquisition”), which subsequently closed in the second quarter of 2022.
Removed
The Acquisition resulted in the transition of nearly 100 locations to our Vetco Total Care hospital brand, as well as the welcoming of over 750 veterinary care professionals to our network of approximately 29,000 partners.
Removed
As of the end of fiscal 2022, we operated a total of 247 full-service veterinary care hospitals, inclusive of the hospitals acquired as part of the Acquisition.
Removed
In parallel with our hospital unit growth, we’ve made considerable investments in our veterinarian value proposition, both with enhanced total rewards programs as well unique scheduling opportunities that offer the flexibility to practice autonomous medicine both in hospitals and in our mobile clinics.
Removed
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.
Removed
In training, we have led with innovation, and in fiscal 2021 we launched online training classes that can be conducted at home. Created a Highly Differentiated Owned and Exclusive Product Offering . We offer a highly differentiated owned and exclusive product assortment that engenders strong customer loyalty and repeat purchasing.

… 20 more changes not shown on this page.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

136 edited+24 added−19 removed295 unchanged
Biggest changeIn particular, the California Privacy Protection Agency is currently engaged in formal rulemaking to adopt regulations implementing the CPRA. Some observers have noted that the CCPA and CPRA could mark the beginning of a trend toward more stringent state privacy legislation in the United States.
Biggest changeSome observers have noted that the CCPA and CPRA could mark the beginning of a trend toward more stringent state privacy legislation in the United States. Similar laws have been passed in several states (including Colorado, Virginia, Utah, Oregon, Montana, Texas, Florida, New Jersey, and others), and have been proposed in additional states and at the federal level.
The CCPA provided for civil penalties for violations enforced by the California Attorney General, as well as a private right of action for data breaches that has resulted in an increase data breach litigation.
The CCPA provided for civil penalties for violations enforced by the California Attorney General, as well as a private right of action for data breaches that has resulted in an increase in data breach litigation.
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.
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; • 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.
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.
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 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.
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.
Our certificate of incorporation and bylaws include provisions that: 35 • 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 • reflect three classes of common stock.
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.
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 12 sales, consumer boycotts, loss of new pet care center development opportunities, lower partner morale and productivity, or partner recruiting and retention difficulties.
It is possible that a court may find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, in which case we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially adversely affect our business, financial condition, or results of operations and result in a diversion of the time and resources of our management and board of directors.
It is possible that a court may find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of 37 actions or proceedings, in which case we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially adversely affect our business, financial condition, or results of operations and result in a diversion of the time and resources of our management and board of directors.
Quarterly operating results may also vary depending on a number of factors, many of which are outside of our control, including: • changes in our pricing policies or those of our competitors; • our sales and channels mix and the relevant gross margins of the products and services sold; • the hiring and retention of key personnel; • wage, cost, and inflationary pressures; • changes in fuel prices or electrical rates; • costs related to acquisitions of businesses; and • general economic factors.
Quarterly operating results may also vary depending on a number of factors, many of which are outside of our control, including: • changes in our pricing policies or those of our competitors; • our sales and channels mix and the relevant gross margins of the products and services sold; 19 • the hiring and retention of key personnel; • wage, cost, and inflationary pressures; • changes in fuel prices or electrical rates; • costs related to acquisitions of businesses; and • general economic factors.
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.
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.
We face competition from other veterinary service providers in the labor market for veterinarians, and from time to time, we have experienced shortages of skilled veterinarians in markets in which we operate our veterinary service businesses, which has required us or our affiliated veterinary practices to increase wages and enhance benefits to recruit and retain enough qualified veterinarians to adequately staff our veterinary services operations.
We face competition from other veterinary service providers in the labor market for veterinarians and, from time to time, we have experienced shortages of skilled veterinarians in markets in which we operate, or desire to operate, our veterinary service businesses, which has required us or our affiliated veterinary practices to increase wages and enhance benefits to recruit and retain enough qualified veterinarians to adequately staff our veterinary services operations.
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.
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.
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.
These factors could also cause consumer confidence and spending to decrease or result in increased volatility in the United States and global 22 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.
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.
For example, it could: 31 • 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.
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.
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.
The sale and delivery of prescription pet medications and controlled substances through our veterinary services businesses are governed by extensive regulation and oversight by federal and state governmental authorities. The laws and regulations governing our operations and interpretations of those laws and regulations are increasing in number and complexity, change frequently, and can be inconsistent or conflicting.
The sale, delivery, and/or administration of prescription pet medications and controlled substances through our veterinary services businesses are governed by extensive regulation and oversight by federal and state governmental authorities. The laws and regulations governing our operations and interpretations of those laws and regulations are increasing in number and complexity, change frequently, and can be inconsistent or conflicting.
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.
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 file annual, quarterly, and current reports with respect to our business and operating results.
Our strategies include, among other things, expanding our veterinary service offerings and building out our digital and data capabilities, growing our market share in services like grooming and training, enhancing our owned 15 brand portfolio, growing our brick and mortar footprint in rural communities, and introducing new offerings to better connect with our customers.
Our strategies include, among other things, expanding our veterinary service offerings and building out our digital and data capabilities, growing our market share in services like grooming and training, enhancing our owned brand portfolio, growing our brick and mortar footprint in rural communities, and introducing new offerings to better connect with our customers.
This integration process involves inherent uncertainties, and we cannot assure you that the anticipated benefits of these acquisitions will be fully realized without incurring unanticipated costs or diverting management’s attention from our core operations. From time to time we also make strategic investments.
This integration process involves inherent uncertainties, and we cannot assure you that the anticipated benefits of these acquisitions 16 will be fully realized without incurring unanticipated costs or diverting management’s attention from our core operations. From time to time we also make strategic investments.
If we do not continue to attract, train, and retain quality associates and management personnel, our performance could be adversely affected. Labor disputes may have an adverse effect on our operations. We are not currently party to a collective bargaining agreement with any of our employees.
If we do not continue to attract, train, and retain quality associates and management personnel, our performance could be adversely affected. 21 Labor disputes may have an adverse effect on our operations. We are not currently party to a collective bargaining agreement with any of our employees.
Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation. Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.
Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation. 38 Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.
If such proceedings result in an adverse outcome, we could, among other things, be required to: • pay substantial damages (potentially treble damages in the United States); • cease the manufacture, use, distribution, or sale of the infringing products, operations, or services; • discontinue the use of the infringing methods or processes; • expend significant resources to develop non-infringing products, operations, or services or re-brand our business and products; and • obtain a license from the third party claiming infringement, which may not be available on commercially reasonable terms, or may not be available at all. 31 If any of the foregoing occurs, our ability to compete in the markets in which we operate could be affected or our business, financial condition, and results of operations may be materially adversely affected.
If such proceedings result in an adverse outcome, we could, among other things, be required to: • pay substantial damages (potentially treble damages in the United States); • cease the manufacture, use, distribution, or sale of the infringing products, operations, or services; • discontinue the use of the infringing methods or processes; • expend significant resources to develop non-infringing products, operations, or services or re-brand our business and products; and • obtain a license from the third party claiming infringement, which may not be available on commercially reasonable terms, or may not be available at all. 29 If any of the foregoing occurs, our ability to compete in the markets in which we operate could be affected or our business, financial condition, and results of operations may be materially adversely affected.
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.
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. 14 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 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.
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.
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.
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.
As a result, our access to credit under the ABL Revolving Credit Facility is potentially subject to significant fluctuations depending on the value of the borrowing base of eligible assets as of any measurement date, as well as certain discretionary rights of the agents in respect of the calculation of such borrowing base value.
As a result, our access to credit under the ABL Revolving Credit Facility is potentially subject to significant fluctuations depending on the value of the 33 borrowing base of eligible assets as of any measurement date, as well as certain discretionary rights of the agents in respect of the calculation of such borrowing base value.
Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our financial condition, results of operations, cash requirements, contractual restrictions, and other factors that our board of directors may deem relevant.
Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and 36 will depend on, among other things, our financial condition, results of operations, cash requirements, contractual restrictions, and other factors that our board of directors may deem relevant.
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.
Although we do not materially rely on any particular vendor, the loss of any of our significant vendors of pet food, particularly owned brand pet food, or pet supplies that we offer could have a negative impact on our business, financial condition, and results of operations.
While to date, we do not believe such identified security events have been material or significant to us, including to our reputation or business operations, or had a material financial impact, we cannot assure you that such incidents or future cyber-attacks will not expose us to material liability.
While to date, we do not believe such identified security events have been material to us, including to our reputation or business operations, or had a material financial impact, we cannot assure you that such incidents or future cyber-attacks will not expose us to material liability.
Federal or state regulatory authorities or private litigants may claim that the notices and disclosures we provide, form of consents we obtain, or our SMS texting practices are not adequate or violate applicable law, resulting in civil claims against us.
Federal or state regulatory authorities or private litigants may claim that the notices and disclosures we provide, form of consents we obtain, or our SMS texting or calling practices are not adequate or violate applicable law, resulting in civil claims against us.
In particular, we must perform system and process evaluation, document our controls and perform testing of our key control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act.
In particular, we must perform system and process evaluation, document our controls and 39 perform testing of our key control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act.
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.
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.
Interruptions in our inventory supply chain have resulted in certain out-of-stock or excess merchandise inventory levels, and could adversely affect our ability to make timely deliveries to e-commerce customers, as well as our sales and results of operations.
Previous interruptions in our inventory supply chain have resulted in certain out-of-stock or excess merchandise inventory levels, and could adversely affect our ability to make timely deliveries to e-commerce customers, as well as our sales and results of operations.
Continuing political and social attention to the issue of climate change has resulted in both existing and pending international agreements and national, regional, or local legislation and regulatory measures to limit greenhouse gas emissions, such as cap and trade regimes, carbon taxes, restrictive permitting, increased fuel efficiency standards, and incentives or mandates for renewable energy, as well as legal and regulatory requirements requiring certain climate-related disclosures, and pressure from shareholders, ratings agencies, and other third parties to make various climate-related disclosures.
Continuing political and social attention to the issue of climate change has resulted in both existing and pending international agreements and national, regional, or local legislation and regulatory measures to limit greenhouse gas emissions, such as cap and trade regimes, carbon taxes, restrictive permitting, increased fuel efficiency standards, and incentives or mandates for renewable energy, as well as legal and regulatory requirements requiring certain climate-related disclosures, and pressure from shareholders, ratings agencies, state agencies, the SEC, and other third parties to make various climate-related disclosures.
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.
To the extent such weather events or natural disasters do become more frequent or severe, disruptions to our business, including store closures and/or damage, and our vendors and costs to repair damaged facilities or maintain or resume operations could increase.
As a result, we may incur material costs to comply with any new labeling requirements relating to the term “natural” and could be subject to liabilities if we fail to timely comply with such requirements, which could have a material adverse effect on our business, financial condition, and results of operations. 26 Failure to comply with governmental regulations or the expansion of existing or the enactment of new laws or regulations applicable to our veterinary services could adversely affect our business and our financial condition or lead to fines, litigation, or our inability to offer veterinary products or services in certain states.
As a result, we may incur material costs to comply with any new labeling requirements relating to the term “natural” and could be subject to liabilities if we fail to timely comply with such requirements, which could have a material adverse effect on our business, financial condition, and results of operations. 24 Failure to comply with governmental regulations or the expansion of existing or the enactment of new laws or regulations applicable to our veterinary services could adversely affect our business and our financial condition or lead to fines, litigation, or our inability to offer veterinary products or services in certain states.
It is difficult to predict how these or any other new laws and regulations will impact our business, but, in some cases, changes in insurance laws, regulations, and guidelines may require that we make significant modifications to our practices, which may be costly and difficult to implement, could harm our ability to effectively grow our pet insurance offerings, and could also harm business, operating results and financial condition. 27 We are subject to risks related to online payment methods and our Petco Pay promotional financing program .
It is difficult to predict how these or any other new laws and regulations will impact our business, but, in some cases, changes in insurance laws, regulations, and guidelines may require that we make significant modifications to our practices, which may be costly and difficult to implement, could harm our ability to effectively grow our pet insurance offerings, and could also harm our business, operating results and financial condition. 25 We are subject to risks related to online payment methods and our Petco Pay promotional financing program .
Even an unsuccessful challenge of our SMS texting practices by our customers, regulatory authorities, or other third parties could result in negative publicity and could require a costly response from and defense by us.
Even an unsuccessful challenge of our SMS texting or calling practices by our customers, regulatory authorities, or other third parties could result in negative publicity and could require a costly response from and defense by us.
Our business may face increased scrutiny from the investment community, other stakeholders, and the media related to our sustainability activities, including the goals, targets, and objectives that we announce, and our methodologies and timelines for pursuing them.
Our business may face increased scrutiny from regulators, the investment community, other stakeholders, and the media related to our sustainability activities, including the goals, targets, and objectives that we announce, and our methodologies and timelines for pursuing them.
In the future, as we offer new payment options to consumers, including by way of integrating emerging mobile and other payment methods, we may be subject to additional regulations, compliance requirements, and fraud.
In the future, as we offer new payment options to consumers, including by way of integrating emerging mobile and other payment methods, we may be subject to additional regulations, compliance requirements, licenses, and fraud.
Our business could be harmed by any material decline in the amount of consumer spending, which could reduce our sales, or a decrease in the sales of higher-margin products, which could reduce our profitability and adversely affect our business.
Our business could be harmed by any material decline 11 in the amount of consumer spending, which could reduce our sales, or a decrease in the sales of higher-margin products, which could reduce our profitability and adversely affect our business.
Some competitors are larger and have access to greater capital and the ability to invest in more resources than we do. We have been facing greater competition from national, regional, local, and online retailers.
Some competitors are larger and have access to greater capital and the ability to invest more resources than we do. We have been facing greater competition from national, regional, local, and online retailers.
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.
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 Class A common 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.
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.
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.
These changes over time could also affect, for example, the availability and cost of certain products, insurance, commodities and energy (including utilities), which in turn may impact our ability to procure those certain goods or services required for the operation of our business at the quantities and levels we require or on otherwise commercially reasonable terms.
These changes over time could also affect, for example, the availability and cost of certain products, insurance, commodities (including grains and proteins), and energy (including utilities), which in turn may impact our ability to procure those certain goods or services required for the operation of our business at the quantities and levels we require or on otherwise commercially reasonable terms.
The use of SOFR-based rates may result in interest rates and/or payments that are higher or lower than the rates and payments that we previously experienced when referenced to LIBOR. SOFR is a relatively new reference rate, has a very limited history, and is based on short-term repurchase agreements backed by U.S. Treasury securities.
The use of SOFR-based rates may result in interest rates and/or payments that are higher or lower than the rates and payments that we previously experienced when referenced to LIBOR. SOFR remains a relatively new reference rate, has a limited history, and is based on short-term repurchase agreements backed by U.S. Treasury securities.
If so, we may suffer damage to our reputation and be subject to proceedings or actions against us by 28 governmental entities or others. Due to the rapidly evolving nature of this area of the law, we have seen an increase in claims filed against us and others by plaintiffs alleging violations of various data privacy laws.
If so, 26 we may suffer damage to our reputation and be subject to proceedings or actions against us by governmental entities or others. Due to the rapidly evolving nature of this area of the law, we have seen an increase in claims filed against us and others by plaintiffs alleging violations of various data privacy laws.
Strategic ventures have the added risk that the other strategic venture partners may have economic, business, or legal interests or objectives that are inconsistent with our interests and objectives. Further, we may be unsuccessful in identifying and evaluating business, legal, or financial risks as part of the due diligence process associated with a particular transaction.
Strategic ventures have the added risk that the other strategic venture partners may have economic, business, or legal interests or objectives that are inconsistent with our interests and objectives. We may also be unsuccessful in identifying and evaluating business, legal, or financial risks as part of the due diligence process associated with a particular transaction.
We have also benefited from increasing pet ownership, discretionary spending on pets, and current trends in humanization and premiumization in the pet industry, as well as favorable pet ownership demographics. To the extent these trends slow or reverse, our sales and profitability would be adversely affected.
We have also benefited from increasing pet ownership, discretionary spending on pets, and trends in humanization and premiumization in the pet industry, as well as favorable pet ownership demographics. To the extent these trends continue to slow or reverse, our sales and profitability would continue to be adversely affected.
We may fail to comply with various state or federal regulations covering the dispensing of prescription pet medications, including controlled substances, through our veterinary services businesses, which may subject us to reprimands, sanctions, probations, fines, or suspensions.
We may fail to comply with various state or federal regulations covering the dispensing and/or administration of prescription pet medications, including controlled substances, through our veterinary services businesses, which may subject us to reprimands, sanctions, probations, fines, or suspensions.
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.
Our current and future marketing programs depend on our ability to collect, maintain, use, and share this personal information with service providers and other 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 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.
Our trademarks, such as Bond & Co., EveryYay, Good 2 Go, Good Lovin’, Harmony, Imagitarium, Leaps & Bounds, Pals Rewards, Petco, Petco Love, PetCoach, Reddy, Ruff & Mews, So Phresh, Vetco, Well & Good, WholeHearted, You & Me, Youly, Vital Care Core, and Vital Care Premier, are valuable assets that support our 28 brand and consumers’ perception of our products.
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.
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 and criminal incidents that we suffer, and employee health-care benefits. Our insurance coverage may not be sufficient, and any insurance proceeds may not be timely paid to us.
Inflation has adversely impacted, and is expected to continue to adversely impact, our financial condition and results of operations. Inflation in the United States remained elevated throughout fiscal 2022.
Inflation has adversely impacted, and is expected to continue to adversely impact, our financial condition and results of operations. Inflation in the United States remained elevated throughout fiscal 2023.
Although we have measures in place to detect and reduce the occurrence of such fraudulent activity, those measures are not always effective, and we have incurred, and could in the future incur, losses for such fraudulent transactions, which could harm our business, financial condition, and results of operations.
Although we have measures in place to detect, reduce, and mitigate the occurrence of such fraudulent activity, those measures are not always effective, and we have incurred, and could in the future incur, financial losses, losses of customers, and reputational harm for such fraudulent transactions, which could harm our business, financial condition, and results of operations.
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.
This amount is net of $53.4 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.
Numerous class-action suits under federal and state laws have been filed in recent years against companies who conduct SMS texting programs, with many resulting in multi-million-dollar settlements to the plaintiffs.
Numerous class action suits under federal and state laws have been filed in recent years against companies who conduct SMS texting or outbound calling programs, with many resulting in multi-million-dollar settlements to the plaintiffs.
Additionally, the Federal Trade Commission (the “FTC”) and many state attorneys general are interpreting existing federal and state consumer protection laws to impose evolving standards for the online collection, use, dissemination, and security of other personal data. Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security, and access.
Additionally, the FTC and many state attorneys general are interpreting existing federal and state consumer protection laws to impose evolving standards for the collection, use, dissemination, and security of other personal data. Courts may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security, and access.
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.
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 vendors were not able to supply us with products in a timely or cost-effective manner.
The inability to fill vacancies in our key personnel positions, including executive positions, on a timely basis could adversely affect our ability to implement our business strategy, which would negatively impact our results of operations.
The inability to fill vacancies in our key personnel positions, including executive positions, on a timely basis could adversely affect our ability to implement our business strategy and be disruptive to our business, which would negatively impact our results of operations.
For example, the Telephone Consumer Protection Act of 1991, a federal statute that protects consumers from unwanted telephone calls, faxes, and text messages, restricts telemarketing and the use of automated SMS text messages without proper consent.
For example, the Telephone Consumer Protection Act of 1991, a federal statute that protects consumers from unwanted telephone calls, faxes, and text messages, restricts telemarketing and the use of automated SMS text messages and certain dialing practices without proper consent.
The scope and interpretation of the laws that are or may be applicable to the delivery of text messages are continuously evolving and developing.
The scope and interpretation of the laws that are or may be applicable to the delivery of text messages and/or outbound calling are continuously evolving and developing.
Competition for senior management personnel is intense with increasingly aggressive compensation packages, and we cannot assure you that we can retain our key personnel or that our succession planning will prove effective. Furthermore, declines in our stock price have been reducing the retention value of our share-based awards, which could impact the competitiveness of our compensation over time.
Competition for senior management personnel is intense with increasingly aggressive compensation packages, and we cannot assure you that we can retain our key personnel or that our succession planning will prove effective. Furthermore, significant declines in our stock price have reduced the retention value of our outstanding share-based awards, which could impact the competitiveness of our compensation over time.
Similarly, our failure or perceived failure to pursue or fulfill our goals, targets, and objectives, to comply with ethical, environmental, or other standards, regulations, or expectations, or to satisfy various reporting standards with respect to these matters, within the timelines we announce, or at all, could have the same negative impacts, as well as expose us to government enforcement actions and private litigation.
Similarly, our failure or perceived failure to pursue or fulfill our goals, targets, and objectives, to comply with ethical, environmental, or other standards, regulations, or expectations, or to satisfy various reporting standards with respect to these matters, within required timelines or those which we announce, or at all, could have the same negative impacts, as well as expose us to federal and state government enforcement actions and private litigation.
If any shipped merchandise were to be delayed because of the impact of severe weather on transnational shipping, particularly from our vendors in Asia, our operations would likely be significantly disrupted.
If any shipped merchandise were to be delayed because of the impact of severe weather or other disruptions on transnational shipping, particularly from our vendors in Asia, our operations would likely be significantly disrupted.
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.
Additionally, our use of consumer data is subject to the terms of our privacy policies and certain contractual restrictions in vendor contracts as well as evolving federal, state, and international laws and enforcement trends.
Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq. Certain of our directors have relationships with our Sponsors, which may cause conflicts of interest with respect to our business. Six of our eleven directors are affiliated with our Sponsors.
Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq. Certain of our directors have relationships with our Sponsors, which may cause conflicts of interest with respect to our business. Four of our ten directors are affiliated with our Sponsors.
As a result of any of the foregoing, we could experience adverse publicity, loss of sales, the cost of remedial measures, and significant expenditures to reimburse third parties for damages, each of which could adversely impact our results of operations.
As a result of any of the foregoing, we could experience adverse publicity, loss of sales, the cost of remedial measures, including substantial legal fees, and significant expenditures to reimburse third parties for damages, each of which could adversely impact our results of operations.
If we fail to increase our wages competitively, we could fail to recruit and retain top talent and face labor shortages or staffing issues, and the quality of our workforce could decline, causing our customer service to suffer, while increasing our wages could cause our earnings to decrease.
If we fail to offer competitive wages, we could fail to recruit and retain top talent and face labor shortages or staffing issues, and the quality of our workforce could decline, causing our customer service to suffer, while increasing our wages could cause our earnings to decrease.
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.
To the extent that we are unable to execute on our growth strategies in accordance with our 13 expectations, our sales growth would come primarily from the organic growth of existing product and service offerings. We have experienced difficulties recruiting and retaining skilled veterinarians due to shortages that could disrupt our business.
In the future, we may be subject to routine administrative complaints incidental to the dispensing of prescription pet medications through our veterinary services businesses.
In the future, we may be subject to routine administrative complaints incidental to the dispensing and/or administration of prescription pet medications through our veterinary services businesses.
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”).
At February 3, 2024, 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”).
Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for descriptions of the First Lien Term Loan and ABL Revolving Credit Facility. The agreements governing our indebtedness include restrictive covenants that limit our operating flexibility, which could harm our long-term interests.
All other key terms of the ABL Revolving Credit Facility remained unchanged. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for descriptions of the First Lien Term Loan and ABL Revolving Credit Facility. The agreements governing our indebtedness include restrictive covenants that limit our operating flexibility, which could harm our long-term interests.
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.
We currently accept payments using a variety of methods, including, but not limited to, credit cards, debit cards, PayPal, Apple Pay, 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.
The pet care industry is highly fragmented. We have completed acquisitions in the past and may pursue expansion and acquisition opportunities in the future.
The pet care industry is highly fragmented. We have completed acquisitions in the past and may pursue expansion and acquisition opportunities in the future, including veterinary hospitals.
We have experienced an attempted union organizing campaign, and may continue to experience union organizing campaigns, which can be disruptive to our operations, increase our labor costs and decrease our operational flexibility.
We have, however, experienced attempted union organizing campaigns, and may continue to experience union organizing campaigns, which can be disruptive to our operations, increase our labor and operating costs, and decrease our operational flexibility.
Environmental Protection Agency, the EEOC, 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, the Federal Trade Commission ("FTC"), and by various other federal, state, local, and foreign authorities.
To help mitigate the impact of these cost increases, we have implemented select price increases, which is consistent with our historical practice and in the aggregate have not impacted our salves volume to date. However, our ability to continue to pass on increased purchase costs in the future will be significantly impacted by market conditions and competitive factors.
To help mitigate the impact of these cost increases, we have in the past implemented select price increases, which is consistent with our historical practice. However, our ability to pass on increased purchase costs in the future will be significantly impacted by market conditions and competitive factors.
In particular, major competitors have sought to gain or retain market share by reducing prices or by introducing additional products or services, which may require us to reduce prices on our key products or services or introduce new offerings in order to remain competitive, and negatively affect our profitability and require a change in our operating strategies.
In particular, major competitors have sought to gain or retain market share by reducing prices or by introducing additional products or services, and this has required us to reduce prices on certain products or services and introduce new offerings in order to remain competitive, which could negatively affect our profitability and/or require a change in our operating strategies.
Furthermore, acquired entities may have differing or inadequate controls, procedures, or policies, including those related to financial reporting, disclosure, and cyber and information security, which could expose us to additional risks and potentially increase anticipated costs or time to integrate the business.
Furthermore, acquired entities or businesses may have differing or inadequate controls, procedures, or policies, including those related to financial reporting, disclosure, practice management, handling of controlled substances, and cyber and information security, which could expose us to additional risks and potentially increase anticipated costs or time to integrate the business.
Quarterly operating results are not necessarily accurate predictors of performance.
Quarterly operating results are not necessarily accurate predictors of long-term performance.

… 99 more changes not shown on this page.

Item 2. Properties

Properties — owned and leased real estate

3 edited+1 added−1 removed0 unchanged
Biggest changeThe original lease term for pet care centers is generally ten years, with certain leases being shorter or longer, and many of these leases contain renewal options. The vast majority of pet care center leases, excluding renewal options, expire at various dates over the next ten years.
Biggest changeWe lease all of our distribution center locations and all of our 1,423 pet care centers in the U.S. and Puerto Rico. The original lease term for pet care centers is generally ten years, with certain leases being shorter or longer, and many of these leases contain renewal options.
Our pet care centers are generally located at sites co-anchored by strong destination stores. Certain leases require payment of property taxes, utilities, common area maintenance and insurance and, if annual sales at certain locations exceed specified amounts, provide for additional rent expense.
Certain leases require payment of property taxes, utilities, common area maintenance and insurance and, if annual sales at certain locations exceed specified amounts, provide for additional rent expense.
Item 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.
Item 2. Pr operties. The Company's headquarters is located in San Diego, California and comprises a total of approximately 257,000 square feet, and is under a long-term lease. The Company also leases facilities for corporate functions in San Antonio, Texas and Quer é taro, Mexico.
Removed
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.
Added
The vast majority of pet care center leases, excluding renewal options, expire at various dates over the next ten years. Our pet care centers are generally located at sites co-anchored by strong destination stores.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

2 edited+0 added−0 removed1 unchanged
Biggest changeItem 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.
Biggest changeItem 3. Legal Proceedings. We are involved in the legal proceedings described in Note 14, Commitments and Contingencies, in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and we are subject to 42 other claims and litigation arising in the ordinary course of business.
We 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
We 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. 43 PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

5 edited+1 added−1 removed4 unchanged
Biggest changePlease read “Risk Factors—The agreements governing our indebtedness include restrictive covenants that limit our operating flexibility, which could harm our long-term interests,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in this Annual Report on Form 10-K for descriptions of restrictions on our ability to pay dividends.
Biggest changePlease read “Risk Factors—The agreements governing our indebtedness include restrictive covenants that limit our operating flexibility, which could harm our long-term interests,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in this Annual Report on Form 10-K for descriptions of restrictions on our ability to pay dividends. 44 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, S&P 500 Consumer Discretionary Distribution & Retail index (formerly the S&P Retail index), and S&P Retail Select Industry index from January 14, 2021 (the initial day of trading for our Class A common stock) through February 3, 2024.
Our future dividend policy is within the discretion of our board of directors and will depend upon then-existing conditions, including our results of operations, financial condition, capital requirements, investment opportunities, statutory restrictions on our ability to pay dividends and other factors our board of directors may deem relevant.
Our future dividend policy is within the discretion of our board of directors, subject to applicable law, and will depend upon then-existing conditions, including our results of operations, financial condition, capital requirements, investment opportunities, statutory restrictions on our ability to pay dividends and other factors our board of directors may deem relevant.
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.
The graph assumes that the value of the investment in our Class A common stock and in each index (including reinvestment of dividends) was $100 on January 14, 2021 and tracks it through February 3, 2024.
The 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.
The 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. 1/14/21 1/21 4/21 7/21 10/21 1/22 4/22 7/22 10/22 1/23 4/23 7/23 10/23 2/24 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 33.88 27.76 11.77 8.44 NASDAQ Composite 100.00 101.44 108.55 114.26 120.88 111.23 96.52 97.17 86.35 91.27 96.54 113.51 101.88 120.46 S&P 500 Consumer Discretionary Distribution & Retail 100.00 99.36 112.41 111.83 117.11 105.22 93.07 96.00 84.47 87.14 87.79 102.81 97.56 116.84 S&P Retail Select Industry 100.00 119.02 126.18 129.78 128.65 108.58 97.09 88.30 87.62 96.92 86.65 96.09 83.48 100.70 45 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.
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.
Holders As of March 28, 2024, there were eighty-nine 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.
Removed
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.
Added
In 2023, we elected to replace the S&P 500 Consumer Discretionary Distribution & Retail index with the S&P Retail Select Industry index because due to the broader recognition of the S&P Retail Select Industry index. In future years, we will no longer provide a comparison to the S&P 500 Consumer Discretionary Distribution & Retail index.

Item 7. Management's Discussion & Analysis

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

80 edited+30 added−33 removed65 unchanged
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.
Biggest changeExecutive Summary Comparing fiscal 2023 and fiscal 2022, our results included the following: • an increase in net sales from $6.04 billion to $6.26 billion, representing period-over-period growth of 3.6%; • comparable sales growth of 1.8%; • net loss attributable to Class A and B-1 common stockholders of $1,280.2 million impacted by goodwill impairment, compared to net income attributable to Class A and B-1 common stockholders of $90.8 million in the prior year; and • A decrease in Adjusted EBITDA from $530.8 million to $401.1 million. 51 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 February 3, 2024 January 28, 2023 January 29, 2022 (53 weeks) (52 weeks) (52 weeks) Net sales: Products $ 5,273,710 $ 5,230,515 $ 5,136,859 Services and other 981,574 805,452 670,290 Total net sales 6,255,284 6,035,967 5,807,149 Cost of sales: Products 3,269,628 3,035,249 2,875,313 Services and other 631,821 573,611 505,226 Total cost of sales 3,901,449 3,608,860 3,380,539 Gross profit 2,353,835 2,427,107 2,426,610 Selling, general and administrative expenses 2,311,625 2,201,548 2,160,539 Goodwill impairment 1,222,524 — — Operating (loss) income (1,180,314 ) 225,559 266,071 Interest income (3,405 ) (1,032 ) (62 ) Interest expense 150,909 101,643 77,397 Loss on extinguishment and modification of debt 920 — 20,838 Other non-operating (income) loss (4,727 ) 12,667 (34,497 ) (Loss) income before income taxes and income from equity method investees (1,324,011 ) 112,281 202,395 Income tax (benefit) expense (27,613 ) 35,347 53,473 Income from equity method investees (16,188 ) (12,976 ) (10,883 ) Net (loss) income (1,280,210 ) 89,910 159,805 Net loss attributable to noncontrolling interest — (891 ) (4,612 ) Net (loss) income attributable to Class A and B-1 common stockholders $ (1,280,210 ) $ 90,801 $ 164,417 52 Fiscal years ended February 3, 2024 January 28, 2023 January 29, 2022 (53 weeks) (52 weeks) (52 weeks) Net sales: Products 84.3 % 86.7 % 88.5 % Services and other 15.7 13.3 11.5 Total net sales 100.0 100.0 100.0 Cost of sales: Products 52.3 50.3 49.5 Services and other 10.1 9.5 8.7 Total cost of sales 62.4 59.8 58.2 Gross profit 37.6 40.2 41.8 Selling, general and administrative expenses 37.0 36.5 37.2 Goodwill impairment 19.5 — — Operating (loss) income (18.9 ) 3.7 4.6 Interest income (0.1 ) (0.0 ) (0.0 ) Interest expense 2.5 1.6 1.3 Loss on extinguishment and modification of debt 0.0 — 0.4 Other non-operating (income) loss (0.1 ) 0.2 (0.6 ) (Loss) income before income taxes and income from equity method investees (21.2 ) 1.9 3.5 Income tax (benefit) expense (0.4 ) 0.6 0.9 Income from equity method investees (0.3 ) (0.2 ) (0.2 ) Net (loss) income (20.5 ) 1.5 2.8 Net loss attributable to noncontrolling interest — 0.0 0.0 Net (loss) income attributable to Class A and B-1 common stockholders (20.5 )% 1.5 % 2.8 % Fiscal years ended February 3, 2024 January 28, 2023 January 29, 2022 (53 weeks) (52 weeks) (52 weeks) Operational Data: Comparable sales increase 1.8 % 4.5 % 18.9 % Total pet care centers (U.S. and Puerto Rico) at end of period 1,423 1,430 1,433 Total veterinarian practices at end of period 288 247 197 Fiscal 2023 (53 weeks) Compared with Fiscal 2022 (52 weeks) Net Sales and Comparable Sales Fiscal years ended (dollars in thousands) February 3, 2024 January 28, 2023 $ Change % Change Consumables $ 3,063,845 $ 2,859,602 $ 204,243 7.1 % Supplies and companion animals 2,209,865 2,370,913 (161,048 ) (6.8 %) Services and other 981,574 805,452 176,122 21.9 % Net sales $ 6,255,284 $ 6,035,967 $ 219,317 3.6 % Net sales increased $219.3 million, or 3.6%, to $6.26 billion in fiscal 2023 compared to net sales of $6.04 billion in fiscal 2022, driven by a 1.8% increase in our comparable sales and an increase of $116.6 million as a result of the 53rd week in fiscal 2023.
Adjusted EBITDA is not a substitute for net income (loss), the most comparable GAAP measure, and is subject to a number of limitations as a financial measure, so it should be used in conjunction with GAAP financial measures and not in isolation. There can be no assurances that we will not modify the presentation of Adjusted EBITDA in the future.
Adjusted EBITDA is not a substitute for net (loss) income, the most comparable GAAP measure, and is subject to a number of limitations as a financial measure, so it should be used in conjunction with GAAP financial measures and not in isolation. There can be no assurances that we will not modify the presentation of Adjusted EBITDA in the future.
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.
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 our commitment for naming rights to the baseball stadium.
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.
We perform our annual impairment test during the fourth quarter of each year or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Management has the option to first perform a qualitative assessment of its trade name asset to determine whether it is necessary to perform a quantitative impairment test.
Net cash provided by operating activities is impacted by our net income (loss) adjusted for certain non-cash items, including: depreciation, amortization, impairments and write-offs; amortization of debt discounts and issuance costs; deferred income taxes; equity-based compensation; impairments of intangible assets; other non-operating income; and the effect of changes in operating assets and liabilities.
Net cash provided by operating activities is impacted by our net (loss) income adjusted for certain non-cash items, including: depreciation, amortization, impairments and write-offs; amortization of debt discounts and issuance costs; deferred income taxes; equity-based compensation; impairments of goodwill and intangible assets; other non-operating (income) loss; and the effect of changes in operating assets and liabilities.
In December 2022, we amended our first lien term loan facility and our revolving credit facility to replace the LIBOR-based rate 48 with a SOFR-based rate as the interest rate benchmark. Please read the discussion under “Liquidity and Capital Resources—Sources of Liquidity” for further information.
In December 2022, we amended our first lien term loan facility and our revolving credit facility to replace the LIBOR-based rate with a SOFR-based rate as the interest rate benchmark. Please read the discussion under “Liquidity and Capital Resources—Sources of Liquidity” for further information.
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.
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. 56 Although other companies report their free cash flow, numerous methods exist for calculating a company’s free cash flow.
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.
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. 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.
How We Assess the Performance of Our Business In assessing our performance, we consider a variety of performance and financial measures including the following: Comparable Sales Comparable sales is an important measure throughout the retail industry and includes both retail and digital sales of products and services.
How We Assess the Performance of Our Business In assessing our performance, we consider a variety of performance and financial measures including the following: 47 Comparable Sales Comparable sales is an important measure throughout the retail industry and includes both retail and digital sales of products and services.
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.
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.
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.
Net sales are driven by comparable sales, new pet center locations, and expanded offerings. 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.
(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.
(4) We define net margin as net (loss) income 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 Loss Attributable to Noncontrolling Interest The noncontrolling interest represents 50% of the net loss of our veterinary joint venture, which is a variable interest entity for which we were deemed to be the primary beneficiary beginning in fiscal 2019 due to revisions made in the joint operating agreement.
Net Loss Attributable to Noncontrolling Interest The noncontrolling interest represents 50% of the net loss of our veterinary joint venture, which was a variable interest entity for which we were deemed to be the primary beneficiary beginning in fiscal 2019 due to revisions made in the joint operating agreement.
Our cost of sales includes the following types of expenses: • direct costs (net of vendor rebates, allowances, and discounts for products sold) including inbound freight charges; • shipping and handling costs associated with sales to customers; • freight costs associated with moving merchandise inventories; • inventory shrinkage costs and write-downs; • payroll costs of pet groomers, trainers, veterinarians, and other direct costs of services; and • costs associated with operating our distribution centers including payroll, occupancy costs and depreciation.
Our cost of sales includes the following types of expenses: • direct costs (net of vendor rebates, allowances, and discounts for products sold) including inbound freight charges; • shipping and handling costs associated with sales to customers; • freight costs associated with moving merchandise inventories; • inventory shrinkage costs and write-downs; • payroll and benefit costs of pet groomers, trainers, veterinarians, and other direct costs of services; and 49 • costs associated with operating our distribution centers including payroll and benefits, occupancy costs, and depreciation.
While these investments provided a key foundation and drive increased sales, ongoing performance of the business will depend on our ability to leverage our existing distribution network and pet care center locations for product delivery and fulfillment, including BOPUS, curbside pick-up, and same day delivery, and build upon and enhance these efforts.
While these investments provide a key foundation and help drive increased sales, ongoing performance of the business will depend on our ability to leverage our existing distribution network and pet care center locations for product delivery and fulfillment, including BOPUS, curbside pick-up, and same day delivery, and build upon and enhance these efforts.
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.
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.
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.
For more information refer to Note 9, “Fair Value Measurements,” to the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
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.
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.
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.
Our multicategory strategy integrates our digital assets with our nationwide physical footprint to meet the needs of pet parents who are looking for a single source for all their pet’s needs.
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.
Prior Year Discussion of Results and Comparisons For information on fiscal 2022 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 28, 2023.
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.
The increase in capital expenditures between fiscal 2022 and fiscal 2021 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.
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.
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 February 3, 2024 related to operating leases and debt, respectively.
We are unable to quantify the factors impacting gross profit rate described above due to the fact that such factors are based on input measures or qualitative information that do not lend themselves to quantification. Selling, General and Administrative Expenses SG&A expenses increased $41.0 million, or 1.9%, to $2.20 billion for fiscal 2022 compared to $2.16 billion for fiscal 2021.
We are unable to quantify the factors impacting gross profit rate described above due to the fact that such factors are based on input measures or qualitative information that do not lend themselves to quantification. Selling, General and Administrative Expenses SG&A expenses increased $110.1 million, or 5.0%, to $2.31 billion for fiscal 2023 compared to $2.20 billion for fiscal 2022.
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.
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 February 3, 2024, while others are considered future obligations. Our contractual obligations primarily consist of operating leases and long-term debt and related interest payments.
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).
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 February 3, 2024 would have affected pre-tax loss by $3.5 million in fiscal 2023. Vendor Allowances We receive various forms of consideration from our merchandise vendors (vendor allowances).
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.
In tandem with Petco Love, a life-changing independent nonprofit organization, we work with and support thousands of local animal welfare groups across the country and, through in-store adoption events, we have helped find homes for nearly 7 million animals.
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).
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 animals).
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.
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 $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.
Investing Activities Net cash used in investing activities was $207.4 million, $320.3 million, and $237.1 million for fiscal 2023, fiscal 2022, and fiscal 2021, respectively, and consisted primarily of capital expenditures supporting our growth and initiatives.
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.
Historically, adjustments to our vendor income deferral have not been material. A 10% difference in our vendor income deferred at February 3, 2024 would have affected pre-tax loss by $2.3 million in fiscal 2023. We have not made any material changes in the accounting methodology we use to assess vendor allowances during the past three fiscal years.
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.
We are increasingly linking our offerings with membership programs such as Vital Care Premier and pet health insurance in an effort to create deeper engagement with our customers, and with our Vital Care Core loyalty program members specifically, which members accounted for over 90% of transactions in fiscal 2023.
Other costs beginning in fiscal 2023 will include as incurred: restructuring costs and restructuring-related severance costs; legal reserves associated with significant, non-ordinary course legal or regulatory matters; and costs related to certain significant strategic transactions.
(3) Other costs include, as incurred: restructuring costs and restructuring-related severance costs; legal reserves associated with significant, non-ordinary course legal or regulatory matters; and costs related to certain significant strategic transactions.
The increase in services and other was due in part to the increase in new pets, growth in our membership offerings including Vital Care Premier and Vital Care Core, and growth in our grooming services and veterinary hospital business in which we now operate 247 veterinary hospitals – an increase of 50 over the prior year.
The increase in services and other was due to growth in our membership offerings including Vital Care Premier and Vital Care Core, and growth in our grooming services and veterinary business in which we now operate 288 veterinary hospitals – an increase of 41 over the prior year.
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.
Net Income (Loss) Attributable to Class A and B-1 Common Stockholders Net loss attributable to Class A and B-1 common stockholders was $(1,280.2) million for fiscal 2023 compared with a net income attributable to Class A and B-1 common stockholders of $90.8 million for fiscal 2022.
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.
All other key terms of the ABL Revolving Credit Facility remained unchanged. 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.
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.
Cash Flows The following table summarizes our consolidated cash flows: Fiscal years ended (dollars in thousands) February 3, 2024 January 28, 2023 January 29, 2022 (52 weeks) (52 weeks) (52 weeks) Total cash provided by (used in): Operating activities $ 215,719 $ 346,003 $ 358,215 Investing activities (207,445 ) (320,324 ) (237,083 ) Financing activities (85,352 ) (33,842 ) (18,782 ) Net (decrease) increase in cash, cash equivalents and restricted cash $ (77,078 ) $ (8,163 ) $ 102,350 57 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.
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.
Through our omnichannel ecosystem, we provide our customers with a comprehensive offering of products and services to fulfill their pets’ health and wellness needs through our more than 1,500 pet care centers in the U.S., Mexico, and Puerto Rico, including a growing network of 288 full service veterinary hospitals, our digital channel, and our flexible fulfillment options.
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.
These gains and losses related to remeasurements of the fair value of the Company's investment in Rover Group, Inc., which began after the consummation of its merger with a publicly traded special purpose acquisition company in fiscal 2021. In fiscal 2023, the Company sold its interest in Rover Group, Inc.
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.
As a percentage of net sales, SG&A expenses increased from 36.5% in fiscal 2022 to 37.0% in fiscal 2023. The increase in SG&A expenses period-over-period was to support our growth as we continue to invest in infrastructure and our people.
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”).
The table below reflects the calculation of Free Cash Flow for the periods presented: Fiscal years ended February 3, 2024 January 28, 2023 January 29, 2022 (dollars in thousands) (53 weeks) (52 weeks) (52 weeks) Net cash provided by operating activities $ 215,719 $ 346,003 $ 358,215 Cash paid for fixed assets (225,598 ) (278,020 ) (239,110 ) Free Cash Flow $ (9,879 ) $ 67,983 $ 119,105 Liquidity and Capital Resources Overview Our primary sources of liquidity are funds generated by operating activities and available capacity for borrowings on our secured asset-based revolving credit facility (the “ABL Revolving Credit Facility”).
If management concludes, based on assessment of relevant events, facts, and circumstances, that it is more likely than not that a reporting unit’s fair value is greater than its carrying value, no further impairment testing is required.
If management 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. 61 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.
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.
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.
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.
Income Tax (Benefit) Expense Our effective tax rate was 2.1% for fiscal 2023, resulting in income tax benefit of $27.6 million, compared to an effective tax rate of 28.0% and income tax expense of $35.3 million for fiscal 2022.
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.
Please read the discussion of these assets under “Critical Accounting Policies and Estimates.” Interest Expense Our interest expense in fiscal 2021 was primarily associated with a term loan facility, and a revolving credit facility.
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.
For more information regarding these activities, 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. 54 Other Non-Operating (Income) Loss Other non-operating income was $4.7 million and other non-operating loss was $12.7 million for fiscal 2023 and fiscal 2022, respectively.
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.
Significant assumptions used in the determination of fair value of the trade name generally include prospective financial information, growth rates, discount rates and comparable multiples from publicly traded companies in similar industries. An impairment charge is recorded for the amount by which the carrying amount of the trade name exceeds its fair value.
This is the primary focus of all our customer engagement efforts from digital, to performance marketing campaigns, to new product introductions, and to Petco partner cross- and up-selling activities in pet care centers. The ability to convert more of our customers to loyal, multi-channel shoppers will positively affect business performance.
This is the primary focus of our customer engagement efforts from digital, to performance marketing campaigns, to new product introductions, and to Petco partner cross- and up-selling activities in pet care centers.
The decrease in supplies and companion animals sales is due in part to a strong stimulus driven fiscal 2021 and a decrease in spending on certain non-essential items.
The decrease in supplies and companion animal sales is due to a decrease in spending on certain non-essential items.
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.
A 10% difference in our actual valuation reserve at February 3, 2024 would have affected pre-tax loss by $1.6 million in fiscal 2023. 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 60 reserve.
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.
Our e-commerce site and mobile app serve as hubs for pet parents to manage their pets’ health, wellness, and merchandise needs, while enabling them to shop wherever, whenever, and however they want. The full value of our ecosystem can be realized through our Vital Care Premier membership program.
In March 2023, the Company repaid $35.0 million on the First Lien Term Loan using existing cash on hand. The repayment was applied to remaining principal payments in order of scheduled payment date.
Principal payments are typically $4.25 million quarterly. In March 2023, May 2023 and August 2023, the Company repaid $35.0 million, $25.0 million and $15.0 million in principal, respectively, of the First Lien Term Loan using existing cash on hand. The repayments were applied to remaining principal payments in order of scheduled payment date.
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.
In fiscal 2023, pet care center merchandise revenue increased 1.0%, which partially offset the impact of lower discretionary purchasing in supplies and companion animals. Our e-commerce and digital sales increased 8.5% from fiscal 2022 to fiscal 2023, driven by strength in our digital pharmacy and repeat customers.
A long-lived asset is not recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition.
Long-lived assets are reviewed for impairment at the lowest level of identifiable cash flows, and are not recoverable if the carrying amount exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition.
Derivative Instruments 57 In November 2022, the Company entered into a series of interest rate cap agreements to limit the maximum interest on a portion of the Company’s variable-rate debt and decrease its exposure to interest rate variability when three-month SOFR as published by CME Group exceeds 4.5%.
Derivative Instruments In November 2022, the Company entered into a series of interest rate cap agreements to limit the maximum interest on a portion of the Company’s variable-rate debt and decrease its exposure to interest rate variability relating to three-month Term SOFR. The interest rate caps became effective December 30, 2022 and expire on December 31, 2024.
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.
A 10% change in our self-insurance reserves at February 3, 2024 would have affected pre-tax loss by $8.9 million in fiscal 2023. 62 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.
Income Tax Expense (Benefit) Income taxes consist of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for allowable credits, deductions, and the valuation allowance against deferred tax assets, as applicable.
Income Tax Expense (Benefit) Income taxes consist of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for allowable credits, deductions, and the valuation allowance against deferred tax assets, as applicable. 50 Income from Equity Method Investees Investments for which the Company exercises significant influence but does not have control are accounted for under the equity method.
These include third-party professional and legal fees and other integration-related costs that would not have otherwise been incurred as part of the Company’s operations.
These include third-party professional and legal fees and other integration-related costs that would not have otherwise been incurred as part of the Company’s operations. 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.
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. 45 Macroeconomic factors, including rising interest rates, inflationary pressures, supply chain constraints, global economic and geopolitical developments, and the prolonged COVID-19 pandemic have varying impacts on our results of operations, such as decreases in sales of discretionary items like supplies, that are difficult to isolate and quantify.
Macroeconomic factors, including rising interest rates, inflationary pressures, supply chain constraints, and global economic and geopolitical developments have had varying impacts on our results of operations, such as decreases in sales of discretionary items like supplies, that are difficult to isolate and quantify.
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.
The table below presents a reconciliation of Mexico joint venture net income to Mexico joint venture EBITDA: Fiscal years ended February 3, 2024 January 28, 2023 January 29, 2022 (dollars in thousands) (53 weeks) (52 weeks) (52 weeks) Net income $ 32,375 $ 24,757 $ 21,773 Depreciation 26,141 19,820 15,679 Income tax expense 11,449 9,409 11,390 Foreign currency loss (gain) 1,520 (268 ) (431 ) Interest expense, net 4,966 5,449 5,263 EBITDA $ 76,451 $ 59,167 $ 53,674 50% of EBITDA $ 38,226 $ 29,584 $ 26,837 (2) Acquisition-related integration costs include direct costs resulting from acquiring and integrating businesses.
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.
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.
Net cash provided by operating activities was $346.0 million in fiscal 2022 compared with net cash provided by operating activities of $358.2 million in fiscal 2021. The decrease in operating cash flow was due to lower operating income, higher interest payments, higher cash paid for payroll and fringe as well as payouts of prior year accrued incentive bonuses.
The decrease in operating cash flow was due to lower operating income, higher interest payments, higher cash paid for payroll and fringe as well as payouts of prior year accrued incentive bonuses. This was partially offset by lower cash paid for advertising and lower cash payments on operating leases due to the timing of rent payments.
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.
Capital expenditures by category during the periods set forth below are as follows: Fiscal years ended (dollars in thousands) February 3, 2024 January 28, 2023 January 29, 2022 New and existing pet care center locations $ 121,815 $ 146,432 $ 140,721 Digital and information technology 70,598 78,611 57,319 Supply chain and other 33,185 52,977 41,070 Total capital expenditures $ 225,598 $ 278,020 $ 239,110 Financing Activities Net cash used in financing activities was $85.4 million for fiscal 2023, compared with $33.8 million used in financing activities in fiscal 2022 and $18.8 million used in financing activities in fiscal 2021. 58 Financing cash flows in fiscal 2023 primarily consisted of $75.0 million in principal repayments on the term loan, borrowings and repayments under the ABL Revolving Credit Facility, and payments for tax withholdings on stock-based awards.
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 increase was primarily driven by higher interest rates on the First Lien Term Loan. For more information 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.
As of January 28, 2023, our purchase obligations and commitments were $353.2 million of which $294.1 million is considered short-term.
As of February 3, 2024, our purchase obligations and commitments were $349.0 million of which $281.1 million is considered short-term.
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.
Customer Pet Purchase Trends Our multi-channel ecosystem is designed to support our customers regardless of how customers choose to shop for their pet care needs. As we saw the major purchase trend shift and grow into areas like e-commerce, services, and veterinary care, we actively invested to build capabilities and offerings to effectively capitalize on the opportunity.
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.
In addition, other companies in our industry may define Adjusted EBITDA differently, limiting its usefulness as a comparative measure. 55 The table below reflects the calculation of Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented: Fiscal years ended February 3, 2024 January 28, 2023 January 29, 2022 (dollars in thousands) (53 weeks) (52 weeks) (52 weeks) Net (loss) income attributable to Class A and B-1 common stockholders $ (1,280,210 ) $ 90,801 $ 164,417 Interest expense, net 147,504 100,611 77,335 Income tax (benefit) expense (27,613 ) 35,347 53,473 Depreciation and amortization 200,782 193,828 172,431 Income from equity method investees (16,188 ) (12,976 ) (10,883 ) Loss on extinguishment and modification of debt 920 — 20,838 Goodwill impairment 1,222,524 — — Asset impairments and write offs 2,833 1,992 10,918 Equity-based compensation expense 81,859 60,784 49,265 Other non-operating (income) loss (4,727 ) 12,667 (34,497 ) Mexico joint venture EBITDA (1) 38,226 29,584 26,837 Acquisition-related integration costs (2) — 15,314 — Other costs (3) 35,193 2,817 18,235 Adjusted EBITDA $ 401,103 $ 530,769 $ 548,369 Net sales $ 6,255,284 $ 6,035,967 $ 5,807,149 Net margin (4) (20.5 )% 1.5 % 2.8 % Adjusted EBITDA Margin 6.4 % 8.8 % 9.4 % (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.
Our product offering leverages a broad, carefully curated assortment of owned brand 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 assortment of national, owned brand and exclusive merchandise, providing customers with a wide variety of nutritional options, including health-focused options free from artificial ingredients, complemented by a wide variety of pet care supplies and companion animals.
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.
Vital Care Premier memberships are at the top of our loyalty programs, followed by Vital Care Core and our perks programs that provide rewards for frequent purchasing. We strive to be a company that is improving millions of pet lives as well as the lives of pet parents and the partners who work for us.
Income from Equity Method Investees Investments for which the Company exercises significant influence but does not have control are accounted for under the equity method. Equity method investment activity is primarily related to a 50% joint venture with Grupo Gigante, S.A.B. de C.V. (the “Mexico joint venture”) to establish Petco locations in Mexico.
Equity method investment activity is primarily related to a 50% joint venture with Grupo Gigante, S.A.B. de C.V. (the “Mexico joint venture”) to establish Petco locations in Mexico. The Company’s share of the investee’s results is presented as either income or loss from equity method investees in the accompanying consolidated statements of operations.
(“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.
(“Petco”, the “Company”, “we”, “our” and “us”) is a pet health and wellness company focused on improving the lives of pets, pet parents, and our own partners.
The decline period-over-period was primarily driven by higher SG&A costs of $41.0 million, higher interest expense of $24.2 million, a $47.2 million change in the remeasurement of our investment in Rover Group, Inc. offset partially by a 20.8 million loss on debt extinguishment recorded in fiscal 2021.
The decline period-over-period was primarily driven by a goodwill impairment charge of $1,222.5 million, higher SG&A costs of $110.1 million, higher interest expense of $49.3 million, offset partially by a $17.4 million change in the remeasurement of our investment in Rover Group, Inc.
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.
Pet Industry Trends The U.S. pet care industry is large, serving millions of households with pets, and has exhibited steady growth driven by an increase in the pet population and trends in pet humanization and premiumization. Due to the essential, repeat nature of pet care, the industry has demonstrated resilience across economic cycles.
We are unable to quantify certain factors impacting sales described above due to the fact that such factors are based on input measures or qualitative information that do not lend themselves to quantification. Gross Profit Gross profit increased $0.5 million, or 0.0%, to $2.43 billion in fiscal 2022 compared to gross profit of $2.43 billion for fiscal 2021.
Service-related sales, which include veterinary hospitals, increased 15.3%, reflecting expansion and maturity of our veterinary hospital footprint and growth in our veterinary and grooming business. We are unable to quantify certain factors impacting sales described above due to the fact that such factors are based on input measures or qualitative information that do not lend themselves to quantification.
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.
Our liquidity as of February 3, 2024 was $572.0 million inclusive of cash and cash equivalents of $125.4 million and $446.6 million of availability on the ABL Revolving Credit Facility.
For more information regarding derivative instruments, refer to Note 9, “ Derivative Instruments ,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. 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.
The interest rate collars become effective on December 31, 2024 and expire on December 31, 2026. For more information regarding derivative instruments, refer to Note 8, “ Derivative Instruments ,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
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.
Gross Profit Gross profit decreased $73.3 million, or 3.0%, to $2.35 billion in fiscal 2023 compared to gross profit of $2.43 billion for fiscal 2022. As a percentage of sales, our gross profit rate was 37.6% for fiscal 2023 compared to 40.2% for fiscal 2022.
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.
The decrease in gross profit rate was primarily due to the mix impact of higher consumables sales and softer supplies and companion animal sales as well as investments made in bringing additional brands into our consumables assortment.
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.
This was partially offset by an increase in sales, effective management of accounts payable, and lower payouts of prior year accrued incentive bonuses. Net cash provided by operating activities was $346.0 million in fiscal 2022 compared with $358.2 million in fiscal 2021.
While we offer pet parents a full spectrum of product choices within our high standards of nutrition and quality, our assortment is differentially 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, we maintain a number of premium products to address ongoing humanization and premiumization trends in the market. We integrate our product offering with our services business which includes veterinary care, grooming and training.
Talent and Culture We see our Petco partners as the core to building a purpose-driven performance culture.
If sales of such products are not significant, we do not increase the average basket size of customers purchasing such products, or we are unsuccessful in transitioning such customers into higher margin products over time, then our profitability could be adversely affected. Talent and Culture We see our Petco partners as the core to building a purpose-driven performance culture.

… 63 more changes not shown on this page.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

5 edited+0 added−1 removed2 unchanged
Biggest changeWe 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.
Biggest changeWe 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 February 3, 2024, we had $1,595.3 million outstanding under the First Lien Term Loan and no amounts outstanding under the ABL Revolving Credit Facility.
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
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. 63
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.
For information regarding the cash flow hedge agreements that we entered into 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.
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.
Credit Risk As of February 3, 2024, our cash and cash equivalents were maintained at major financial institutions in the United States, and our current deposits are likely in excess of insured limits. We believe these institutions have sufficient assets and liquidity to conduct their operations in the ordinary course of business.
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.
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 February 3, 2024 would have increased annual cash interest in the aggregate by approximately $16.2 million.
Removed
As 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.

Other WOOF 10-K year-over-year comparisons