10-Q 1 woof-20240803.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 3, 2024

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-39878

 

Petco Health and Wellness Company, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

81-1005932

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

10850 Via Frontera

San Diego, California

92127

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (858) 453-7845

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Class A Common Stock, par value $0.001 per share

 

WOOF

 

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

The number of shares of the registrant’s Class A Common Stock outstanding as of September 6, 2024 was 236,566,841.

The number of shares of the registrant’s Class B-1 Common Stock outstanding as of September 6, 2024 was 37,790,781.

The number of shares of the registrant’s Class B-2 Common Stock outstanding as of September 6, 2024 was 37,790,781.

 

 


 

Table of Contents

 

 

 

Page

 

 

 

PART I.

FINANCIAL INFORMATION

4

 

 

 

Item 1.

Financial Statements (Unaudited)

4

 

Consolidated Balance Sheets

4

 

Consolidated Statements of Operations

5

 

Consolidated Statements of Comprehensive Loss

6

 

Consolidated Statements of Equity

7

 

Consolidated Statements of Cash Flows

8

 

Notes to Unaudited Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.

Controls and Procedures

27

 

 

 

PART II.

OTHER INFORMATION

28

 

 

 

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 3.

Defaults Upon Senior Securities

28

Item 4.

Mine Safety Disclosures

28

Item 5.

Other Information

28

Item 6.

Exhibits

29

Signatures

30

 

 

1


 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 as contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements that are not statements of historical fact, including, but not limited to, statements regarding: our expectations with respect to our revenue, expenses, profitability, and other operating results; our growth plans; our ability to compete effectively in the markets in which we participate; the execution on our transformation initiatives; and the impact of certain macroeconomic factors, including inflationary and interest rate pressures, consumer spending patterns, global supply chain constraints, and global economic and geopolitical developments, on our business. Forward-looking and other statements in this Form 10-Q may also address our progress, plans, and goals with respect to sustainability initiatives, and the inclusion of such statements is not an indication that these contents are necessarily material to investors or required to be disclosed in our filings with the U.S. Securities and Exchange Commission (the “SEC”). Such plans and goals may change, and statements regarding such plans and goals are not guarantees or promises that they will be met. In addition, historical, current, and forward-looking sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future.

Such forward-looking statements can generally be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “intends,” “will,” “shall,” “should,” “anticipates,” “opportunity,” “illustrative”, or the negative thereof or other variations thereon or comparable terminology. Although we believe that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to be correct or that any forward-looking results will occur or be realized. Nothing contained in this Form 10-Q is, or should be relied upon as, a promise or representation or warranty as to any future matter, including any matter in respect of our operations or business or financial condition. All forward-looking statements are based on current expectations and assumptions about future events that may or may not be correct or necessarily take place and that are by their nature subject to significant uncertainties and contingencies, many of which are outside of our control.

Forward-looking statements are subject to many risks, uncertainties and other factors that could cause actual results or events to differ materially from the potential results or events discussed in such forward-looking statements, including, without limitation, those identified in this Form 10-Q as well as the following: (i) increased competition (including from multi-channel retailers, mass and grocery retailers, and e-Commerce providers); (ii) reduced consumer demand for our products and/or services; (iii) our reliance on key vendors; (iv) our ability to attract and retain qualified employees; (v) risks arising from statutory, regulatory, and/or legal developments; (vi) macroeconomic pressures in the markets in which we operate, including inflation and prevailing interest rates; (vii) failure to effectively manage our costs; (viii) our reliance on our information technology systems; (ix) our ability to prevent or effectively respond to a data privacy or security breach; (x) our ability to effectively manage or integrate strategic ventures, alliances, or acquisitions and realize the anticipated benefits of such transactions; (xi) economic or regulatory developments that might affect our ability to provide attractive promotional financing; (xii) business interruptions and other supply chain issues; (xiii) catastrophic events, political tensions, conflicts and wars (such as the ongoing conflicts in Ukraine and the Middle East), health crises, and pandemics; (xiv) our ability to maintain positive brand perception and recognition; (xv) product safety and quality concerns; (xvi) changes to labor or employment laws or regulations; (xvii) our ability to effectively manage our real estate portfolio; (xviii) constraints in the capital markets or our vendor credit terms; (xix) changes in our credit ratings; (xx) impairments of the carrying value of our goodwill and other intangible assets; (xxi) our ability to successfully implement our operational adjustments, achieve the expected benefits of our cost action plans, and drive improved profitability; and (xxii) the other risks, uncertainties and other factors referred to under “Risk Factors” and identified elsewhere in this Form 10-Q and our other filings with the SEC. The occurrence of any such factors could significantly alter the results set forth in these statements.

We caution that the foregoing list of risks, uncertainties and other factors is not complete, and forward-looking statements speak only as of the date they are made. We undertake no duty to update publicly any such forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required by applicable law, regulation or other competent legal authority.

In addition, statements such as “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Form 10-Q. While we believe that information provides a reasonable basis for these statements, that information may be limited or

2


 

incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

 

3


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 

 

 

August 3,
2024

 

 

February 3,
2024

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

127,620

 

 

$

125,428

 

Receivables, less allowance for credit losses ($1,859 and $1,806, respectively)

 

 

47,035

 

 

 

44,369

 

Merchandise inventories, net

 

 

672,328

 

 

 

684,502

 

Prepaid expenses

 

 

59,758

 

 

 

58,615

 

Other current assets

 

 

35,152

 

 

 

38,830

 

Total current assets

 

 

941,893

 

 

 

951,744

 

Fixed assets

 

 

2,206,885

 

 

 

2,173,015

 

Less accumulated depreciation

 

 

(1,447,180

)

 

 

(1,356,648

)

Fixed assets, net

 

 

759,705

 

 

 

816,367

 

Operating lease right-of-use assets

 

 

1,368,740

 

 

 

1,384,050

 

Goodwill

 

 

980,064

 

 

 

980,297

 

Trade name

 

 

1,025,000

 

 

 

1,025,000

 

Other long-term assets

 

 

201,245

 

 

 

205,694

 

Total assets

 

$

5,276,647

 

 

$

5,363,152

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and book overdrafts

 

$

474,496

 

 

$

485,131

 

Accrued salaries and employee benefits

 

 

135,235

 

 

 

101,265

 

Accrued expenses and other liabilities

 

 

196,518

 

 

 

200,278

 

Current portion of operating lease liabilities

 

 

306,507

 

 

 

310,507

 

Current portion of long-term debt and other lease liabilities

 

 

5,095

 

 

 

15,962

 

Total current liabilities

 

 

1,117,851

 

 

 

1,113,143

 

Senior secured credit facilities, net, excluding current portion

 

 

1,575,630

 

 

 

1,576,223

 

Operating lease liabilities, excluding current portion

 

 

1,104,709

 

 

 

1,116,615

 

Deferred taxes, net

 

 

219,574

 

 

 

251,629

 

Other long-term liabilities

 

 

127,400

 

 

 

121,113

 

Total liabilities

 

 

4,145,164

 

 

 

4,178,723

 

Commitments and contingencies (Notes 3 and 7)

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Class A common stock, $0.001 par value: Authorized - 1.0 billion shares;
    Issued and outstanding -
235.8 million and 231.2 million shares, respectively

 

 

236

 

 

 

231

 

Class B-1 common stock, $0.001 par value: Authorized - 75.0 million shares;
    Issued and outstanding -
37.8 million shares

 

 

38

 

 

 

38

 

Class B-2 common stock, $0.000001 par value: Authorized - 75.0 million shares;
    Issued and outstanding -
37.8 million shares

 

 

 

 

 

 

Preferred stock, $0.001 par value: Authorized - 25.0 million shares;
    Issued and outstanding -
none

 

 

 

 

 

 

Additional paid-in-capital

 

 

2,260,381

 

 

 

2,229,582

 

Accumulated deficit

 

 

(1,118,549

)

 

 

(1,047,243

)

Accumulated other comprehensive (loss) income

 

 

(10,623

)

 

 

1,821

 

Total stockholders’ equity

 

 

1,131,483

 

 

 

1,184,429

 

Total liabilities and stockholders’ equity

 

$

5,276,647

 

 

$

5,363,152

 

 

See accompanying notes to consolidated financial statements.

4


 

PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts) (Unaudited)

 

 

 

 

Thirteen weeks ended

 

 

Twenty-six weeks ended

 

 

 

August 3,
2024

 

 

July 29,
2023

 

 

August 3,
2024

 

 

July 29,
2023

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

1,263,749

 

 

$

1,278,598

 

 

$

2,543,480

 

 

$

2,595,194

 

Services and other

 

 

260,006

 

 

 

252,136

 

 

 

509,415

 

 

 

491,448

 

Total net sales

 

 

1,523,755

 

 

 

1,530,734

 

 

 

3,052,895

 

 

 

3,086,642

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

787,103

 

 

 

789,091

 

 

 

1,579,825

 

 

 

1,594,850

 

Services and other

 

 

155,927

 

 

 

148,639

 

 

 

313,685

 

 

 

294,306

 

Total cost of sales

 

 

943,030

 

 

 

937,730

 

 

 

1,893,510

 

 

 

1,889,156

 

Gross profit

 

 

580,725

 

 

 

593,004

 

 

 

1,159,385

 

 

 

1,197,486

 

Selling, general and administrative expenses

 

 

578,257

 

 

 

568,967

 

 

 

1,173,699

 

 

 

1,145,832

 

Operating income (loss)

 

 

2,468

 

 

 

24,037

 

 

 

(14,314

)

 

 

51,654

 

Interest income

 

 

(672

)

 

 

(764

)

 

 

(1,090

)

 

 

(1,940

)

Interest expense

 

 

36,805

 

 

 

37,493

 

 

 

73,622

 

 

 

74,694

 

Loss on partial extinguishment of debt

 

 

 

 

 

305

 

 

 

 

 

 

746

 

Other non-operating (income) loss

 

 

 

 

 

(1,795

)

 

 

2,665

 

 

 

(4,614

)

Loss before income taxes and income
   from equity method investees

 

 

(33,665

)

 

 

(11,202

)

 

 

(89,511

)

 

 

(17,232

)

Income tax (benefit) expense

 

 

(4,651

)

 

 

6,732

 

 

 

(9,128

)

 

 

5,724

 

Income from equity method investees

 

 

(4,191

)

 

 

(3,328

)

 

 

(9,077

)

 

 

(6,458

)

Net loss attributable to Class A and B-1
   common stockholders

 

$

(24,823

)

 

$

(14,606

)

 

$

(71,306

)

 

$

(16,498

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per Class A and B-1 common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.09

)

 

$

(0.05

)

 

$

(0.26

)

 

$

(0.06

)

Diluted

 

$

(0.09

)

 

$

(0.05

)

 

$

(0.26

)

 

$

(0.06

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing net
    loss per Class A and B-1 common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

273,074

 

 

 

267,163

 

 

 

271,421

 

 

 

266,824

 

Diluted

 

 

273,074

 

 

 

267,163

 

 

 

271,421

 

 

 

266,824

 

 

 

See accompanying notes to consolidated financial statements.

5


 

PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands) (Unaudited)

 

 

 

Thirteen weeks ended

 

 

Twenty-six weeks ended

 

 

 

August 3,
2024

 

 

July 29,
2023

 

 

August 3,
2024

 

 

July 29,
2023

 

Net loss attributable to Class A and B-1
   common stockholders

 

$

(24,823

)

 

$

(14,606

)

 

$

(71,306

)

 

$

(16,498

)

Other comprehensive (loss) gain, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(10,921

)

 

 

1,107

 

 

 

(9,256

)

 

 

2,164

 

Unrealized (loss) gain on derivatives

 

 

(7,848

)

 

 

3,915

 

 

 

(1,476

)

 

 

2,931

 

(Gains) losses on derivatives reclassified to income

 

 

(862

)

 

 

361

 

 

 

(1,712

)

 

 

794

 

Total other comprehensive (loss) gain, net of tax

 

 

(19,631

)

 

 

5,383

 

 

 

(12,444

)

 

 

5,889

 

Comprehensive loss attributable to Class A and
   B-1 common stockholders

 

$

(44,454

)

 

$

(9,223

)

 

$

(83,750

)

 

$

(10,609

)

 

See accompanying notes to consolidated financial statements.

6


 

PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands) (Unaudited)

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class
A
(shares)

 

 

Class
B-1
(shares)

 

 

Class
B-2
(shares)

 

 

Amount

 

 

Additional paid-in capital

 

 

Accumulated
deficit

 

 

Accumulated
other
comprehensive
income (loss)

 

 

Total
stockholders’
equity

 

Balance at February 3, 2024

 

 

231,156

 

 

 

37,791

 

 

 

37,791

 

 

$

269

 

 

$

2,229,582

 

 

$

(1,047,243

)

 

$

1,821

 

 

$

1,184,429

 

Equity-based compensation expense
   (Note 6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17,451

 

 

 

 

 

 

 

 

 

17,451

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(46,483

)

 

 

 

 

 

(46,483

)

Foreign currency translation
   adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,665

 

 

 

1,665

 

Unrealized gain on derivatives (Note 4),
   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,372

 

 

 

6,372

 

Gains on derivatives reclassified to
   income (Note 4), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(850

)

 

 

(850

)

Issuance of common stock,
   net of tax withholdings

 

 

1,793

 

 

 

 

 

 

 

 

 

2

 

 

 

(277

)

 

 

 

 

 

 

 

 

(275

)

Balance at May 4, 2024

 

 

232,949

 

 

 

37,791

 

 

 

37,791

 

 

$

271

 

 

$

2,246,756

 

 

$

(1,093,726

)

 

$

9,008

 

 

$

1,162,309

 

Equity-based compensation expense
   (Note 6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,879

 

 

 

 

 

 

 

 

 

11,879

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24,823

)

 

 

 

 

 

(24,823

)

Foreign currency translation
   adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,921

)

 

 

(10,921

)

Unrealized loss on derivatives (Note 4),
   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,848

)

 

 

(7,848

)

Gains on derivatives reclassified to
   income (Note 4), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(862

)

 

 

(862

)

Issuance of common stock,
   net of tax withholdings

 

 

2,878

 

 

 

 

 

 

 

 

 

3

 

 

 

1,746

 

 

 

 

 

 

 

 

 

1,749

 

Balance at August 3, 2024

 

 

235,827

 

 

 

37,791

 

 

 

37,791

 

 

$

274

 

 

$

2,260,381

 

 

$

(1,118,549

)

 

$

(10,623

)

 

$

1,131,483

 

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class
A
(shares)

 

 

Class
B-1
(shares)

 

 

Class
B-2
(shares)

 

 

Amount

 

 

Additional paid-in capital

 

 

Retained earnings

 

 

Accumulated
other
comprehensive
(loss) income

 

 

Total
stockholders’
equity

 

Balance at January 28, 2023

 

 

228,338

 

 

 

37,791

 

 

 

37,791

 

 

$

266

 

 

$

2,152,342

 

 

$

232,967

 

 

$

(4,098

)

 

$

2,381,477

 

Equity-based compensation expense
   (Note 6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,282

 

 

 

 

 

 

 

 

 

22,282

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,892

)

 

 

 

 

 

(1,892

)

Foreign currency translation
   adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,057

 

 

 

1,057

 

Unrealized loss on derivatives (Note 4),
   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(984

)

 

 

(984

)

Losses on derivatives reclassified to
   income (Note 4), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

433

 

 

 

433

 

Issuance of common stock,
   net of tax withholdings

 

 

727

 

 

 

 

 

 

 

 

 

1

 

 

 

(1,254

)

 

 

 

 

 

 

 

 

(1,253

)

Balance at April 29, 2023

 

 

229,065

 

 

 

37,791

 

 

 

37,791

 

 

$

267

 

 

$

2,173,370

 

 

$

231,075

 

 

$

(3,592

)

 

$

2,401,120

 

Equity-based compensation expense
   (Note 6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24,322

 

 

 

 

 

 

 

 

 

24,322

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,606

)

 

 

 

 

 

(14,606

)

Foreign currency translation
   adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,107

 

 

 

1,107

 

Unrealized gain on derivatives (Note 4),
   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,915

 

 

 

3,915

 

Losses on derivatives reclassified to
   income (Note 4), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

361

 

 

 

361

 

Issuance of common stock,
   net of tax withholdings

 

 

761

 

 

 

 

 

 

 

 

 

1

 

 

 

(1,457

)

 

 

 

 

 

 

 

 

(1,456

)

Balance at July 29, 2023

 

 

229,826

 

 

 

37,791

 

 

 

37,791

 

 

$

268

 

 

$

2,196,235

 

 

$

216,470

 

 

$

1,791

 

 

$

2,414,764

 

 

 

See accompanying notes to consolidated financial statements.

7


 

PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

 

 

Twenty-six weeks ended

 

 

 

August 3,
2024

 

 

July 29,
2023

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(71,306

)

 

$

(16,498

)

Adjustments to reconcile net loss to net cash provided by operating
   activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

99,305

 

 

 

97,919

 

Amortization of debt discounts and issuance costs

 

 

2,435

 

 

 

2,446

 

Provision for deferred taxes

 

 

(27,782

)

 

 

(11,002

)

Equity-based compensation

 

 

29,348

 

 

 

46,248

 

Impairments, write-offs and losses on sale of fixed and other assets

 

 

7,069

 

 

 

1,035

 

Loss on partial extinguishment of debt

 

 

 

 

 

746

 

Income from equity method investees

 

 

(9,077

)

 

 

(6,458

)

Amounts reclassified out of accumulated other comprehensive (loss) income

 

 

(2,274

)

 

 

1,055

 

Non-cash operating lease costs

 

 

207,605

 

 

 

211,576

 

Other non-operating loss (income)

 

 

2,665

 

 

 

(4,614

)

Changes in assets and liabilities:

 

 

 

 

 

 

Receivables

 

 

(2,083

)

 

 

(16,679

)

Merchandise inventories

 

 

11,769

 

 

 

(23,011

)

Prepaid expenses and other assets

 

 

(7,166

)

 

 

(14,237

)

Accounts payable and book overdrafts

 

 

(9,644

)

 

 

97,062

 

Accrued salaries and employee benefits

 

 

34,591

 

 

 

1,221

 

Accrued expenses and other liabilities

 

 

3,015

 

 

 

(1,238

)

Operating lease liabilities

 

 

(209,738

)

 

 

(232,518

)

Other long-term liabilities

 

 

2,224

 

 

 

1,212

 

Net cash provided by operating activities

 

 

60,956

 

 

 

134,265

 

Cash flows from investing activities:

 

 

 

 

 

 

Cash paid for fixed assets

 

 

(60,029

)

 

 

(114,023

)

Cash paid for acquisitions, net of cash acquired

 

 

(259

)

 

 

(2,040

)

Proceeds from investment

 

 

998

 

 

 

10,248

 

Proceeds from sale of assets

 

 

1,019

 

 

 

 

Cash received from partial surrender of officers' life insurance

 

 

206

 

 

 

 

Net cash used in investing activities

 

 

(58,065

)

 

 

(105,815

)

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings under long-term debt agreements

 

 

201,000

 

 

 

 

Repayments of long-term debt

 

 

(201,000

)

 

 

(60,000

)

Debt refinancing costs

 

 

(3,028

)

 

 

 

Payments for finance lease liabilities

 

 

(3,528

)

 

 

(3,349

)

Proceeds from employee stock purchase plan and stock option exercises

 

 

1,630

 

 

 

2,454

 

Tax withholdings on stock-based awards

 

 

(3,468

)

 

 

(4,873

)

Proceeds from issuance of common stock

 

 

2,500

 

 

 

 

Net cash used in financing activities

 

 

(5,894

)

 

 

(65,768

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(3,003

)

 

 

(37,318

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

136,649

 

 

 

213,727

 

Cash, cash equivalents and restricted cash at end of period

 

$

133,646

 

 

$

176,409

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

Interest paid, net

 

$

69,399

 

 

$

72,005

 

Income taxes paid

 

$

15,581

 

 

$

27,423

 

Supplemental non-cash investing and financing activities disclosure:

 

 

 

 

 

 

Accounts payable and accrued expenses for capital expenditures

 

$

15,684

 

 

$

30,336

 

 

See accompanying notes to consolidated financial statements.

8


 

PETCO HEALTH AND WELLNESS COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

Petco Health and Wellness Company, Inc. (together with its consolidated subsidiaries, the “Company”) is a pet health and wellness company focused on improving the lives of pets, pet parents, and its own partners. The Company manages its business as one reportable operating segment.

In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary for a fair presentation as prescribed by accounting principles generally accepted in the United States (“GAAP”). All adjustments were comprised of normal recurring adjustments, except as noted in these Notes to Consolidated Financial Statements.

There have been no significant changes from the significant accounting policies disclosed in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2024.

The accompanying consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Interim financial results are not necessarily indicative of results anticipated for the full year. The accompanying consolidated financial statements and these Notes to Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2024, from which the prior year balance sheet information herein was derived.

Use of Estimates

The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates are based on information that is currently available and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.

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 the three-month Secured Overnight Financing Rate as published by CME Group ("Term SOFR"). The interest rate caps became effective December 30, 2022 and expire on December 31, 2024. The interest rate caps are accounted for as cash flow hedges, and changes in the fair value of the interest rate caps are reported as a component of accumulated other comprehensive income (loss) ("AOCI").

In March 2023, the Company entered into an interest rate collar agreement 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 collar became effective March 31, 2023 and expires on March 31, 2026.

In June 2023, the Company entered into an interest rate collar agreement 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 collar became effective September 30, 2023 and expires on December 31, 2026.

9


 

In December 2023, the Company entered into an interest rate collar agreement 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 collar becomes effective December 31, 2024 and expires on December 31, 2026.

In March 2024, the Company entered into two interest rate collar 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 collars become effective on December 31, 2024 and expire on December 31, 2026.

The interest rate collars are accounted for as cash flow hedges, and changes in the fair value of the interest rate collars are reported as a component of AOCI.

In August 2024, the Company entered into an interest rate swap agreement to fix the interest rate 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 swap becomes effective September 30, 2024 and expires on December 31, 2026.

Cash and Cash Equivalents

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the consolidated balance sheets to the total amounts reported in the consolidated statements of cash flows (in thousands):

 

 

 

August 3,
2024

 

 

February 3,
2024

 

Cash and cash equivalents

 

$

127,620

 

 

$

125,428

 

Restricted cash included in other current assets

 

 

6,026

 

 

 

11,221

 

Total cash, cash equivalents and restricted cash in
   the statement of cash flows

 

$

133,646

 

 

$

136,649

 

 

2. Revenue Recognition

Net sales by product type and services were as follows (in thousands):

 

 

Thirteen weeks ended

 

 

Twenty-six weeks ended

 

 

August 3,
2024

 

 

July 29,
2023

 

 

August 3,
2024

 

 

July 29,
2023

 

Consumables

$

744,766

 

 

$

734,077

 

 

$

1,508,740

 

 

$

1,497,128

 

Supplies and companion animals

 

518,983

 

 

 

544,521

 

 

 

1,034,740

 

 

 

1,098,066

 

Services and other

 

260,006

 

 

 

252,136

 

 

 

509,415

 

 

 

491,448

 

Net sales

$

1,523,755

 

 

$

1,530,734

 

 

$

3,052,895

 

 

$

3,086,642

 

 

3. Senior Secured Credit Facilities

On March 4, 2021, the Company entered into a $1,700.0 million secured term loan facility maturing on March 4, 2028 (the “First Lien Term Loan”) and a secured asset-based revolving credit facility with availability of up to $500.0 million, subject to a borrowing base, originally maturing on March 4, 2026 (as amended from time to time, the “ABL Revolving Credit Facility”). In March 2024, the Company amended the ABL Revolving Credit Facility, which now consists of two tranches, to increase its total availability from $500.0 million to $581.0 million and extend the maturity on a portion of this availability. The first tranche has availability of up to $35.0 million, subject to a borrowing base, maturing on March 4, 2026. The second tranche has availability of up to $546.0 million, subject to a borrowing base, maturing on March 29, 2029. Interest on the ABL Revolving Credit Facility is now

10


 

based on, at the Company's option, either the base rate subject to a 1% floor, or Term SOFR subject to a floor of 0%, plus an applicable margin. All other key terms of the ABL Revolving Credit Facility remained unchanged.

As of August 3, 2024, the Company was in compliance with its covenants under the First Lien Term Loan and the ABL Revolving Credit Facility.

Term Loan Facilities

Interest on the First Lien Term Loan is based on, at the Company’s option, either a base rate or Term SOFR plus the credit spread adjustment recommended by the Alternative Reference Rates Committee ("Adjusted Term SOFR"), subject to a 0.75% floor, payable upon maturity of the SOFR contract, in either case plus the applicable rate. 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 normally $4.25 million quarterly.

The Company voluntarily repaid $35.0 million and $25.0 million of the principal of the First Lien Term Loan using existing cash on hand in March 2023 and May 2023, respectively. The repayments were applied to the remaining principal payments in order of scheduled payment date and, as a result, the entire remaining balance was included in senior secured credit facilities, net, excluding current portion in the consolidated balance sheets as of August 3, 2024 and February 3, 2024. The Company accounted for the repayments as partial extinguishments and recognized losses on debt extinguishment of $0.3 million and $0.7 million during the thirteen and twenty-six week periods ended July 29, 2023, respectively.

As of August 3, 2024, the outstanding principal balance of the First Lien Term Loan was $1,595.3 million ($1,580.5 million, net of the unamortized discount and debt issuance costs). As of February 3, 2024, the outstanding principal balance of the First Lien Term Loan was $1,595.3 million ($1,578.6 million, net of the unamortized discount and debt issuance costs). The weighted average interest rate on the borrowings outstanding was 9.0% and 9.0% as of August 3, 2024 and February 3, 2024, respectively. Debt issuance costs are being amortized over the contractual term to interest expense using the effective interest rate in effect at issuance. As of August 3, 2024 and February 3, 2024, the estimated fair value of the First Lien Term Loan was approximately $1,451.7 million and $1,497.6 million, respectively, based upon Level 2 fair value hierarchy inputs.

Revolving Credit Facilities

In March 2024, the Company amended the ABL Revolving Credit Facility to increase its total availability and extend the maturity on a portion of the availability. Fees of $3.0 million relating to the Company’s entry into the amendment were capitalized as debt issuance costs. These fees consisted of arranger fees and other third-party expenses. The unamortized portion of the debt issuance costs of the ABL Revolving Credit Facility previously capitalized is being amortized over the amended contractual term.

As of August 3, 2024 and February 3, 2024, no amounts were outstanding under the ABL Revolving Credit Facility. As of August 3, 2024, $527.6 million was available under the ABL Revolving Credit Facility, which 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. As of August 3, 2024 and February 3, 2024, unamortized debt issuance costs of $4.9 million and $2.4 million, respectively, relating to the ABL Revolving Credit Facility were outstanding and were being amortized using the straight-line method over the remaining term of the agreement.

The ABL Revolving Credit Facility has availability up to $581.0 million and a $150.0 million letter of credit sub-facility. The