Petco Health and Wellness Company, Inc. (WOOF) Earnings Call Transcript & Summary

Good morning. Thank you for joining us. For those who's first time, this is their first fireside chat, welcome to the Goldman Sachs 28th Annual Global Retailing Conference. I'm Kate McShane. I'm the Hardlines, Broadlines and Grocery analyst here at the firm. It's my pleasure to introduce the members of the management team for Petco Health and Wellness, and I'll also be moderating our fireside chat. Petco is a health and wellness company focused on the complete requirements of pets and pet parents with more than 1,400 stores. Over the past 3 years, the company has transformed its business model from a traditional retailer of pet products to a fully integrated digital focused provider of pet health and wellness offerings. Today, we have with us Ron Coughlin, Chairman and Chief Executive Officer of Petco. Ron joined the company as CEO in 2018 and has more than 25 years of experience in consumer products and technology. We have also with us Brian LaRose, Chief Financial Officer of the company, who was just named Chief Financial Officer, actually within the last month or so. So congratulations. And thank you, Ron and Brian, for joining us today. I'm going to turn the presentation over to Ron, who's going to run through a few slides, and then we'll open it up for the fireside chat.

Awesome. Thank you, Kate, and Brian will pull that up as I start. So first of all, thank you for having us Kate, and thank you all the investors for joining us today. We're excited to be here and we join you today with confidence as well as excitement about the future of Petco. I'm going to share a brief overview today on Petco, and then we will leave plenty of time for Q&A. Before I start, I was told to say that we included a safe harbor statement, which I will not read and non-GAAP reconciliations and presentation posted to the Events section of our website. All right. Now that we're done with that [ thrilling ] page, can we shift to the next one. So I have to start with our team because the team has been a big part of the story. And if you think about a house, in many ways, we took Petco down to the studs. It had been a growth company for years. But however, in '16, '17, '18, that growth stalled, and it needed to be retooled, and that's what this team has come in and do. What you see is folks from Target, folks from Walmart, folks from Restoration Hardware, HP, PepsiCo, Best Buy. So we brought in world-class talent and we really retooled Petco from start to finish. Whether it's the data that we use, whether it's the processes that we deploy, across the organization, we've really retooled Petco. And as a result, the results have come along. And so we said that we would grow and we grew 20% this last quarter. 30% on a 2-year basis. We said we would gain share and we gained share, including the report that I got this week covering July. So we've continued to gain share across the areas where we focused. We said our value proposition would resonate with customers. We're the only pet partner who can provide all of the pet's needs and 50% of pet parents say that's what they're looking for. And we added 1 million customers in the last quarter, significantly more than our key online competitor. If we look to the next page, we operate in an absolutely incredible category. Pet has always been known as being a fantastic category. But now it's an even better category, with 7% projected CAGR into 2025. And that category has shown resilience for years and years. Within that category, we are the only integrated ecosystem across products, services, veterinary care and now a membership program. Our merchandise is differentiated, whether it's owned brands or exclusive brands, 50% of our products, it can't get in other places, and that gives us insulation versus key competitors. Our pet care centers have turned into strategic advantages, whether that because there are services centers or whether it's because they're fulfillment centers. Over 83% of our e-commerce orders get fulfilled through our pet care centers. That means they are faster to the customer and lower cost than online competitors. We've scaled our digital platform with 150% revenue growth on a 2-year stack. Importantly, our e-commerce business was growing roughly 30% prior to COVID. All the replatforming we did in '18, '19 was paying dividends even before COVID, and then we caught the wave of COVID. We're mix shifting to services, including the fastest vet build-out in history. We're putting down 72 vets this year, and we are on track to deliver that, and vet is ahead of our financial projections. Wherever we put a vet, not only do we get the vet revenue, but we're seeing a 4- to 5-point lift in our center store sales. And then one of the areas we're focused on is recurring revenue. Our recurring revenue was up 60% in the quarter and recurring revenue customer base up 50%. That's behind programs like PupBox that we announced expansion of this year, inclusive of Vital Care, the industry's first end-to-end care for -- membership program for pets. Our customer base is 22.5 active customers. And as I said earlier, we added 1 million net new in Q2, and we've continued to add in prior quarters. All of those capabilities and strategic focus areas are delivering fantastic results. 20% growth on a 1-year comp, 30% on a 2 year. It's our 11th consecutive quarter of growth. In Q2, we had 19% top line revenue growth, 19% bottom line, and we raised our guidance in Q1, and we raised our guidance again in Q2. Next page. If you look at the ecosystem, we are the only company in the industry that has this complete ecosystem. As I said earlier, 50% of pet parents are saying they want a one-stop shop. They want to stop going 1 place for food, 1 place for grooming, 1 place for training and another place for veterinary care. We bring it all together. We have vet hospitals, vet clinics and TeleVet. We have grooming. We have training. We have own brands. We have the best food brands in the category. We have supplies, and we bring that to life in an omnichannel fashion. If you look at 11:00 on this page, Vital Care, it is the industry's first membership program where you get your checkups, your vaccinations, discounts on grooming and products. We are over 100,000 members today, and we see that scaling well into the future and being a sticky glue to our offer that nobody, nobody can compete with. If you go to the next page, just to bring that to life a little bit, if you look at the independents. Yes, they have premium products, but they don't have the developed services. They don't have the veterinary and they can't put it all together in terms of holistic membership. If you look at pet specialty, in essence, our key pet specialty competitor, they spun out their vets. They don't have a lot of the high-end foods because they don't have the nutrition capabilities. Mass and grocery definitionally don't have the services capabilities nor the high-end products. And online competitors definitionally don't have the services. If you take a look at vet, it's a $35 billion TAM. The TeleVet or the online vet is roughly $100 million of that $35 billion TAM. So we are running into open field in terms of solving this customer need, 50% customers looking for a one-stop shop. Next page. We've developed a very powerful, compelling value proposition. We are the only company focused on health and wellness with the health and wellness positioning. We got rid of artificial ingredients. We got rid of shock collars. We got rid of rawhide chews. We're the only player that's doing that. We have omnichannel, 39% of customers say they want to shop omnichannel. And we firmly believe we are best positioned to win that customer. And if you look on the right, we're gaining new customers. We have 4 million multichannel customers, which means they might shop for food in brick-and-mortar but also shop digitally, they might add on a grooming, they might add on a vet. So our multichannel customers have between 2x and 7x higher revenue than a single channel customer. So we're driving folks to become multichannel customers, and we're seeing double-digit growth in our multichannel customers. And I talked earlier about our recurring revenue. Next page from a financial standpoint. We had strong momentum coming into 2020 with 6% growth prior to COVID and gaining share. That did accelerate during the pandemic and favorable dynamics of adding new pets, 11 million new pets in 2020. I call that the furry annuity because they're going to need to get fed, they're going to need groomed. They're going to need to get veterinary care for the next decade, and that's going to power growth. All of this has translated into customer acquisition and revenue growth. We had record revenue growth of $1.4 billion, up 19% and a 20% comp growth or 30% on a 2-year stack last quarter. It translated to bottom line growth with adjusted EBITDA up 19% even as we invested in future growth areas like marketing as well as our people. We're very proud to say we had double-digit growth in our average wage rate. Gross profit increased about 13% with a softening in gross margin consistent with our expectations. That was primarily driven by COVID-19 dynamics from the prior year, where we saw higher supplies mix. In year 1, people buy more supplies, crates, et cetera. In year 2, that shifts more towards food. Last year in the middle of the breakout of COVID, services were shut down or impinged upon. So as our services rescale, that provides a favorable overlap that has a mix impact. To be clear, any mix shift impact on gross margin from grooming and training services is really a P&L geography story because from an EBITDA margin standpoint, they're similar to average Petco with labor and cost of sales. We also had an exceptional consumable second quarter as spend shifts towards consumables in year 2 of an animal's life. Consumables is a fantastic category with high stickiness, so that's good for our business. Beyond that, there were some pandemic-driven increases in supply chain, which are going to be more short term in nature. As we look into H2 and 2022, we maintain confidence and excitement about what we're seeing and the strength of our model. If we turn the page. So I'll sign off with this. There's lots of companies, every company talks about their purpose. There's not many companies and none in our category whose purpose is about improving lives, pet lives, pet parent lives and the lives of folks who work at Petco. We save 400,000 pet lives from euthanasia every single year. We support cancer research. And just last month, we announced 1 million vaccines that we're partnering with Merck to give away for free to shelters around the country to save and improve pet lives. This is foundational to who we are and how we operate. And with that, back to you, Kate.

Okay. Great. Thank you for that introduction. We're going to kick off the chat, I think, with the questions that we get the most from investors, I think this goes all the way back to when you were going public not too long ago. But there have been 2 pretty big changes going on in your story. First is just the change in the industry as a result of the pandemic. And kind of what you walked through in the presentation about who Petco is today versus who you were in the past. So if we could maybe just start with the industry growth piece. We all know there's been a record amount of pet adoptions, which has resulted in the installed base being much bigger. So I guess the first question is, how does this bigger installed base change the trajectory of the industry growth? And what are you currently seeing with regards to pet adoptions today?

Yes. So I'll start and Brian can add color or anything I miss. So from an industry growth standpoint, as I said, we had 11 million new pets in 2020. I equate it with the baby boom, right? If you think about what the baby boom did across the American economy, it had a significant, significant impact that was lasting. And I think that the pet boom of 2020 will be similar. We saw elevated adoptions. We continue to see backlogs at breeders as breeders try to catch up. And we see that actually with our companion animal business where we're just trying to catch up to demand. So there is significant pent-up demand. If you look at the data, 65% of millennials say they plan on getting a pet in the next 5 years, and 30% say they plan on getting one in the next year. So we see that continuing. What we now know is a lot of the pets went to millennials and Gen Zers. And those folks spend more than prior generations. So we see that as a positive on spend per pet from a long-term basis. Anything I missed on the category piece, Brian?

Not on the category piece. Well, other than when you look at the TAM and the size of the category, it's not a one size fit all -- fits all, Kate. There are -- where we are well positioned are in the segments of the category and of the market that are growing the fastest. And if you go back to that slide Ron shared about how we stack up versus competition, there's nobody else positioned across the ecosystem, particularly in the high-growth categories like we are.

Yes. To me, the most emblematic categories, subcategories are fresh food, fresh frozen, which is predicted to go from $1 billion to $5 billion roughly depending on who's predicting it or our Reddy brand, which think about a puffer vest, right? If a millennial is walking down the street with a puffer vest, guess what? Their boxer has a puffer vest too and those Reddy puffer vests are flying off the shelves. So that's the category piece. You want to talk about -- me to talk about the Petco kind of regeneration or?

Yes, I'd love that. And specifically, because I know there's a whole list of things that you've been working on for the last 3 years. But if you had to pinpoint one that you think has been like the linchpin in bringing Petco to be what it is today or what you're most proud of, which one would it be?

People. People. When you bring in new people, let's take our focus on 2, the Head of New Stores and the Head of Digital. They basically took the business down to the studs, changed the data, changed the processes. Every single part of one of our pet care center, otherwise known as stores, general managers' lives changed with what he did. Five key metrics tracked every week, weekly memo, monthly guide, the whole process of how we run our pet care centers has been changed. And similarly, from a digital standpoint, we were a promotional site, and we changed everything. We changed our SKU approach. We changed our pricing approach. We changed our experience. We launched curbside, we launched same-day delivery. So when you bring in great people, Justin came from Best Buy and Target, and Darren came in from Jet.com and IAC. They changed things for the better, and they know what world-class looks like, and that's what we've been -- that's the journey we've been on.

Okay. That's helpful. And you had mentioned new customers that you've acquired quite a few new customers in the last year or so. And it sounds like it's a slightly different customer, which is great. But in addition to that, it sounds like you've invested a lot in terms of figuring out who these customers are, your database. So we're curious about how you're leveraging this data to provide a more personalized or tailored offering to your customers, whether it be from a pushing sales standpoint or just a promotional standpoint?

Yes. We stood up our analytics group, surprise, surprise. The folks from Jet and Walmart came in with a whole different view of analytics. They started deploying in the digital. Well, we like that. Let's take that across the whole enterprise, and that person is now Head of Analytics across the enterprise. So when we talk about, for example, recurring revenue customers. When we talk about multichannel customers, all that view, all that analytics is new to the company, and we're seeing the benefit of it. When we start driving double-digit growth in multichannel customers, it's because we know -- well, Kate, you're buying food with us, but you're not grooming with us. Let's make sure we're customizing and talk to you about how great our grooming is or you might be food and grooming, but you haven't done veterinary with us. Well, we just launched a vet hospital in your area. So let's talk to you about the doctor that's at that hospital and her accreditations. So we're customizing. We used to blanket e-mails $10 off $40, $10 off $30 type discount type e-mails, and that's not our approach anymore. It's very targeted to the individual pet and the individual person based upon the analytics that we're providing. The other thing I'll talk about analytics so is that's the customer-facing side of it. When I first came in, I'd go to the pet care center, I went to all 50 states within my first year. And I'd say, how is your mix shift to premium going? They didn't have access to the data because the folks in San Diego thought they were the only ones who could access the data. We democratized data, made them general managers of their business and surprise, surprise, business took off.

I'd just add 2 things, Kate, to that. I'd say when Ron talks about the analytics, part of that approach is looking at everything, not just from a here and now standpoint, but how it relates to LTV. So we do a lot of work around CAC as -- not just CAC related to marketing spend, but CAC related to different ways we attract customers into the ecosystem and what does that LTV look like? And as long as we see that return, we keep investing in different areas. And all this data around customers is meaningless if it's not showing up in the marketplace. Ron talked about the revenue results. In addition, we got a share report just a couple of days ago and all indications in that report are that we continue to gain share.

Good point.

Great. If I could maybe pivot to vet because this is another area where we do get quite a few questions. You mentioned before, Ron, that you have 155 vet hospitals and Vetco clinics. I wondered if you could maybe talk about how you're differentiated? So the question we get is why would someone bring their pet to Petco versus a "traditional vet"? And when you think about your competition, there is another specialized retail chain that does have a vet offering as well. So if you can maybe walk us through the levels of differentiation, that would be helpful.

Sure. So we did a lot of research as to whether or not customers would want vet within a Petco. And there is a subsegment of [ vets ] who don't. They want to go to their independent vet. And whether that's philosophically their view or they're tied to their vet. However, there is a scale portion and the majority of customers who aren't of that mindset, who don't have that loyalty, I was going to a vet. I wasn't crazy about the vet and they were definitely overcharging me. And when I could get veterinary care within the Petco that I was going to anyway, it was very appealing. I'll go back to the macro data, 50% of customers are looking for a one-stop shop. They don't like having to go for food 1 place, grooming 1 place, vet another. That admits that the other 50% want to do something else. But for those 50%, we're the only ones who can provide that solution to the other pet specialty player that has vets in their locations, they spun out their vets into Banfield, which means they can't provide a cohesive customer experience. They don't have the customer data. If a dog gets diagnosed with skin issues, whoops, my lights just went out. If a dog -- hold on one second. I'll finish here and then we'll switch. If a dog gets diagnosed with a skin issue in the vet, they won't know that in mid aisle. So we believe we have a better mousetrap, and it shows up in Vital Care program where we can bundle in vet care. And so that's the consumer appeal piece of it. From a business standpoint, our CAC is unbeatable because we have the traffic. So I went to the 100th vet opening in Encinitas, California. I said, how is our appointments? We're booked for the next 3 months? Why are we booked for the next 3 months? Because we had all those customers coming there who loved our folks in that pet care center who were happy to get veterinary care at the same place.

Okay. And then just to follow up and close the loop on the vet conversation. Your strategy is some of the vet clinics are being outright owned by Petco, but there are some that are JVs. So could you maybe walk us through the rationale of that particular strategy and how that mix will change over time?

Yes. Brian, do you want to handle that one?

Yes. So you're right. When we first started this, Kate, and this is before I joined the company but, we partnered with a company who had knowledge in this space because we felt like that was the right way to approach it. As we learned more about the model, we liked the return so much that we started to build out our own. So the first, say, tranche of vet back 3 years ago were a JV primarily. Once we put our first own vet in and we liked the return, we started to shift that. So we still have a JV partnership and some of the vets that we're adding are there. More of our vets. So we haven't given the specific breakout of the 70 this year, but more of them, in fact, well more than half are outright owned. From a total installed base of the 155, they're still slightly more of the JV, but that will pass that threshold to 50% from an own standpoint soon because we continue to go overweight on owned. We like the return. We like the model. We still feel like the JV historically had given us the ability to scale. So although we like the return on owned, we also wanted to make sure that we were adding a certain number per year. So we did augment our owned build-out with that partnership.

And just to build, our vet clinic business, where we're in over 800 of our pet care centers with vet clinics gives us a feeder system of vets. So we have over 1,000 vets that do part-time shifts with us. That gives us an incredible competitive advantage in terms of sourcing vet and our time to fill on vets is lower than industry average because of it.

I would imagine that...

Yes, we actually just got over 1,000 locations, so up from the 800s to over 1,000 locations in Vetco.

And just on that point with regards to the vets, I would imagine that's a pretty important consideration given that there are so many more pets. There's probably a lot more demand for that occupation. The schools only have so many vets coming out of it every year. So I would imagine that flexibility is important.

Well, there's 2 things on that. One is our value proposition is flexible medicine, flexible time as well as great compensation. We're even giving the vet stock. But the idea that you can work -- have flexible hours and flexible practice is very differentiated. If you know anything about vets, first of all, the multiples are through the roof. But the second thing is there's been a lot of consolidation and they're paying high prices when they're consolidating. Then they're pushing [ quotas ] down on the vets. If you know anything about vets, that's not the type of person that wants [ quota ]. Sadly, it's the highest suicide rate profession in America. So we're taking a much kinder, friendly. And part of the reason we can do that is because our CAC is so much lower than everyone else's.

Okay. Great. If we can maybe move on to gross margins. Gross margins have been scrutinized a little bit by investors since the beginning just due to the longer-term negative mix impact from growing your services and growing digital. So I wondered if we could maybe talk about just the short term and the long term. Can we talk about gross margins and what happened this past quarter in Q2, where they were down about 200 basis points. And how should we think about your mix of business and how it contributes to margins both in the near and longer term?

Yes, I can take that one, Kate. So first, let me start where you started, Kate, and I'll start with Q2 and with services. So as we mentioned, we had 49% year-over-year growth in services, and that's coming off of significant capacity restrictions last year in grooming and training. That mix shift to services for Q2 alone was about 25%, about 1/4 of that 200 basis point year-over-year decline. Now it's important to remember though that as Ron teed up in his presentation, that the labor for services sits in gross margin. It sits in cost of sales. So while the gross margin for services is lower, the adjusted EBITDA in that business is comparable with the rest of the companies. From a bottom line standpoint, there was really no impact. Also looking back to last year, we did benefit from the exponential growth in pets. Year 1 of pets, you have an overweight towards the supplies category, which we saw last year with significant growth in supplies. As that pet grows, you see a mix shift in year 2 towards very sticky consumables. And that is exactly what is playing out. The life cycle that we expected for pets is what is playing out in the actual results. So we had a great consumables quarter off of the back of the pet life cycle in addition to the 1 million customers that we added and the success of our nutrition perks program. Now we like that mix shift. Those are very sticky customers that give us a great LTV long term. And that combination of the strong supplies last year, strong consumables this year is about half of the year-over-year impact to gross margin. So you got a quarter from services, half from that dynamic. And then the last quarter is really from other mix shift to digital plus supply chain impacts, which we believe are sort of short term and will alleviate over time. If you put that all together kind of beyond Q2, we do expect the sticky consumables to stay with us through the balance of the year and perhaps longer into next year and maybe even strengthen modestly, supplies will still grow strong, just off of a much higher base, and that will normalize as we start to get into next year. You still have some tough comp quarters like Q1 '21, where we had a little bit of a lift from stimulus that we called out in the Q1 earnings call. And then in the near -- so all in all, in the near term, there will be slight modest mix impacts due to the growth in services and due to the stickiness of consumables that we expect to stay. At the same time, Kate, we're not just sitting around not doing anything about it. We have levers to help offset some of that mix pressure. Premium brands and owned brands and building that out, optimizing our digital fulfillment channels across the both BOPUS, ship from store, same-day delivery, which nobody else can offer, as Ron mentioned. Over 80% of our orders, in fact mid-80s are fulfilled through our pet care centers. That gives us enormous leverage. Grooming and training will continue to grow. We're still not at full scale there. So we're starting to lap last year's restrictions, but we're not all the way where we want to be yet. And then just executing the vet build-out and other cost optimization. I would tell you, too, that if you look at the bottom line, we delivered our results in Q1 and Q2 and raised guidance both on the top and bottom line. So these gross margin dynamics are baked into our guidance. And I know you asked the longer-term question. We haven't guided beyond '21, but we continue to see opportunities for operating leverage on the bottom line as we look beyond '21.

Okay. That's great. We have about 9 minutes left. I want to make sure I get in one more question and then the questions that we're asking every company. And then for anyone who's listening in who has a question, please send your question now because there's a little bit of a delay. And so if you want to get your question in, just send it now, so we can be sure to ask it at the end. Ron, I have to ask that on Tuesday, you disclosed that you purchased a sizable amount of stock. I just wondered if you could maybe walk us through the thinking there and what -- what we should take away from that?

It's simple. We have a phenomenal category. As I said, it's called to be a 7%, 8% this year, 7% from a long-term standpoint. And we're really well positioned within the category to take advantage of it, and we're gaining share in a great category, and our people are the best in the industry and they're executing. So I have a lot of confidence. I feel like the stock is undervalued. And so it was a great personal investment for me and a sign of commitment that I know we have upside.

Okay. As I mentioned, there are 4 questions that we're asking every company that's presenting at the Goldman Sachs Retail Conference this year. It's actually 4 questions with the fourth question having 2 parts. So they're multiple choice and you can let us know what you think. But as we think about consumer demand going forward and as we get further away from stimulus, do you expect momentum to accelerate, decelerate or stay the same through the end of 2021?

Consumer demand accelerate or decelerate through the end of 2021. What we said publicly is our momentum stayed through Q3. And so we're happy with momentum we came out [indiscernible] in Q3. What we -- the underlying dynamic of more millennials and more Gen Zers getting pets means there's upside in spend per pet. So we don't see that declining. So we see continued growth and strong growth, and that's reflected in our guidance.

Okay. The second question is how do you think about digital penetration in 2022 as a percentage of sales relative to what we saw in 2021, higher, lower, the same?

Brian, do you want to handle that?

Yes. I mean by definition, Kate, it would be higher, when we talk about the market, right? When you look at that 7% CAGR long term that Ron spoke about, the digital component of that is about 25%, and we've been gaining share. So definitely -- definitionally, if you just follow the market and our statements around share, you would say that it will be higher.

Okay. The third question is, how should we think about promotions in 2022? Will it be higher or lower versus '21?

Higher or lower than '21? I would hope it's -- actually, I'm going to top out and say, I would hope it's the same. It's been a very favorable environment right now. We're in a dynamic where there's not a single vendor who planned for 11 billion -- 11 million new pets. And that supply will get better, but there will still be probably more demand than supply as we go into 2022, and I think that will moderate.

Yes, it's been rational, Kate. We mentioned that some folks may not have caught it. So in our Q2 earnings call, we mentioned that our revenue associated with promotional activity was actually meaningfully down in Q2 year-over-year from 2020.

Okay. Great. And then the last question is, there have been an increasing amount of reports about supply chain disruption and pressures. I just wondered, does Petco have one big lever to help mitigate the supply -- sorry, the supply chain pressures, whether it's increasing lead times or shifting production or something else?

I'll hand it to Brian, but I would [indiscernible] PCCs.

Yes. Let me -- let me start, Kate, by saying that we're not in the excuses business. So in this sector, inventory has been -- there have been pockets of tightness and supply chain costs, there have been pockets of increases, we don't make excuses. I think what you see showing up in our results is our ability to manage. So one of the levers that we have is our PCCs, right? We leverage our PCCs as micro distribution centers. And that is something that we talk about a lot. The reason we talk about it a lot is because it is important, it is meaningful. It will be increasingly more of an advantage for us as the market shifts into areas like fresh, it is very difficult to have a viable economic model to ship 100% of your fresh food from a DC. We've done the math. When we leverage our PCCs, we see the ability to manage costs.

Okay. And the part 2 of that question is, do you expect your inventories to grow faster or slower than sales in the second half of this year?

We didn't give inventory guidance, Kate, but let me say it this way. We did have inventory growing faster than sales in Q2. That was not due to operational inefficiencies, that was due to our ability to go out and procure product, particularly given the differentiation we have in our assortment. And to stay out in front of demand. You do have some seasonal activity in Q4. So from a seasonality standpoint, you want to make sure you have enough inventory to support that seasonality at the end of Q3 going into Q4. So I'll just kind of talk about it that way as opposed to giving specific numbers.

That's helpful. We do have a couple of questions from the audience that just came in. The first one is on real estate. What is your outlook for real estate in the store footprint? Are you a net grower? Or should we expect to see some store closings over time?

Yes, I'll kick it off, then Brian can add on. So our primary strategy is adding throughput in existing locations through adding the vets. And when we do that, we see a significant scaling of revenues via the vet, via that we build out in Just Food for Dogs kitchen, we build out Reddy store in store when we come do that. That is the primary utilization of capital. Beyond that, we see the opportunity to grow 10% to 15% in high population growth areas. And then we also see a scale opportunity in relocations where we see a lift where we do that. Additionally, we will add locations in our Mexican operations where we're #1 online, #1 offline with a local partner named Grupo Gigante and that business is cash flow positive and a wonderful double-digit growing business.

Yes. And we've guided, Kate, for the year kind of roughly flat, and that's what you saw in the first 2 quarters. As Ron mentioned, there are dynamics underneath that. I think it's important to not just talk about pluses and minuses, but as Ron mentioned, relocations, what's happened in the last year, obviously, unfortunately, one of the things that happened in the pandemic is you had a lot of businesses closed in other industries. For us, what that means is new and more attractive locations where we can relocate. So we go through a very detailed process in our real estate reviews, location by location, where do we see opportunities to actually increase our share of wallet in a certain area by relocating to a different site. And then if we're staying in a site, there are opportunities in the commercial market now to get better terms because of what's happened in the commercial real estate market. So there's operating leverage within our portfolio.

Okay. Thank you. And with that, we're at 11:29. So I think we should stop there. So thank you so much, Brian and Ron for joining us today, and thank you to the audience for dialing in.

Thank you for having us.

Thank you, Kate.