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

So good morning, everyone. My name is Anna Andreeva. I'm a senior analyst here at Needham covering the consumer e-commerce space, and welcome to First Annual Needham Consumer Tech and E-commerce Conference. Next up, we have Petco Health and Wellness Company. Very excited to have the management team. We have Ron Coughlin, CEO; Darren MacDonald, Chief Digital and Innovation Officer; as well as Kristine Moser, Investor Relations. Petco is a health and wellness company that's focused on the needs of pets and pet parents with more than 1,400 stores or fulfillment centers. And in the past 3 years, the company has undergone quite a transformation from a traditional retailer towards becoming a provider of pet health care and wellness type of needs. We're going to have Ron and Darren go through a presentation and then kick it off with a few questions. And if there are any questions from the audience, please e-mail me at [email protected], or you can enter the questions into the panel as well, and we'll go through them. Without further ado, to Ron.

All right. Well, thank you very much for taking the time. Thank you, Anna, and thank you for tuning in. We're going to keep it brief and go through an overview for those of you who aren't as familiar with our strategy and momentum, and then we're going to make sure we take as many questions as possible. If we go to the next slide. So we have the safe harbor. This presentation will be on our website, as well the safe harbor, so for your meeting pleasure. So in a nutshell, we operate in a phenomenal, phenomenal category. It's a 7% growth category. They're now calling -- forecasters are now calling 2021 at 8% growth and the forecast from '21 to '25 is for 7% growth. Underneath that, strong pet per household growth as well as strong spend per pet. The spend per pet is really being propelled by Gen Zers and millennials taking on the majority of new pets. And we continue to see elevated new pet adoptions as we speak. There continues to be back-ups at breeders, and we still continue to see elevated adoptions. We have a compelling value proposition, whether you look at it from a health and wellness standpoint. Nobody else in our space is positioned from a health and wellness standpoint. Omnichannel, what we're seeing is the promise of omnichannel really coming to the fore, that combination of a strong digital offering, which Darren will elaborate on, and a strong brick-and-mortar offering. We see 39% of our customers say they want an omnichannel offering. We have the only end-to-end ecosystem. I'll elaborate on this. Training as well as we're doing the fastest vet build-out in history, and we'll double-click on that. Our 2-year comp is 32%. We did a 15% this quarter on top of a 17% last year, and we had leverage in our model with 17% EBITDA growth. Our net new customers were 830,000. For reference, last quarter, our new customer acquisition was roughly 3x our online competitor's customer acquisition. And our active customers, which is a very powerful base for us to monetize, is 23.3 million. Next page. So if you look at kind of the momentum that we have, we're expanding wallet and share of voice. Our recurring revenue grew 60% in the quarter, yes, and 45% growth in those customers. So we're putting more and more of our customer base in recurring revenue, which is good in terms of predictability, good in terms of stickiness. We also have the modern version of the punch card on food, on grooming. We call them the perks programs. We have over 1 million. And again, this is sticky. And then last, our Vital Care program, which is the industry's first comprehensive membership program for $19 a month, you get a checkup, a vaccine and discounts on food, grooming, et cetera. As I said earlier, we're executing the fastest pet build-out in history. We have 173 vet hospitals, on track for 197 for year-end. The 4-wall economics are very, very attractive. On top of that, we get mid-single-digit center store lift. We're becoming a leader in digital. Our digital 2-year is 159%. I looked at just about every retailer that there is, and it's one of the highest in the entire retail universe, is that 159%, 2-year. And then from a -- within that, 40% growth in repeat delivery. Again, recurring revenue, sticky revenue. We have significant growth opportunities ahead, whether that is in Fresh/Frozen, which is predicted to go from $1 billion to $4 billion in the next 3 years. We have double-digit growth in owned brands. And what you'll find about us is we have a significant portion of our business, majority in either owned and exclusive. So we don't face the competitors, the mass players, the grocery players, the Amazons of the world on roughly 70% of our portfolio. And then prescription is a big headroom category, $11 billion. We replatformed in Q2, and we're already seeing the benefit in Q3 with 50% growth, and Darren can elaborate on that. And then one of the things that we probably haven't talked about as much is we've been averaging about $20 million to $30 million of cost out a year. This is something I know very well. I ran the commodity HPPC business, which is a 3% margin business when I got it. So we know costs. We do it well. We generate leverage in our model, and we anticipate continuing to generate leverage in our model. Next page. So this is the ecosystem brought to life in visuals. What you see is we own our hospitals or JV our hospitals. We have televets, we have clinics, we have grooming, we have training, things that online players, things that mass players don't have. We have very, very strong owned brands. We opened a Reddy flagship store in SoHo. Anna and I were talking about that before you all get on. And then we have a lot of exclusive brands that, for example, ORIJEN, you can't find ORIJEN in the Walmarts of the world. You can't find ORIJEN on the Amazons of the world directly sold by Amazon. You can't find JustFoodForDogs in those places. And then we bring this to life with our pet care centers combined with now our first world digital offering. And then I talked about Vital Care already. Now importantly, if you look in the middle, 50% of customers are saying they want a one-stop shop because they go one place for food, they go another place to get groomed, they go to another place to get veterinary services. And so this idea of simplification under someone they trust is very, very appealing. Next page. Pass it over to Darren.

Ron said it at the top. Over the past 2 years, we've driven a 159% 2-year stack, which we believe is the fastest in the category. And in fact, it's almost 80% larger than our next biggest online-only competitor. So we think we're playing a totally different digital game right now than the rest of the category. If you look at that 29% of customers who want to shop digital only, we think that our capabilities allow us to compete really effectively head-to-head. But the really great part and the thing that I hope that people really help to understand is that 39% of our customers want -- 39% of total customers want to shop in an omnichannel manner. And then if you think about 50% of customers who want to get everything in one location, we're really the only specialty player in town. And this is really where our assets become most important for our business and where we shine the brightest. We have 1,500 pet care centers that are fulfilling 80% of our e-commerce orders. So we have great leverage in our pet care centers. So when products are available for BOPUS or same-day delivery, customers are absolutely opting for one of those fulfillment methods. 90% of the time, when a product is available for BOPUS or same-day delivery, customers are actually choosing it. So our goal is to make as much product available to customers because this convenience vector is incredibly important to e-commerce customers. One of our biggest drivers for us is to create multichannel customers where we get 2 to 7x the amount of revenue from those customers, and they stay with us longer as well. So our goal is really to drive as much people from pet care centers to e-commerce and e-commerce back to pet care centers because it helps to round out this whole offering. Next slide. Now all this comes together with our app, which has grown 100% in both users and revenue. It's really been incredible. And in Q3, our app star rating is 4.8, which really signifies that customers are really loving the experience that we're putting together for them. And it all comes together at the bottom of this slide. You can see all of the experiences that drive 360-degree health care. So whether we tell you about smart care reminders, you're due for your flea and tick, you're due for your dental, you're due for your -- next repeat delivery order is going to come or it's any of the membership benefits that Ron talked about. It could be Pals Rewards, curbside pickup, dog training. Everything that you need to manage your animal's welfare is in your pocket. And really, this is an area where I think that Petco shines the brightest. There are other companies that have paid more to get more installs, but our weekly active users, we think, are way stickier than the rest of the category. And the data would suggest as much as well. So we're very excited about the mobile strategy as well. Ron?

Yes. I'll just close. We take purpose very, very seriously. Every company has one of these slides, but not every company truly saves 400,000 lives a year. This is what we do with our Petco Love Foundation. In addition, we do -- we sponsor work on cancer. We rolled out one of the first -- [ as part of ] one of the first cancer diagnostic crossovers from human to pet. And we actually just -- the foundation just enabled their first facial recognition for pets, and we reunited 1,600 pets with their loving family. So we make significant impact. And then we just got a major award on the sustainability side as well. So that's something that we are reflecting in a much stronger way as we speak as well. And with that, I'll pass it over to Anna.

That was great. Thank you so much for all the background. So let's kick it off. We're asking our companies 3 questions this morning. First off, talk about what surprised you to the upside or the downside during this third quarter. You just reported last week. Secondly, how are you approaching 4Q? Still supply chain issues in the industry, you're more insulated than most given the mix of your exclusive and owned brands. And then finally, how are you approaching '22? What are you most excited about? And conversely, what still makes you cautious?

Yes. Let me hop right in. So I think the biggest surprise was how strong our business was. We did 15% on top of 17%. I remember we were doing the IPO, a lot of folks question, "Can you grow in the second half?" Because we had such strong numbers a year ago. And we said, no, we're going to grow. And then the question was, "Can you do double digit again?" And we did actually 15% on top of 17% with strong flow-through. So that would be one. The subcomponent to that would be consumables. Consumables were much stronger than we expected. They were 21% growth. The category did low teen. So why did that happen? First, we got stronger supply vis-a-vis competitors than we thought. In the categories where we play at the high end, we are the big kahuna. And so we're getting supply stronger than we expect. The second thing is our food perks program has stickiness, and that's really working. Third, the repeat delivery program that Darren talked about, as we said, grew 40%. So our consumables are really, really strong. And some of those customers' LTV is 20 points higher than an average customer. So it's really good for our business. Our retention is 30% plus better than a supplies customer. So it's very good for our business from a mid- to long-term standpoint, but it does create some issues on the gross margin rate line in the short term, which is part of what we'll get to, I'm sure, later. So that was probably the biggest surprise. In terms of approaching the holiday quarter, we're sitting with 95% -- actually, that's as of last week, so probably more like 96%, 97% of our holiday stock either in our DCs or in our pet care centers, formerly known as stores. Our momentum is strong. And one of the things about us is only 30% of our revenue is internationally sourced. So all the port conversations, it is more of a fraction of our business. So we feel really good about how we're navigating. From a labor standpoint, we're in a good position, and we can talk about later in more depth in a bit, but we feel like we have the labor we need. And from a stock standpoint, we're looking good. And the momentum is there. We're seeing a continuation of the trends we saw in Q3 in the early days. I guess we're 1/5 or 1/6 into Q4. And we're seeing a continuation of the momentum that we saw in Q3. What are the biggest opportunities? One of the truisms about this business is just how much opportunity we have. First, we operate in a 7% growth category. So the -- we still see elevated pet adoptions, and we still see growing spend per pet. So that's the backdrop that makes me excited. We are doing the fastest vet build-out. We've said we're going to do roughly 70 vets a year. The real breakthrough was the success of our own vet model. We have joint venture vets, and we have owned vets. We started owned vets 2 years ago, and we really, really like that model, and it's exceeding our financial expectations. So you'll see that be our primary focus going forward. Where we put a vet in a pet care center, as I said, we see a mid-single-digit 4-wall economics with 20% adjusted EBITDA margin. So that, in many ways, is a step and repeat in our businesses that not many people have. We've come in, we put in a vet, we put in a JustFoodForDogs, and we put a Reddy store in store. It's a step and repeat that drives a significant lift in our pet care center. The second opportunity is Darren's business, digital. As I said, we had 150-plus 2-year comp, and our momentum continues on that side of our house. And we truly, truly believe we have competitive advantages. 80% of our e-commerce gets fulfilled through a pet care center. So that means it's faster to the customer and lower costs than our online competitors. And then third, the monetization of our 23 million customers. We're just getting started on that. And you look at the recurring revenue progress and other programs, and that's strong. And then lastly, $11 billion prescription market. That's a market that we're just scratching the surface. But you think about it, right? We now have 173 hospitals with doctors writing scripts that get fulfilled either through our pet care center or our e-commerce solutions. That didn't exist. And so we have a built-in ecosystem that's going to give -- that provides us the right to succeed in prescription. And then lastly, I guess, cost structure. We'll continue to drive cost structure out to get leverage in the model.

Okay. That's terrific. Thank you for that. We'll talk about the vet opportunity because the vet is very exciting. But before we dive into that, there were a lot of questions about the gross margins on the call. And I think you talked about the mix shift to consumables driving 1/3 of the gross margin degradation with the remainder being split between services and e-comm and also some of the supply chain costs. How should we think about the profitability across your consumables, supplies and services? I'm not sure if you've provided a relative delta in profitability across those 3. And I think you said on the call that at some point in '22, you do expect the growth in consumables to converge with that of the rest of the box. Could you maybe talk to us about that? Maybe the timing there would be great.

So first, the shift to consumables was a significant factor. Again, it's really good for our business. And nobody else who talked about gross margin degradation has that dynamic where it's -- the retention is 30 plus better and your LTV is better of that customer. It is the foundation of the pet industry, is sticky consumables. And we gained share at twice the rate that we did prior year. So it was good. The other piece of context is $53 million gross profit increase year-on-year. So while the rate declined, our gross margin dollars were up $53 million. And when the consumer wants to spend more, you want to capture as much of that as possible. So I talked about the consumable dynamic. On the services, it is important today, and it will be important as you look at our business for a long time to look at the services. If you -- the cost of sales -- COGS is in cost of sales on services. So if you look at services at the EBITDA line, it's basically neutral to the rest of the enterprise. It's just a P&L geography issue on services, and it's the nature. As we mix shift to services, you will see some of that at the gross margin line, but it gets -- at the EBITDA line, it is neutral. And then lastly, supply chain. We had supply chain pressures like other companies did. I think our team did a great job mitigating as much as possible, but those did put pressure on us. Importantly, every business gross margin improved in the quarter. So whether you look at Darren's digital business, whether you look at our supplies business, whether you looked at our consumables business, each of them got better in the quarter. However, that mix shift towards those 2 areas had the gross margin impact. When you think about the normalization, we see the normalization happening probably towards Q2. Q1 is when stimulus came out. And because of the stimulus, you have discretionary spend, which is, let me get more tennis balls, let me get more toys, things like that. So it's most likely Q2 when we see that normalization of consumables vis-a-vis supplies.

Okay. Okay. That's very helpful. Just a follow-up on the third quarter. You took guidance up for the year, and it looked like you kind of flow through the beat from 3Q, which embeds some deceleration as you look at the fourth quarter. I guess the question is, what are you seeing quarter-to-date, if anything, about the business? And any specific opportunities from the fourth quarter of last year that you could capitalize on?

Yes. So we delivered Q3 ahead of our expectations. Q4, we had a 17% growth, which is why you see a range in terms of the guidance. The guidance is double digit on top of the 17%. So our business is very, very strong. I will tell you that thus far into Q4, we see a continuation of Q3 trends. So we are coming into Q4 with a lot of momentum. Our programs are fantastic. Our holiday program is hitting well. Like I said, we have 95% of our stock in hand, and our consumable trend continues. So we have a lot of momentum to guide at the base, base level, had double-digit on top of 17%, which is strong. Right now, we're stronger than that.

Okay. Okay. That's great. Shifting gears to...

The only other thing I would add is we did take pricing in Q3. As we navigated Q3, we did take pricing in several areas, both merchandise and on services. And the full benefit of those pricing moves will be seen in Q4, where there was only a partial benefit for those pricing move in Q3.

On that point, how is the consumer reception to some of the pricing? And I remember in the past, you've talked about a pretty benign promotional environment for the pet space. Just wanted to get your thoughts on that now.

Yes. We operate in one of the most inflexible, inelastic categories there is. And so that -- we've been able to pass through basically all the pricing that we've gotten from vendors without unit declines. We operate on the highest end of the category. But that said, we want to make sure we provide for all customers. So we have super premium products like the JustFoodForDogs. We have premium products. We have value products. So we make sure we provide for all customers, but we have seen success passing through all the pricing that's come our way. Basically, all the pricing, you're never 100% sure of every inch of it, but basically all the pricing has come our way, we've had success passing through.

Okay. Great. Just switching gears to vet and services, really exciting part of the business. I think the growth there has been pretty similar. For the past couple of quarters on the 2-year step, you're growing in the high 30s. How is that coming in versus expectations? And what are some of the learnings that you're applying going forward for the business?

Yes. We couldn't be more excited about it. From a vet standpoint, it's a $35 billion market. The majority is -- the vast majority is the part that we're competing with, which is veterinarian's hands on dogs and cats, et cetera. We're up to 173 vet hospitals. We will be ending the year with strength. We like the return that we're seeing on our owned vet hospitals in particular. So as I said, you'll see us double down on that. We also have 1,100 vet clinics. And when I first came in, I didn't focus much on that business. It's a wonderful business. It's been over-delivering. But the symbiosis is really, really powerful and unique to Petco. So we have -- I believe it's 1,300 vets that bid for shifts for our vet clinics. Well, guess what? They are 2 things. One, there is a feeder system for our vet hospitals when they want to go to a full-time role. And secondly, if we have an opening, they can fill shifts for us. So that is quite a unique capability that we have. And they're also a feeder system for the Rx business that Darren has. And maybe, Darren, you want to talk about kind of that ecosystem?

Yes. I mean just building on the leadership that we have on the vet side of the business, I mean, our prescription business grew 50% year-over-year. I mean it's on fire. Even if you click down beneath that, our prescription and food business was up triple digits. And if you think about the other side of the business on prescription, we're doing really great, innovative things with our relationship with Vetsource. And now we do automated adjudication of prescriptions directly between the pharmacist and the veterinarian. And so now it's much easier to get your prescription actually fulfilled. So we're really excited. I mean it's a big category. We're talking $11 billion, $12 billion. And we think that we're really uniquely situated to go after the market. Think about the fact that we have all these Vetco total care clinics, and we have our hospitals as well. We have tons of customers right now in our ecosystem that are all captured right now. And we're just really beginning to monetize them for all their prescription and pharmacy needs. So we see a tremendous upside. And then final point I would just say as we get into the OTC side of it, this is just going to get really big for us, and we're really excited about it.

The labor market, right, within the vet space, it really has been tight for some time. And you're competing with your online competitor as well that's, right, pivoting into the space in a bigger way. Are you seeing any changes in terms of the vet availability and also when it comes to labor type of increases?

Yes. It has been a tight market, and we compete in that. I will tell you that our value proposition is hunting. We've done a lot of work in this space. So let me give you some unique things. Number one, we offer flexibility in working hours, working days. A lot of the vets are of child-bearing or at the age when they're having kids. And so we offer flexibility on that, number one. Number two, we offer autonomous medicine. A lot of the roll-ups dictate medicine. We don't dictate medicine. We allow the vets to have autonomous medicine, and that resonates. Number three, we offer stock in the company. They have a piece of the company, and they feel connected to that. Four, they're part of a pet care center. And they're part of an ecosystem taking care of the pet, and they're not kind of isolated in a practice somewhere. And for a lot of the vets, that's very, very appealing. So our time to fill is ahead of industry benchmark, and our retention is ahead as well. And I'll come back to the vet clinic piece, right? I mean that is another advantage for a feeder system for us. So we are -- it is a tight market, but we feel good about where we are. And we're executing, and we're on track for our commitment for the year.

Okay. Ron, from 173 currently to 900, that's a nice growth trajectory. I guess why not old stores or pet care centers that would have at that hospital? Is that more of a space constraint? And would you accelerate this faster than 70 a year?

Yes. So there are some of the locations that don't have the size, as you said. Right near you, Third Avenue in New York City, the Unleashed, right? The Unleashed aren't going to [ happen ] for a vet hospital. There are others where the economics wouldn't work in certain areas. The 900 is where we target now, but here is the beauty of our model. We have the hospitals, and we also have the clinics. So where we don't have a hospital, we have a clinic. And if we get up to 2, 3 days and we know we have enough demand, then we can switch the strategy there. So we're able to flex each model very fluidly as we need it, but 900 is where we sit right now.

Okay. Okay. Makes sense. Switching gears to Darren, not to leave you behind. The growth in the e-comm business obviously has been pretty substantial. I think overall, e-comm is a lower-margin territory for Petco, and I think BOPUS within that has the highest margins. What are you seeing in terms of the mix with BOPUS and some of the other channels? And is there a scale for your e-comm business that you think is needed for you to reach profitability or not be dilutive?

Well, let me first off say, we are the fastest growing in the category. We also think we are either the most or one of the most profitable in the category. And we have more active customers than a lot of our online competition. So we feel like we're in a great place right now for sure. The big driver for us is our infrastructure. I mean you hit on it. The BOPUS business has been on fire for us. It continues to grow. It is the most profitable transaction that we have. And we continue to lean into improving that customer experience to drive more penetration of it. We launched curbside delivery in the past year. So now you just come out, drive up with your app. We know where you are. You open your trunk. We put the product in it and off you go. And it's a really incredible experience. Then you add in the other big convenience vector for us right now, which is same-day delivery through our partnership with DoorDash, which is a cost-advantaged transaction for us as well relative to either ship from DC that our competitors would do. But both of those transactions give us enhanced overall gross margins. I'll give you a few other things that we're working on that I'm really excited about. A lot of our AOV growth this past year came from us actually getting more units into a basket. I came from Jet and Walmart, where this was just such an important thing for us to be able to do, is get more product into a singular basket. We were successful in it this year, and we're going to continue to be successful in that in the coming years. That will improve gross margins. We've launched our Petco AdWorks product this year. That's an advertising initiative that allows our vendors to invest in promoting their products, either through sponsored listings and search or through things like banners. We've invested in AutoStore, which is reducing our cost of delivering a product from a distribution center. So as we continue to add more e-comm-only assortment, we'll continue to mix into multiple fulfillment methods. If it comes from a DC, we want to make sure that we have everything inside of one box, and we're going to get better and better economics from that. And then last thing I would say is we're lifting AOV through things like Klarna, which is a tool that gives customers more financial independence and ability to pay for their goods. We have Petco credit card as well. And so that's also lifting AOV. So what I would expect to see is ongoing improvements. We've added a few hundred basis points in my time here in terms of gross margin. We're going to continue on that effort in the coming years. And I think we're going to continue to mix into better and better margins through the e-commerce channel.

Okay. Okay. Terrific. We have a question from the audience. How is Vital Care scaling compared to expectations? And how do you see the growth potential there?

Yes. So Vital Care, what we said in the quarter was 137,000 members. That continues to scale. It is ahead of our expectations. For me, the question isn't whether we'll get to 1 million. It's when we get to 1 million. It is a transformative change to how you take care of your pet. And one of the beautiful things is you're going to take better care of your pet, but at the same time, it's good for our business. 19% of the Vital Care customers are new to food with us. Over 30% of the Vital Care customers are new to services with us. So its intent was to get greater share of wallet while we take better care of pets, and that's exactly what we're doing. You will see us evolve Vital Care into kind of a 2.0 version in the next short window, and we're very excited about what we do on the back of that.

Do you think the consumer understands the benefit of this program? I'm just thinking there are various incentives that Petco offers, the perks being one of them. Do you feel that there is an opportunity maybe to incorporate Vital Care better with the perks going forward?

You mean in terms of Pals or the...

Exactly.

Yes. You'll see that whole ecosystem come together more cleanly in '22. But those who signed up for Vital Care love Vital Care. So it's resonating. They're using it. And as I said, it's having the intended impact because of the new to food, new to services with us. Those folks were getting groomed someplace else, and now they're getting groomed at Petco. They were getting food someplace else, and now they're getting food at Petco. So we're very excited. And here's the kicker. Nobody else can do it, right? Nobody else has an integrated ecosystem. The only one you could argue would be our pet specialty competitor, but they don't own the vets. So they don't have integrated experience. They don't have integrated systems. So we're the only ones who can do this, and it's very, very appealing.

Okay. That's great. Two more from me. Really curious for you to speak about how you're positioned in the premium and fresh food space relative to the competition. I think you said this is a TAM that's getting to $4 billion at some point. And of course, you having that footprint to ship from is a big differentiator of the model, but just curious about your thoughts there, how it's coming in versus expectation and how you're educating the consumer as well.

Yes. We love this category. And Darren can add in terms of digital advantages. We love this category, $1 billion to $4 billion. We play it with 3 brands right now. JustFoodForDog is our lead brand. We have Instinct and we have Freshpet. So we have Instinct and Freshpet in all of our locations, and we have JustFoodForDogs. What we said is we're going to take JustFoodForDogs to over 700 locations. We're currently at 517. So we're on track to deliver that. The amazing, amazing thing is where we put JustFoodForDogs, within 2 years, it's either #1 or #2 with the highest AOV and twice the trip frequency. So when we look at JustFoodForDogs -- actually, we look at it differently than other brands because we actually look at the enterprise impact of JustFoodForDogs because of the trip frequency and what happens on the back end of that trip frequency. So we love it, and you'll see us push even further. We're #1 in Fresh/Frozen. And we are -- I think last I checked, it was 5x our leading online competitor in terms of the size of Fresh/Frozen. And the reason is underlying economics, which is back over to Darren to elaborate upon.

Maybe just think about the way that our competitors deliver fresh product and frozen product versus us. They've got to put it in a cardboard box with a bunch of installation, cooling packages, and it's got to shift from a distribution center. That's heavy. By the way, it's bad for the environment, which customers are responding to, and they're not happy with that. And then you look at how we deliver it, which is through BOPUS and same-day delivery. It goes literally into a paper bag that is fulfilled by somebody inside of our pet care centers. And either the customer comes to us to pick it up or we should put out same-day delivery. So it is literally the freshest way that you can possibly get your food. And it's much more economically sustainable. And it's done at a tremendous, tremendous shipping advantage relative to our competition. That's been a huge growth driver for us.

Okay. Okay. Great. In the interest of time, just a lot to talk about your business, but one question on profitability. So far, it seems that a lot of the OpEx leverage has come from top line growth as opposed to expense cuts. Ron, you mentioned earlier that there's some opportunity in the business. Are there specific buckets on the SG&A side that you think about? And remind us, with this many pet care centers, do you have an opportunity to renegotiate some of the leases?

Yes. So just on your last point, we have a strong fixed cost leverage with our leases, whether that be kind of flat extended period leases, whether that be renegotiations or when that -- whether that be relocations. It's been a favorable market for us to do relocations, same -- basically same price, better location, more throughput. So we -- our real estate story is a tailwind for us, absolutely. The second thing is, as I said, we haven't talked a lot about it. We've been taking $20 million to $30 million ever since I walked in the store. At HP, we had a 3% margin PC business, competing against Lenovo with the Chinese cost structure, and we took #1 on the back of cost structure moves. I know how to do cost structure. My team knows how to do cost structure. And we've been successful taking $20 million to $30 million. We've been using that to reinvest, but that gives us optionality, right? We can use it to reinvest in growth, which is what we've done, or we can use it for the bottom line. But we have explicitly identified initiatives for '22 to go after tangible EBITDA cost-out opportunities. So they are already underway.

Okay. I think we have 1 minute left, so I'm going to squeeze one in. How do you guys think about the optimal capital structure going forward? I think 2.6x net debt to adjusted EBITDA, I mean, that number has come down. Would you consider, I guess, a potentially leaner capital structure down the road?

So when I was interviewing for this job 3.5 years ago, my jaw dropped when I saw the debt level, I have to admit. And with the IPO, we made significant headway against that. We're now -- after this past quarter, we're at 2.6. You will see us do 2 things. You will see us continue to pay that down until we get to a reasonable level, and we anticipate sharing that in the spring, in the second -- that level in the spring. And then secondarily, we just have tremendous growth opportunities. The investments we made in the digital business generated that 156% growth. The vet build-out, 173 today. Well, that is great payback for us. The prescription business of $11 billion, not to mention the insurance business. So we have such growth opportunities in the 7% growing category that we'll continue to invest in them. There's not many companies that have the growth opportunities we do. We'll continue to pay down debt. And then when we get our debt to a level where we want it, then we'll look at other opportunities with our cash. We're a cash flow generating machine, but we'll have plenty of cash to do those types of things.

Okay. Well, this has been great. Thank you so much to the Petco team. Thank you to everyone who listened in, and happy early Thanksgiving, everyone.

Thank you. Thanks for joining us.

Thanks, Anna.

Absolutely. Thanks to have you.