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

Thank you, everyone. Going to get started. Good afternoon. Thank you for joining us. It's my pleasure to introduce Petco and moderate our fireside chat. Today, we have with us Joel Anderson, Chief Executive Officer, and Sabrina Simmons, Chief Financial Officer. Thank you for joining us today.

Thank you, Kate. I feel like you guys have so much going on.

kind of fun being here a year later because you came last year and you were still in your phase one entering phase two last year and now we're fully into phase three of your new strategy. Yes. And so I thought we could maybe start there just now that you're in the Reach for the Sky phase three. Shifting from cost-cutting to driving top-line growth, what are some early signs that you're seeing that's allowing you to get more confidence in the story?

Well, I'd start by saying I'd be remiss if my person next to me didn't remind me that phase two never goes away. Yes, always focused on efficiency and getting better there but but it is much more fun to talk about phase three right and getting back to to growth, right? And we call it Reach for the Sky. And I think so much of our growth, Kate, was really trying to figure out, you know, how is Petco different? differentiate ourselves. And through that, you know, four pillars emerged and behind that, several building blocks. And so while we're still in the very early innings of it, it's nice to now have reported two quarters in a row of positive comps, and doing so with healthy margins. So I feel like we're a really nice balance and making a lot of good progress on it.

talk about the differentiation. I mean the pet space is so fragmented still I feel like. maybe could you walk us through, you have the four pillars, but maybe in terms of like, as you discover things along the way, what do you think is some of the key parts of the difference? differentiation of Petco versus everyone else? Yeah, I mean, we'll start with that.

We have services. And what's unique about our services is that they're wholly owned. So grooming, hospitals, they're all part of Petco. And I think one of the mistakes we made in the past was that we kind of ran them separately. And so one of the things we've uncovered is bringing it all together one Petco way. And that really allows our... our groomers now to see, you know, what product they're buying or for our veterinarians to recommend product. And so that's just one example, but it's an example of it's a point of differentiation we weren't taking advantage of. You look at our companion animal business. the only national retail that does saltwater fish as an example so we've got a real big focus on differentiation both in the services side and the product side so those are just just a couple of real good examples.

Yeah, I know when you first came into the role, you were very excited about that and services in general. because at a minimum it's a traffic driver. Right. And so maybe what are some of the improvements you've made in those services in particular? Maybe we leave that for a little bit later, but on the grooming and-

Okay. training you know one of them was what I was just alluding to and it was in some ways just a technology unlock and that was really arming our groomers with more information and so up until a few months ago they couldn't even see you know what that the pets they were grooming were buying. And so they might uncover itchy skin or something wrong with the coat. And now they can actually see what food they're feeding their dog or cat. And they can recommend, you might want to try this instead of that. And so that's just an example. of really trying to be bigger and SPAC, fully serve our customer in a greater way than we have in the past.

And in that vein, I think getting much better at enabling our customers ease of use to make appointments and reminders. I mean, we weren't doing any of that a year ago, and we're still pretty early in the journey of using the data to actually enable ease of appointment and more frequency and visits.

Yeah, you go on the app now and services are right there front and center. You can make all your appointments there much easier than you could before. So it's that whole unlock to making it easier to interact with Petco in many different ways.

Great. That's great. I think one thing that we get a lot of questions on is just what is happening in the pet space in general. So not the competitive stuff, but just the industry. And I think the trend that seems to be emerging is growth in cat adoption. maybe flattish dog adoption or maybe still down a little bit. And so we wanted to talk through that a little bit. And how you think if this were to be more of a secular trend where you do see more growth in cat versus dog, is there a different lifetime value associated with that and how do you manage that?

Yes, you got it pretty right, pretty close to right. Dog adoption is down a little bit this year and cat adoption's up. But, you know, I think any... you know, great retailer, especially specialty retailer, you've gotta be really good at uncovering trends. So even within dog, while it's down in terms of adoption, one of the trends in dog is premiumization, fresh and frozen. And we talked a lot about on our last call the rollout of Hill's in quarter three here, all the freezers we added in the first half of the year that will now support new products. So I think even when there's a down area, you've still got to look for the bright spots within that. As it relates to CAT, yeah, that is growing, and it's an area where can't, for the first time of past puppy households, um, new puppies versus new kittens. And it's an area we've been leaning into for a while. And the merchant team has done a great job of tracing that trend. of adoption in treats and our new cat shop, candy shop, which has been great. And so that's just a good example of us being really good at being better and then more nimble about, you know, chasing new trends quicker.

I think something that comes up too with regards to just the competitive set is just all the price investment. And I think this came up on your quarterly call too in terms of, you know, you've had these tariff refunds. There have been a couple of retailers out there talking about price investment. It can kind of go across the board, right? It might not all be in pet necessarily. there does seem to be some more focus on that. So could you maybe talk a little bit about your pricing strategy, how you're managing promotions, what you're seeing in the environment when it comes to price competitiveness?

Well, there's probably a not a week that goes by that Sabrina and I don't talk about price. But having said that, it is, you know, as a specialty retailer, price is important. It's important to our customer. We watch it every week. But it's not how we're going to win. So we've got to stay close on price, but it's not a winning strategy for us to go up against Amazon and Walmart and try and lead our way through price. We believe that Petco, through differentiated product, integrated services, the knowledge our pet partners, our store partners have, that that's how we're going to win. And so as long as we stay competitive in price, it's those other areas that are the points of differentiation for us.

And then I think, you know, along with the price, from a competitive standpoint, speed is the other is the other piece. And I know Petco has always had a very robust omni-channel strategy. And again, digitally it sounds like there's been a lot of improvement there. So could you maybe walk us through? what you've brought to the omni-channel strategy, how that has changed, how you compete on speed when it comes to more of the consumables.

piece of the business? Well, it's important that specifically when we talk about that pillar, Kate, we call it integrated omni-channel, and we're intentional on that because, you know, from an NSPAC perspective, somebody that shops us both you know center store services and online is five times the NSPAC for us And as we've uncovered that, we know we had to make our omni-channel capabilities more robust. And so while we improved a lot of profitability last year, ship's a big piece of it now. Our in stock on auto ship is approaching 100%, meaning like somebody is really counting on that auto ship order. We've got to deliver it on time. We've added BOPUS capabilities. So, you know, you can now have your auto ship sent to the store. That's something that's a point of differentiation from a pure play. And if you think about it, you're sending fresh food or you live somewhere where you're not going to be home when it's coming in having that convenience of picking up at our store on your on your time frame is a real point of differentiation so we're adding in all the omni-channel capabilities but it's It's really about unlocking, you know, bigger NSPAC for our customers. That's really where the focus has been.

Great. Thank you. And would you say there was any friction on the auto ship side of things as you've gotten that to be a bigger percentage of your revenues? What have you improved there, and where do you see that going?

Well, let's start with, we changed the name to AutoShip. Yep, yep. And that's really being relevant to where the industry is. That's becoming a common industry name. And that alone has really changed the perception of the customer. I didn't know you offered auto ship. And so there's that piece of it. We've improved the speed. We do a lot of our auto ship fulfillment from the stores so that we can get it to the customer quickly. And then we've improved in stocks. And so I think that's something we really learned was really a important concern of the customers, like the reliability that my monthly or bimonthly order is always there on time and is in stock. So those are some of the big pieces of it. Unlocking the friction, improving the customer service. has been another piece of it. I don't know if I left anything else.

I would just add that the really exciting thing is that, you know we did all the cleanup especially online last year and so we're seeing really healthy regrowth in that channel but at great margins much healthier so the plan that we set the journey on last year to execute is working. In other words, that we're regrowing that business but with much healthier margins.

That's great. Maybe if we could just go back to the stores. I jumped to digital, but with stores, I think you're still expecting to close 15 to 20 stores this year as part of your optimization strategy. Can you maybe talk to us a little bit about where we go beyond this year? Are there still stores that you're looking at? at to close? Are these stores that are closing unprofitable? And just how much has it contributed maybe to the improvement that you've seen so far with the healthier store base?

Yes, I mean, I think our fleet overall is in a very healthy great position overall. So some of the closures we're doing is what you would expect naturally is cropping on a 1500 store fleet, just cropping some of the underperformers which occur in retail over time naturally as some locations become less trafficked than others. So we look to relocate or in some cases close those stores. But again, I think the fleet overall is in a very healthy position. We're really focused on, over time, hopefully the net becomes a net positive, but the foremost focus area is really in improving sales per square foot and productivity and comp. And I think we're well on our way on that path with the two quarters of positive comp and focusing on all of our operational improvements and all of the four-pillar work with assortment, et cetera, that's going to drive, you know, sales improvement inside that box.

Great. And then Joel, you had mentioned that you are testing a seven store prototype that's shown great results in sales and margins. I know it's very, very early days, but there's been a lot of curiosity about what those stores look like, what you're seeing out of the those stores and then how you're thinking about the rollout or potential rollout one day.

Well, if I piggyback on what Sabrina was just talking about, as about half of our fleet comes up for renewal in the next three years, you know, one of the options is certainly closing. We, you know, that number is getting less and less, but we also are looking at relocating. And when you relocate, um, you want to move forward with your newest and best thinking. And I think any specialty retailer or any physical brick and mortar retailer the physical environment's really important. And so we've been doing a lot of experimenting on a new prototype. And uh We're really pleased with the results we're seeing. The NPS scores have improved dramatically. you know, the average order size is up, transactions are up, so it we're reactivating customers in the market. We've done a much better job on impulse in the market. At the same time, when you're doing remodels, you wanna make sure you get it right before you go deploy that capital. So we're going to be very disciplined in that. You get economies of scale when you start a rollout. But one of the other benefits you get from a new prototype is you get learnings that can be, um, deployed throughout the rest of the chain that might not even be capital intensive. Uh little nuggets of gold there that you want to, um, you know, deploy out so we're really pleased with her it's really early eventually it'll lead to a you know a remodel strategy but we're going to make sure we get it right before we before we roll with it but early results have been really good we're going to test a few more stores this this year still and other standalone markets to make sure we're getting the right reads, but early results are good, Kate. Pretty comparable, yeah. We didn't change the footprint and we used a pretty steady market that represents kind of the fleet.

That's great. The size of the store, is it pretty comparable to the size? Pretty comparable, yes. But, yeah, no change in size at all. Okay, and 50% up for renewal. I know Sabrina just mentioned that. I mean, that's a big number in terms of the next three years. How are you thinking about relocations? Again, like are you looking for similar size real estate? Are you looking to really drastically change anything?

when relocating. I I think we bring that up and please add in Sabrina, um, more of just to give everyone confidence, like we have flexibility. You know, and so that just gives us the opportunity that when you've been in a market, you know, DMA or a spot for 10 years, 15, sometimes the centroid moves. And so just that flexibility, like you still might want to be in that that spot but it might be a 1 mile down the road or a 0.5 mile down the road or a different center and so we just have a lot of flexibility without having to you know break leases or do anything that's you know pretty episodic. So it's a it'll be a very smooth transaction transition over time and it might be a remodel, it might actually be going back to the landlord. for some TA money to help us in the remodel. So there's just a lot of flexibility going forward.

Yes, and I think we've been really successful in having those opportunities to open up a conversation around negotiation. So we've done pretty well in the last couple years together regarding rent and how we're sure we're getting really good fair rent for the location and the traffic etc and getting that equation as everyone in retail knows so much of the equation is about rent so we the team's done a great job I think of really using the opportunities that we have with the renewals to have those conversations and and kind of right-size that.

Yes, you know, Petco is a differentiated player in a strip center and you know we people forget like it brings a lot of families and so the landlord like having us as part of it and so that to Sabrina's point gives us some leverage.