PETCO HEALTH AND WELLNESS COMPANY, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q (this "Form 10-Q"), as well as the corresponding Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2022 (the "2021 Form 10-K"). The discussion and analysis below contains certain forward-looking statements about our business and operations that are subject to the risks, uncertainties, and other factors referred to in Part II, Item 1A, "Risk Factors" of this Form 10-Q. These risks, uncertainties, and other factors could cause our actual results to differ materially from those expressed in, or implied by, the forward-looking statements. The risks described in this Form 10-Q and in other documents we file from time to time with theU.S. Securities and Exchange Commission (the "SEC"), including the section entitled "Forward-Looking Statements" in this Form 10-Q, should be carefully reviewed. All amounts herein are unaudited. Overview Founded in 1965,Petco Health and Wellness Company, Inc. ("Petco", the "Company", "we", "our" and "us") is a category-defining health and wellness company focused on improving the lives of pets, pet parents, and our own partners. We have consistently set new standards in pet care while delivering comprehensive pet wellness products, services and solutions, and creating communities that deepen the pet-pet parent bond. In recent years, we have transformed our business from a successful yet traditional retailer to a disruptive, fully integrated, omnichannel provider of holistic pet health and wellness offerings, including premium products, services, and veterinary care. Through our integrated ecosystem, we provide our over 25 million total active customers with a comprehensive offering of differentiated products and services to fulfill their pets' health and wellness needs through our more than 1,500 pet care centers in theU.S. ,Mexico , andPuerto Rico , including a growing network of more than 225 in-store veterinary hospitals, our digital channel, and our flexible fulfillment options. Our multicategory, go-to-market strategy integrates our strong digital assets with our nationwide physical footprint to meet the needs of pet parents who are looking for a single source for all their pet's needs. Our e-commerce site and personalized mobile app serve as hubs for pet parents to manage their pets' health, wellness, and merchandise needs, while enabling them to shop wherever, whenever, and however they want. By leveraging our extensive physical network of pet care centers, we are able to offer our comprehensive product and service offering in a localized manner with a meaningful last-mile advantage over much of our competition. The full value of our health and wellness ecosystem is realized for customers through our Vital Care membership program. From the nutrition and supplies pets need each day, to the services that keep them at optimal health, Vital Care makes it easier and more affordable for pet parents to care for their pet's whole health all in one place. Vital Care memberships are at the top of our integrated loyalty programs, followed by our perks programs that provide rewards for frequent purchasing and our Pals Rewards loyalty program. We strive to be a truly unique company, one that is saving and improving millions of pet lives and tangibly improving the lives of pet parents and the partners who work for us, while at the same time executing our differentiated strategy with excellence. In tandem with Petco Love (formerly thePetco Foundation ), an independent nonprofit organization, we work with and support thousands of local animal welfare groups across the country and, through in-store adoption events, we have helped find homes for more than 6.6 million animals. Macroeconomic factors, including the prolonged COVID-19 pandemic, inflationary pressures, supply chain constraints and global economic and geopolitical developments, have varying impacts on our results of operations that are difficult to isolate and quantify. We cannot predict the duration or ultimate severity of these macroeconomic factors or the ultimate impact on the broader economy or our operations and liquidity. Please refer to the risk factors referred to in Part II, Item 1A, "Risk Factors" of this Form 10-Q. How We Assess the Performance of Our Business
In assessing our performance, we consider a variety of performance and financial measures, including the following:
16
--------------------------------------------------------------------------------Comparable Sales
Comparable sales is an important measure throughout the retail industry and includes both retail and digital sales of products and services. A new location or digital site is included in comparable sales beginning on the first day of the fiscal month following 12 full fiscal months of operation and is subsequently compared to like time periods from the previous year. Relocated pet care centers become comparable pet care centers on the first day of operation if the original pet care center was open longer than 12 full fiscal months. If, during the period presented, a pet care center was closed, sales from that pet care center are included up to the first day of the month of closing. There may be variations in the way in which some of our competitors and other retailers calculate comparable sales. As a result, data in this filing regarding our comparable sales may not be comparable to similar data made available by other retailers. Comparable sales allow us to evaluate how our overall ecosystem is performing by measuring the change in period-over-period net sales from locations and digital sites that have been open for the applicable period. We intend to improve comparable sales by continuing initiatives aimed to increase customer retention, frequency of visits, and basket size. General macroeconomic and retail business trends are also a key driver of changes in comparable sales.
Non-GAAP Financial Measures
Management and our board of directors review, in addition to GAAP (as defined
herein) measures, certain non-GAAP financial measures, including Adjusted
EBITDA, and Free Cash Flow, to evaluate our operating performance, generate
future operating plans, and make strategic decisions regarding the allocation of
capital. Further explanations of these non-GAAP measures, along with
reconciliations to their most comparable GAAP measures, are presented below
under "Reconciliation of Non-GAAP Financial Measures to GAAP Measures."
Executive Summary
The financial results for the thirteen weeks ended
•
an increase in net sales from
•
comparable sales growth of 4.1%;
•
a decrease in operating income from
•
a decrease in net income attributable to Class A and B-1 common stockholders from$52.8 million to$19.9 million , representing a period-over-period decrease of 62.2%, which was inclusive of a$19.2 million lower remeasurement of the fair value of an investment in securities and$14.7 million of integration-related costs related to the purchase of the remaining stake in our veterinary joint venture; and
•
a decrease in Adjusted EBITDA from
17
--------------------------------------------------------------------------------Results of Operations
The following tables summarize our results of operations and the percent of net sales of line items included in our consolidated statements of operations (dollars in thousands):
Thirteen weeks ended Thirty-nine weeks ended
October 29, October 30, October 29, October 30,
2022 2021 2022 2021
Net sales $ 1,501,220 $ 1,443,264 $ 4,458,008 $ 4,292,792
Cost of sales 903,543 848,555 2,658,180 2,501,688
Gross profit 597,677 594,709 1,799,828 1,791,104
Selling, general and administrative
expenses 549,622 532,760 1,651,829 1,607,938
Operating income 48,055 61,949 147,999 183,166
Interest income (130 ) (18 ) (287 ) (53 )
Interest expense 27,307 18,769 68,761 58,504
Loss on extinguishment and modification
of debt - - - 20,838
Other non-operating (income) loss (576 ) (19,773 ) 9,369 (64,934 )
Income before income taxes and income
from equity method investees 21,454 62,971 70,156 168,811
Income tax expense 4,161 14,095 20,799 43,784
Income from equity method investees (2,627 ) (2,637 ) (7,821 ) (7,490 )
Net income 19,920 51,513 57,178 132,517
Net loss attributable to noncontrolling
interest - (1,239 ) (891 ) (2,906 )
Net income attributable to Class A and
B-1
common stockholders $ 19,920 $ 52,752 $ 58,069 $ 135,423
Thirteen weeks ended Thirty-nine weeks ended
October 29, October 30, October 29, October 30,
2022 2021 2022 2021
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 60.2 58.8 59.6 58.3
Gross profit 39.8 41.2 40.4 41.7
Selling, general and
administrative expenses 36.6 36.9 37.1 37.5
Operating income 3.2 4.3 3.3 4.2
Interest income (0.0 ) (0.0 ) (0.0 ) (0.0 )
Interest expense 1.8 1.3 1.5 1.3
Loss on extinguishment and
modification of debt - - - 0.5
Other non-operating (income)
loss (0.0 ) (1.4 ) 0.2 (1.5 )
Income before income taxes and
income
from equity method investees 1.4 4.4 1.6 3.9
Income tax expense 0.3 1.0 0.5 1.0
Income from equity method
investees (0.2 ) (0.2 ) (0.2 ) (0.2 )
Net income 1.3 3.6 1.3 3.1
Net loss attributable to
noncontrolling interest - (0.1 ) (0.0 ) (0.1 )
Net income attributable to
Class A and B-1
common stockholders 1.3 % 3.7 % 1.3 % 3.2 %
Thirteen weeks ended Thirty-nine weeks ended
October 29, October 30, October 29, October 30,
2022 2021 2022 2021
Operational Data:
Comparable sales increase 4.1 % 15.5 % 4.3 % 20.9 %
Total pet care centers at end of period 1,428 1,449 1,428 1,449
Adjusted EBITDA (in thousands) $ 137,555 $ 138,509 $ 412,061 $ 419,328
18--------------------------------------------------------------------------------
Thirteen and Thirty-nine Weeks Ended
Thirty-nine Weeks Ended October 30, 2021
Thirteen weeks ended Thirty-nine weeks ended
(dollars in October 29, October 30, $ % October 29, October 30, $ %
thousands) 2022 2021 Change Change 2022 2021 Change Change
Consumables $ 720,512 $ 643,125 $ 77,387 12.0 % $ 2,093,510 $ 1,850,203 $ 243,307 13.2 %
Supplies and
companion animals 575,259 635,278 (60,019 ) (9.4 %) 1,775,149 1,957,022 (181,873 ) (9.3 %)
Services and
other 205,449 164,861 40,588 24.6 % 589,349 485,567 103,782 21.4 %
Net sales $ 1,501,220 $ 1,443,264 $ 57,956 4.0 %$ 4,458,008 $ 4,292,792 $ 165,216 3.8 % Net sales increased$58.0 million , or 4.0%, to$1.50 billion in the thirteen weeks endedOctober 29, 2022 compared to net sales of$1.44 billion in the thirteen weeks endedOctober 30, 2021 , driven by a 4.1% increase in our comparable sales. Net sales increased$165.2 million , or 3.8%, to$4.46 billion in the thirty-nine weeks endedOctober 29, 2022 compared to net sales of$4.29 billion in the thirty-nine weeks endedOctober 30, 2021 , driven by a 4.3% increase in our comparable sales. Our sales growth period-over-period was driven by our strong execution and differentiated model across digital and in our pet care centers and continued growth in our active customer base. Our total sales mix remains strong, led by continued momentum in consumables and services, whose customers shop more frequently and have among our highest long-term value. This growth is slightly offset by a decrease in supplies and companion animals sales driven by softening in discretionary spend associated with the current inflationary macroeconomic environment and the lapping of a stimulus-driven prior year. We have made certain pricing actions to partially offset cost increases during the thirty-nine weeks endedOctober 29, 2022 . The increase in consumables sales between the periods was driven in part by the increase in new pets, our strategic investments in customer acquisition and retention, continued expansion of our product assortment and a mix shift to more premium consumables, including fresh and frozen food. The decrease in supplies and companion animals sales is due in part to a strong stimulus driven thirty-nine week period endedOctober 30, 2021 and a decrease in spending on certain non-essential items. The increase in services and other was due in part to the increase in new pets, growth in our membership offerings like Vital Care, and growth in our grooming services and veterinary hospital business in which we now operate over 225 veterinary hospitals - an increase of over 55 sinceOctober 30, 2021 . For the thirteen and thirty-nine weeks endedOctober 29, 2022 , pet care center merchandise delivered growth of 1.0% and 1.1%, respectively, led by strong growth in consumables. E-commerce and digital sales increased 9.9% and 10.1% during the thirteen and thirty-nine weeks endedOctober 29, 2022 , respectively, driven by strength in our online initiatives such as repeat delivery, buy online pick up in-store ("BOPUS"), ship from store, and same day delivery as well as an increase in average basket. Services sales, which include veterinary hospitals, increased 14.4% and 15.4% during the thirteen and thirty-nine weeks endedOctober 29, 2022 , respectively, reflecting expansion of our veterinary hospital footprint and strong growth in veterinary and grooming customers.
Gross Profit
Gross profit increased$3.0 million , or 0.5%, to$597.7 million in the thirteen weeks endedOctober 29, 2022 compared to gross profit of$594.7 million for the thirteen weeks endedOctober 30, 2021 . As a percentage of sales, our gross profit rate was 39.8% for the thirteen weeks endedOctober 29, 2022 compared with 41.2% for the thirteen weeks endedOctober 30, 2021 . Gross profit increased$8.7 million , or 0.5%, to$1,799.8 million in the thirty-nine weeks endedOctober 29, 2022 compared to gross profit of$1,791.1 million for the thirty-nine weeks endedOctober 30, 2021 . As a percentage of sales, our gross profit rate was 40.4% for the thirty-nine weeks endedOctober 29, 2022 compared with 41.7% for the thirty-nine weeks endedOctober 30, 2021 . The decrease in gross profit rate between the periods was primarily due to the mix impact of strong consumables sales and lower supplies and companion animal sales during the thirteen and thirty-nine weeks endedOctober 29, 2022 . Sales channel impacts driven by strength in our digital and services business, moderate increases in distribution costs, and one-time integration costs relating to the purchase of the remaining stake in our veterinary joint venture also contributed to the decrease in gross profit rate during the thirteen and thirty-nine weeks endedOctober 29, 2022 as compared to the prior year periods. 19 --------------------------------------------------------------------------------
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses increased$16.9 million , or 3.2%, to$549.6 million for the thirteen weeks endedOctober 29, 2022 compared to$532.8 million for the thirteen weeks endedOctober 30, 2021 . As a percentage of net sales, SG&A expenses were 36.6% for the thirteen weeks endedOctober 29, 2022 compared with 36.9% for the thirteen weeks endedOctober 30, 2021 . The increase in SG&A expenses period-over-period was to support our growth as we continue to invest in infrastructure and our people, along with higher variable costs on increased sales. SG&A expenses increased$43.9 million , or 2.7%, to$1,651.8 million for the thirty-nine weeks endedOctober 29, 2022 compared to$1,607.9 million for the thirty-nine weeks endedOctober 30, 2021 . As a percentage of net sales, SG&A expenses were 37.1% for the thirty-nine weeks endedOctober 29, 2022 compared with 37.5% for the thirty-nine weeks endedOctober 30, 2021 , reflecting operating leverage from net sales growth. The increase in SG&A expenses period-over-period was to support our growth as we continue to invest in infrastructure and our people and was partially offset by a decrease in advertising expenses, primarily due to investments that were made during the thirty-nine week period endedOctober 30, 2021 for our rebranding campaign, inclusive of a TV launch and associated advertisements.
Interest Expense
Interest expense increased$8.5 million , or 45.5%, to$27.3 million in the thirteen weeks endedOctober 29, 2022 compared with$18.8 million in the thirteen weeks endedOctober 30, 2021 . Interest expense increased$10.3 million , or 17.5%, to$68.8 million in the thirty-nine weeks endedOctober 29, 2022 compared with$58.5 million in the thirty-nine weeks endedOctober 30, 2021 . The increase was primarily driven by higher interest rates on the First Lien Term Loan. For more information on these obligations, refer to Note 3, "Senior Secured Credit Facilities," to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Loss on Extinguishment and Modification of Debt
Loss on extinguishment and modification of debt was$20.8 million for the thirty-nine weeks endedOctober 30, 2021 . This loss was recognized in conjunction with theMarch 2021 refinancing of the Amended Term Loan Facility and Amended Revolving Credit Facility. There was no loss on debt extinguishment and modification for the thirteen weeks endedOctober 30, 2021 or the thirteen and thirty-nine weeks endedOctober 29, 2022 . For more information regarding these activities, refer to Note 3, "Senior Secured Credit Facilities," to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Other Non-Operating (Income) Loss
Other non-operating income was$0.6 million for the thirteen weeks endedOctober 29, 2022 , and other non-operating loss was$9.4 million for the thirty-nine weeks endedOctober 29, 2022 . Other non-operating income was$19.8 million and$64.9 million for the thirteen and thirty-nine weeks endedOctober 30, 2021 , respectively. These losses and gains relate to non-cash remeasurements of the fair value of our investment in Rover Group, Inc. For more information regarding this activity, refer to Note 4, "Fair Value Measurements," to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Income Tax Expense
Our effective tax rates were 17.3% and 26.4%, resulting in income tax expense of$4.2 million and$20.8 million for the thirteen and thirty-nine weeks endedOctober 29, 2022 , respectively, compared to effective tax rates of 21.1% and 24.4%, resulting in income tax expense of$14.1 million and$43.8 million for the thirteen and thirty-nine weeks endedOctober 30, 2021 , respectively. The decrease in effective tax rate for the thirteen weeks endedOctober 29, 2022 is primarily driven by an increase in federal tax credits. The increase in effective tax rate for the thirty-nine weeks endedOctober 29, 2022 is primarily driven by a decrease in earnings in the thirty-nine weeks endedOctober 29, 2022 and the recognition of professional fees and other transaction costs incurred by the Company in connection with its initial public offering during the thirteen and thirty-nine weeks endedOctober 30, 2021 . 20 -------------------------------------------------------------------------------- Reconciliation of Non-GAAP Financial Measures to GAAP Measures The following information provides definitions and reconciliations of certain non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP. Such non-GAAP financial measures are not calculated in accordance with GAAP and should not be considered superior to, as a substitute for or alternative to, and should be considered in conjunction with, the most comparable GAAP measures. The non-GAAP financial measures presented may differ from similarly-titled measures used by other companies. Adjusted EBITDA We present Adjusted EBITDA, a non-GAAP financial measure, because we believe it enhances an investor's understanding of our financial and operational performance by excluding certain material non-cash items, unusual or non-recurring items that we do not expect to continue in the future, and certain other adjustments we believe are or are not reflective of our ongoing operations and performance. Adjusted EBITDA enables operating performance to be reviewed across reporting periods on a consistent basis. We use Adjusted EBITDA as one of the principal measures to evaluate and monitor our operating financial performance and to compare our performance to others in our industry. We also use Adjusted EBITDA in connection with establishing discretionary annual incentive compensation targets, to make budgeting decisions, to make strategic decisions regarding the allocation of capital, and to report our quarterly results as defined in our debt agreements, although under such agreements the measure is calculated differently and is used for different purposes. Adjusted EBITDA is not a substitute for net income (loss), the most comparable GAAP measure, and is subject to a number of limitations as a financial measure, so it should be used in conjunction with GAAP financial measures and not in isolation. There can be no assurances that we will not modify the presentation of Adjusted EBITDA in the future. In addition, other companies in our industry may define Adjusted EBITDA differently, limiting its usefulness as a comparative measure. Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations-Reconciliation of Non-GAAP Financial Measures to GAAP Measures" included in the 2021 Form 10-K for more information regarding how we define Adjusted EBITDA. 21 --------------------------------------------------------------------------------
The table below reflects the calculation of Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented:
Thirteen weeks ended Thirty-nine weeks ended
October 29, October 30, October 29, October 30,
(dollars in thousands) 2022 2021 2022 2021
Net income attributable to Class A and B-1
common stockholders$ 19,920 $ 52,752 $ 58,069 $ 135,423 Interest expense, net 27,177 18,751 68,474 58,451 Income tax expense 4,161 14,095 20,799 43,784 Depreciation and amortization 48,029 42,792 143,599 125,637 Income from equity method investees (2,627 ) (2,637 ) (7,821 ) (7,490 ) Loss on debt extinguishment and modification - - - 20,838 Asset impairments and write offs 930 3,228 2,299 5,918 Equity-based compensation 15,775 13,381 40,892 36,491 Other non-operating (income) loss (576 ) (19,773 ) 9,369 (64,934 ) Mexico joint venture EBITDA (1) 7,040 6,661 20,319 18,523 Store pre-opening expenses 3,931 4,222 11,093 11,739 Store closing expenses 1,310 1,264 4,051 3,329 Non-cash occupancy-related costs (2) 2,496 1,540 6,976 5,564 Acquisition-related integration costs (3) 1,592 - 14,687 - Other costs (4) 8,397 2,233 19,255 26,055 Adjusted EBITDA$ 137,555 $ 138,509 $ 412,061 $ 419,328 Net sales$ 1,501,220 $ 1,443,264 $ 4,458,008 $ 4,292,792 Net margin (5) 1.3 % 3.7 % 1.3 % 3.2 % Adjusted EBITDA Margin (5) 9.2 % 9.6 % 9.2 % 9.8 % (1)Mexico joint venture EBITDA represents 50% of the entity's operating results for the periods presented, as adjusted to reflect the results on a basis comparable to our Adjusted EBITDA. In the financial statements, this joint venture is accounted for as an equity method investment and reported net of depreciation and income taxes. Because such a presentation would not reflect the adjustments made in our calculation of Adjusted EBITDA, we include our 50% interest in ourMexico joint venture on an Adjusted EBITDA basis to ensure consistency. The table below presents a reconciliation ofMexico joint venture net income toMexico joint venture EBITDA: Thirteen weeks ended Thirty-nine weeks ended October 29, October 30, October 29, October 30, (dollars in thousands) 2022 2021 2022 2021 Net income$ 5,251 $ 5,274 $ 14,448 $ 14,987 Depreciation 4,861 3,660 13,866 10,461 Income tax expense 2,957 3,277 8,344 8,688 Foreign currency gain (395 ) (60 ) (15 ) (547 ) Interest expense, net 1,406 1,171 3,994 3,457 EBITDA$ 14,080 $ 13,322 $ 40,637 $ 37,046 50% of EBITDA$ 7,040 $ 6,661 $ 20,319 $ 18,523 (2)
Non-cash occupancy-related costs include the difference between cash and straight-line rent for all periods.
(3)
Acquisition-related integration costs include direct costs resulting from acquiring and integrating businesses. These include third-party professional and legal fees and other integration-related costs that would not have otherwise been incurred as part of the Company's operations. For the thirteen weeks endedOctober 29, 2022 , approximately$1.0 million of integration costs were recorded in cost of sales and$0.6 million of integration costs were recorded in selling, general and administrative expenses relating to the purchase of the remaining stake in our veterinary joint venture. For the thirty-nine weeks endedOctober 29, 2022 , approximately$7.7 million of integration costs were recorded in cost of sales and$7.0 million of integration costs were recorded in selling, general and administrative expenses relating to the purchase of the remaining stake in our veterinary joint venture.
(4)
Other costs include: severance; legal reserves and related fees; one-time consulting and other costs associated with our strategic transformation initiatives; discontinuation and liquidation costs; and costs related to our initial public offering and refinancing.
(5)
We define net margin as net income attributable to Class A and B-1 common stockholders divided by net sales and Adjusted EBITDA margin as Adjusted EBITDA divided by net sales.
Free Cash Flow
Free Cash Flow is a non-GAAP financial measure that is calculated as net cash
provided by operating activities less cash paid for fixed assets. Management
believes that Free Cash Flow, which measures our ability to
22
--------------------------------------------------------------------------------generate additional cash from our business operations, is an important financial measure for use in evaluating the Company's financial performance.
The table below reflects the calculation of Free Cash Flow for the periods
presented:
Thirty-nine weeks ended
October 29, October 30,
2022 2021
(dollars in thousands)
Net cash provided by operating activities $ 209,463 $ 288,444
Cash paid for fixed assets (212,074 ) (164,330 )
Free Cash Flow $ (2,611 ) $ 124,114
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are funds generated by operating activities and
available capacity for borrowings on our $500 million secured asset-based
revolving credit facility maturing March 4, 2026 (the "ABL Revolving Credit
Facility"). Our ability to fund our operations, to make planned capital
investments, to make scheduled debt payments and to repay or refinance
indebtedness depends on our future operating performance and cash flows, which
are subject to prevailing economic conditions and financial, business, and other
factors, some of which are beyond our control. Our liquidity as of October 29,
2022 was $592.6 million , inclusive of cash and cash equivalents of $148.7
million and $443.9 million of availability on the ABL Revolving Credit Facility.
We are a party to contractual obligations involving commitments to make payments
to third parties. These obligations impact our short-term and long-term
liquidity and capital resource needs. We believe that our current resources,
together with anticipated cash flows from operations and borrowing capacity
under the ABL Revolving Credit Facility will be sufficient to finance our
operations, meet our current cash requirements, and fund anticipated capital
investments for at least the next 12 months. We may, however, seek additional
financing to fund future growth or refinance our existing indebtedness through
the debt capital markets, but we cannot be assured that such financing will be
available on favorable terms, or at all.
Cash Flows
The following table summarizes our consolidated cash flows:
Thirty-nine weeks ended
October 29, October 30,
(dollars in thousands) 2022 2021
Total cash provided by (used in):
Operating activities $ 209,463 $ 288,444
Investing activities (252,697 ) (167,770 )
Financing activities (27,033 ) (14,863 )
Net (decrease) increase in cash, cash equivalents
and restricted cash $ (70,267 ) $ 105,811
Operating Activities
Our primary source of operating cash is sales of products and services to
customers, which are substantially all on a cash basis, and therefore provide us
with a significant source of liquidity. Our primary uses of cash in operating
activities include: purchases of inventory; freight and warehousing costs;
employee-related expenditures; occupancy-related costs for our pet care centers,
distribution centers and corporate support centers; credit card fees; interest
under our debt agreements; and marketing expenses. Net cash provided by
operating activities is impacted by our net income adjusted for certain non-cash
items, including: depreciation, amortization, impairments and write-offs;
amortization of debt discounts and issuance costs; deferred income taxes;
equity-based compensation; impairments of goodwill and intangible assets; other
non-operating loss (income); and the effect of changes in operating assets and
liabilities.
23
--------------------------------------------------------------------------------
Net cash provided by operating activities was $209.5 million in the thirty-nine
weeks ended October 29, 2022 compared with net cash provided by operating
activities of $288.4 million in the thirty-nine weeks ended October 30, 2021 .
The decrease in operating cash flow was due to lower operating income, an
increase in cash paid for inventory, higher payroll and fringe benefits
including payouts of prior year accrued incentive bonuses. This was partially
offset by timing differences in accounts payable as well as lower cash payments
on operating leases due to the timing of rent payments.
Investing Activities
Cash used in investing activities consists of capital expenditures, which in the thirty-nine weeks endedOctober 29, 2022 and the thirty-nine weeks endedOctober 30, 2021 primarily supported our transformation initiatives. Net cash used in investing activities was$252.7 million and$167.8 million for the thirty-nine weeks endedOctober 29, 2022 andOctober 30, 2021 , respectively. The increase in capital expenditures between the periods was predominantly due to the expansion of our veterinary hospitals, investments in digital assets and innovation in response to our sales growth. In addition, inMay 2022 , we completed the purchase of the remaining 50% stake in our veterinary joint venture for$35.0 million , which is now a wholly owned subsidiary.
Financing Activities
Net cash used in financing activities was
Financing cash flows in the thirty-nine weeks endedOctober 29, 2022 primarily consisted of borrowings and repayments under the ABL Revolving Credit Facility, quarterly term loan repayments, and payments for tax withholdings on stock-based awards. Financing cash flows in the thirty-nine weeks endedOctober 30, 2021 primarily consisted of borrowings and repayments of debt in connection with theMarch 4, 2021 debt refinancing transaction discussed under "Sources of Liquidity" below. For more information regarding these activities, refer to Note 3 "Senior Secured Credit Facilities," to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Sources of Liquidity
OnMarch 4, 2021 , the Company completed a refinancing transaction by repaying the Amended Term Loan Facility and entering into a new$1,700 million secured term loan facility maturing onMarch 4, 2028 (the "First Lien Term Loan") and the ABL Revolving Credit Facility, which matures onMarch 4, 2026 and has availability of up to$500.0 million , subject to a borrowing base. Interest under the First Lien Term Loan is based on, at the Company's option, either a base rate or Adjusted LIBOR, subject to a 0.75% floor, payable upon maturity of the LIBOR 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 LIBOR plus 1.0%. The applicable rate is 2.25% per annum for a base rate loan or 3.25% per annum for an Adjusted LIBOR loan. Principal payments are$4.25 million quarterly and commenced onJune 30, 2021 . The terms under the ABL Revolving Credit Facility are substantially similar to those of the Amended Revolving Credit Facility. InNovember 2022 , the Company entered into a series of interest rate cap agreements to limit the maximum interest on a portion of the Company's variable-rate debt and decrease its exposure to interest rate variability when the three-month Secured Overnight Financing Rate as published by CME Group exceeds 4.5%. The interest rate caps are forward-starting with an effective date ofDecember 30, 2022 and expire onDecember 31, 2024 .
For more information regarding this indebtedness, refer to Note 3, "Senior Secured Credit Facilities," to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in
24
--------------------------------------------------------------------------------
apply judgments that affect the reported amounts of assets, liabilities, net
sales, expenses and related disclosures. We base our estimates and judgments on
historical experience, current trends and other factors that we believe to be
relevant at the time our consolidated financial statements are prepared. On an
ongoing basis, we review the accounting policies, assumptions, estimates and
judgments to ensure that our financial statements are presented fairly and in
accordance with GAAP. However, because future events and their effects cannot be
determined with certainty, actual results could differ from our assumptions and
estimates, and such differences could be material.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in the 2021 Form 10-K.
Recent Accounting Pronouncements
Refer to Note 1, "Summary of Significant Accounting Policies," to the Notes to
Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q
for information regarding recently issued accounting pronouncements.
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