Dear Shareholders and Friends,
2021 was an incredible year in Petco’s quest to deliver Purpose Driven Performance. For us that means having a tangible impact on the world around us while striving to execute as well as any company on the planet. As the consumer environment around us continued to change rapidly, Petco moved boldly in its effort to shape the future of pet health & wellness, deepen our competitive moats, take care of our people and out-execute the competition.
Our complete end-to-end health & wellness positioning and offering is differentiated. And, over the last two years, we have established a position as a leader of the next generation of retail that we call Retail 3.0, a theme which we expanded on significantly at our inaugural Investor Day in March of 2022.
As the consumer environment around us continued to change rapidly, Petco moved boldly in its effort to shape the future of pet health & wellness, deepen our competitive moats, take care of our people and out-execute the competition.
Our ecosystem-led strategy is attracting, retaining and resonating with the highest value pet parents, and combined with our execution-driven mindset and rigorous cost discipline, we delivered record financial results in 2021.
We over-delivered against financial projections, beating expectations and raising guidance four quarters in a row, realizing 31% revenue growth on a two-year basis, 127% two-year digital growth and delivering seven consecutive quarters of double-digit comparable sales growth – which, at the time of this letter, makes us 1 of only 5 companies in the top 50 U.S. retail universe to deliver this level of sustained performance.
And we have combined these business results with tangible progress on our Purpose agenda, having a tangible impact on pet lives, pet parent lives, Petco partner lives and the world around us. Our Petco partners across Pet Care Centers, Distribution Centers and our Support Centers have been there through challenging times to care for pets.
In 2021 we saw elevated levels of pet ownership, continuing the trend we’ve seen since the beginning of the pandemic. Pet parents are in it for the long term as they grow up and grow old together with their furry friends. We call it the furry annuity, but to think of it another way, what we’re seeing with pets is akin to the post WWII Baby Boom. New births drove sales of diapers in the ‘50’s, set dance floors ablaze in the discos of the ‘70s and they are now fueling today’s healthcare boom.
The difference is, we ARE the Pampers, we ARE the Studio 54 and we ARE the Kaiser Permanente of pets.
Our differentiated model and omnichannel capabilities have resulted in Petco gaining more than its fair share with these new furry, scaled and feathered friends.
We have deepened our customer relationships, increased digital and Pet Care Center engagement and we now offer more ways than ever for pets and pet parents to interact with our products and services.
A major megatrend shaping the future of the pet industry is the evolution in the way people think about and treat their pets. We know that 77% of pet owners now consider themselves pet parents, and 60% love to spoil their pets. On top of that, Millennials and Gen Z’ers are increasingly becoming pet parents with 26% of Gen Z’ers and 24% of Millennials adopting a new pet in 2021, the largest of any age cohort. These groups skew highly on humanization and are higher spending.
The trend toward pet humanization and the growing demand for health-conscious, premium pet products are long-term, secular trends that are here to stay. The average pet parent is spending more on their pets and actively seeking out personalized recommendations and guidance, and lastly, they increasingly want to care for their pets in a way that is good for the planet and society.
These are some of the powerful trends that continue to shape the category. Over the last two years, the pet category has outpaced historical trends, growing at a 9% compound annual growth rate (CAGR), with forecasts that it will remain strong at a 7% CAGR through 2025. The pet category has proven to be among the most economically resilient categories in our economy.
The significant work we have done over the last four years to retool Petco positioned us well in 2021, delivering 18% revenue growth for the year with overall share gains in food, in digital and in veterinary services.
We are well positioned to capture the market, an achievement only made possible by our one-of-a-kind ecosystem.
More than 54% of pet parents are looking for a one-stop-shop for their pet’s needs. In fact, that’s up 4 points in the last two years.
That’s why we have been laser-focused on building a ‘one-of-one’ end-to-end pet wellness ecosystem that spans services and products, on and offline, all with a membership model that utilizes data and insights in a personalized way.
And our ecosystem is a win-win.
It results in better care for pets and creates structural advantages for Petco. The ecosystem positions us to meet the customer mega trends shaping the category, particularly the committed health-conscious pet parents who take the very best care of their pets, spending 16% more on their pet’s whole care than the average pet parent.
Pet services are large, fragmented markets. With a combined total spend of $45 billion, the majority of which comes from real, tangible, “hands on pet” offerings, our blend of veterinary, grooming and training services gives us a substantial advantage. Pet services also have some of the highest growth rates in the pet category, benefitting from the massive increase in pet ownership.
Looking in detail at some of the key components, our Vetco Total Care hospitals continued to deliver incredible results with incremental benefits as the addition of a Vetco hospital within a Pet Care Center has been generating a mid single-digit center store sales increase, primarily driven by more customer trips.
Our vet hospitals and associated Pet Care Center remodel is a major driver of growth through our ‘step and repeat’ model which, in addition to the full hospital, includes a JustFoodforDogs FreshFood Pantry and a Reddy store-in-store. Combined, this step and repeat model, targeting roughly 70 locations per year, is a powerful and unique driver of shareholder value.
As of fiscal year-end 2021, we reached 197 full-service veterinary hospitals, continuing one of the fastest vet buildouts in history. Petco is now operating at scale. In addition, we had approximately 1,000 weekly Vetco mobile clinics, that provide both people and buying synergies.
To further accelerate our vet growth, we recently announced the transformational purchase of the remaining position of our Thrive hospital joint venture. This is an exciting and important milestone in our veterinary hospital journey, demonstrating our deep commitment to providing pet parents high-quality, integrated health and wellness services. There are tangible synergies from this acquisition.
And our build out in vet provides a powerful adjacency with insurance and Rx in a closed loop fashion as our veterinarians are writing scripts that we can now fulfill.
The total pet merchandise category is $72 billion, projected to grow at a 7% CAGR to 2025.
Within the most premium section of consumables, we’re projecting double-digit growth during the same timeframe. We continue to take share in this category that has shown remarkable consistency through economic cycles due to our differentiated portfolio, including premium, exclusive and owned brands.
In particular, the fresh and frozen market is growing rapidly, driven by humanization and premiumization trends, and is among one of the most attractive avenues of growth for Petco. In this segment, our substantial brick-and-mortar footprint provides an incredible competitive advantage versus online-only players as 98% of fresh and frozen is fulfilled in-store.
To capitalize on this opportunity, we recently expanded our relationship with JustFoodForDogs, making us the exclusive national brick-and-mortar retailer of JustFoodForDogs fresh-frozen meals through 2024, with the right to extend through 2026. We also have the right to receive warrants for an ownership stake in this exciting high growth company, with the potential for more equity in the future. In addition, we’ll co-develop a new fresh and frozen owned brand product line under WholeHearted, which I’m very excited about.
Reddy is one example of how we are extending our presence within the highest value parts of the market, through ‘human-like’ fashionable products and new merchandising channels including shop-in-shops, Lowe’s and our flagship store in SoHo. Reddy primarily targets millennials, who generally consider their pets as an extension of themselves and their family. And it’s having tremendous success, both in driving incremental share of wallet and increasing awareness through its designer apparel and accessories, turning every sidewalk into a fashion runway.
We also announced an initiative to lead an acceleration in the $4 billion Pet Health OTC category. We are relaunching our Well & Good brand and working with vendors on enhanced offerings across holistic grooming, first aid and nutritional supplements that are easy to understand, simple to use and efficacious. We plan to launch physical and digital “Healthy Habits Hubs” to bring these offerings to life and help solution-seeking pet parents.
The omnichannel promise of integrated brick-and-mortar plus digital that we’ve all been talking about for years was accelerated by the pandemic and is now winning with consumers. We call it Retail 3.0. It’s clear that Petco is now a leader in this transition as we have a combination of best-in-class digital assets and a strategic physical footprint.
But it’s more than that.
It’s the way we are leveraging our physical footprint as micro-distribution centers for over 80% of our digital orders across curbside, same-day and ship from store.
Combine this with a scaled and rapidly growing services offering and the fact that we make a tangible difference in the communities within which we operate, and we have a Retail 3.0 offer that pet specialty retailers, pureplay online players and mass players just can’t match.
A great Retail 3.0 offer starts with a winning digital capability. It is clear our digital business is winning and has become a key channel for customers.
Digital delivered 127% two-year growth, one of the highest of any retailer. Underneath that momentum is a great customer experience. Our digital business is driving 70% higher retention of our multichannel customers and 51% higher recurring revenue customer sales in 2021. This is in part due to the highly personalized nature of our online and app-based shopping – our digital offering helps get customers what they want, when they want it, not to mention our ability to market directly to each of these customers leveraging our exceptional analytics capabilities.
Our Petco app continues to grow in popularity, with our weekly active user base growing 90% in the past year. As the epitome of how our 360-degree strategy is coming to life, the app’s highly personalized approach allows pet parents to get what they need, when they need it, and provides data to fuel our precision marketing. This data, in turn, enables us to increase share of wallet with customers who stay with Petco longer and spend more at higher margins.
With 91% of digital customers choosing same-day delivery or BOPUS when available, combining our digital capabilities with over 1,400 same-day delivery locations gives us opportunities to capture both cost and speed advantages against competitors while being better for the planet.
It is clear that our Pet Care Centers are powerful complements to our digital business.
We’ve had 7 consecutive quarters of positive B&M comp growth and introduced Petco Pet Care Centers to 9.1 million new customers over the past two years through aggressive marketing and moving customers across our ecosystem. When you consider the consumer buying shifts that COVID-19 has generated over the last two years, this is an outstanding result.
But it’s the powerful combination of these offerings that is really delivering Retail 3.0 and Petco is positioned at the forefront of the next generation of retail.
Among the many exciting avenues of growth for Petco, one of the most important is our recent launch of Vital Care 2.0, an enhanced version of the most comprehensive pet wellness membership program in the category.
From the nutrition and supplies pets need every day to the checkups and services that keep them at optimal health, Vital Care 2.0 brings the entire Petco ecosystem into one offering, making it easier and more affordable for pet parents to care for their pets’ whole health, all in one place. Only Petco can do this.
Since rolling out the enhanced Vital Care 2.0 program in Pet Care Centers in early 2022, there has been a tangible increase in sign-ups, building on the nearly 160,000 subscribers who were already finding tremendous value in the prior iteration. The expansion to cats has been very well received and is contributing to the member uptick.
Vital Care is an incredible tool for both better pet health and share of wallet growth for Petco, with these customers spending 3x more than the average customer across our merchandise and services. Over 20% of these members are new to food and over 30% are new to services with Petco. Vital Care is at the center of our go-forward customer value proposition, and the early adoption of Vital Care is proof of the value of the program to our pet parents.
Vital Care is an incredible tool for both better pet health and share of wallet growth, with these customers spending 3x more than the average customer across our merchandise and services.
Our double-digit growth momentum in Mexico continues. Now with 108 Pet Care Centers supported by over 2,800 partners, Petco Mexico goes from strength to strength as demonstrated by its eighth consecutive year of double-digit comp growth, the addition of 12 new Pet Care Centers in the last year alone, and the recent exciting announcement of expansion into Chile, including physical stores and e-commerce.
Our partnership with Canadian Tire is rebounding after tight Covid lockdowns in Canada, and in 2021 we expanded our wholesale business with Invivo in France.
In Q4, we announced an exciting pilot with Lowe’s for Petco store-in-stores in select locations. We see tremendous potential in exposing new customers to our great product line-up, particularly owned brands.
Lastly, we complimented our ecosystem by announcing a partnership with Rover for discounts on walking and boarding.
Our growth momentum continues, with past successes compounding. Competitively, we have steadily gained share overall as well as in the digital and brick-and-mortar channels discretely. Our customer acquisition engine has proven to be a competitive advantage across both new and existing pet households. In 2021, we added millions of net new customers, bringing our total active customer count to 24.1 million at the end of fiscal 2021.
2021 revenue grew 18% to $5.8 billion, the highest in company history. For the fourth quarter of 2021, revenue grew 13% with comparable sales up 14%, or 30% on a 2-year stack with strength in transactions and average basket trends.
Adjusted EBITDA1 outpaced revenue growth for the year, up 22% to $591 million, as we continue to generate operating leverage. Our performance enabled us to generate free cash flow1 for the year of $119 million, up 9% versus the prior year, supported by strong liquidity at the end of the year of $650 million. And we delivered these results through a dynamic cost and supply environment.
Looking forward, building on our strong performance in 2021 with a track record of execution, we are confident in our ability to drive continued growth and market share gains in our areas of focus. And we are laser focused on the future. With our recently raised long-term forecast, we’re investing and expecting to drive sustainable, profitable growth and shareholder value for the long run.
On the topline, our plans and investments are designed to enable us to outgrow the category powered by our ecosystem, our omnichannel capabilities, our step and repeat “vet plus” remodel approach, our merchandise differentiation and incremental TAM capture.
From a profit standpoint, our plans entail continuing to grow adjusted EBITDA1 at a faster clip than revenue – with aggressive cost discipline.
At Petco, purpose-driven performance means combining incredible business results with tangible improvements in the lives of pets, pet parents and those working at Petco.
We are on a mission to improve the lives of pets, pet parents and our Petco partners.
This year we saved nearly 400,000 pet lives, and in partnership with Merck, we distributed over half a million free vaccines to under-resourced communities as part of our 1 million free vaccines commitment.
As part of Petco Love’s Love Lost program, a searchable database that uses facial recognition technology to help reunite lost pets with their families, we reunited approximately 4,000 pets with their loving parents in 2021, leveraging our database of over 100,000 searchable pets, including nearly 2,000 shelter locations.
One shining example of Petco Love’s support is our continuing relationship with Gloria Marti and the incredible Puerto Rico-based Save a Sato. In 2020, Petco Love recognized her lifesaving work with the title of National Unsung Hero and a $50,000 grant award.
And her lifesaving work continues; in 2021 we proudly celebrated her dedication by awarding Save a Sato with an additional $50,000 grant for her ongoing work, transferring 1,200+ animals to adoption partners to help them find loving homes.
And while the world has remained in turmoil around us, events further afield have not gone unnoticed. Our hearts go out to the people of Ukraine, and the love that the Ukrainians have for their pets is seen in photo after photo, whether people leaving the country with pets in tow or lying by their side in a shelter. Together with our nonprofit Petco Love, we’re coordinating with international animal welfare partners, donating $1 million to support the ongoing needs of pets and pet parents in Ukraine and neighboring countries offering refuge.
At Petco, we are committed to increasing our assortment of sustainable products to 50% by the end of 2025, reinforcing our pledge to corporate social responsibility and preserving the health and wellness of pets, people and planet. In addition to offering more sustainable products and solutions for pet parents – such as our incredibly popular SoPhresh product line – in fiscal 2021, we eliminated 66,000 pounds of plastic waste and nearly 8 million pounds of cardboard waste by fulfilling online orders in Petco Pet Care Centers. We also eliminated more than 4.5 million single-use plastic bags within our Owned Brand supply chain.
In the first quarter of 2022, American Humane, the world’s largest certifier of animal welfare, protecting more than 1 billion animals around the globe, awarded Petco the American Humane Certified Seal of Approval; the only pet retailer to be granted such an award.
We will continue to disclose our progress on these efforts through our annual Sustainability Report which highlights how each day we strive to do the right thing for pets, pet parents and the planet we all share.
As always, we continue to prioritize the wellbeing of those who work at Petco and believe that our partners are worth investing in. The Board and I have committed that as the company does better, our partners will continue to do better too.
That is why in 2021 we increased average wage rates by double-digit percentages for partners with us since the beginning of the pandemic, paid out bonuses over 200%, and invested nearly $12 million in benefits premiums and enhancements since the pandemic.
In our vet business, we’ve worked hard to put our doctors in the driver’s seat. By layering on our autonomous medicine approach to allow personalized care, flexible hours, industry leading compensation, benefits, equity awards and total rewards, we are becoming the employer of choice in the industry. All reasons why over 93% of our doctors recommend us as a great place to work.
We believe that fostering a diverse and inclusive environment for our partners is not only the right thing to do, but a key piece of servicing our more than 24 million unique and diverse customers. That’s why I am so proud that in fiscal 2021, more than 50% of our director and above new hires and promotions were filled by women and people of color.
Our Petco partners have done an amazing job helping our customers even as we navigated the Omicron spike at the end of the year and all with a continued focus on health and safety for everyone around them. Our safety measures worked, as Petco employee Covid rates have been less than half national averages throughout the pandemic.
I’m grateful to each of our team members for how they delivered for pets and the parents that love them throughout the past year. #PetcoStrong may have begun as a grassroots mantra, but almost two years on, it’s become our partners’ rallying cry.
1 Non-GAAP financial measure; please refer to the section titled “Reconciliation of Non-GAAP Financial Measures to GAAP Measures” beginning on page 51 of the company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2022 for definitions and reconciliations of Non-GAAP to GAAP financial metrics.
Information about the forward-looking statements in this letter can be found here.