UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October ~~29,~~28, ~~2022~~2023


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-39878

Petco Health and Wellness Company, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware	81-1005932
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10850 Via Frontera San Diego, California	92127
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (858) 453-7845

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Class A Common Stock, par value $0.001 per share

WOOF

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s Class A Common Stock outstanding as of December ~~6, 2022~~5, 2023 was ~~228,129,255~~230,697,818.

The number of shares of the registrant’s Class B-1 Common Stock outstanding as of December ~~6, 2022~~5, 2023 was 37,790,781.

The number of shares of the registrant’s Class B-2 Common Stock outstanding as of December ~~6, 2022~~5, 2023 was 37,790,781.

Table of Contents


		Page

PART I.	FINANCIAL INFORMATION	34

Item 1.	Financial Statements (Unaudited)	34
	Consolidated Balance Sheets	34
	Consolidated Statements of Operations	45
	Consolidated Statements of Comprehensive Income	56
	Consolidated Statements of Equity	67
	Consolidated Statements of Cash Flows	8
	Notes to Unaudited Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1617
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2527
Item 4.	Controls and Procedures	2528

PART II.	OTHER INFORMATION	2729

Item 1.	Legal Proceedings	2729
Item 1A.	Risk Factors	2729
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2729
Item 3.	Defaults Upon Senior Securities	2729
Item 4.	Mine Safety Disclosures	2729
Item 5.	Other Information	2730
Item 6.	Exhibits	2831
Signatures		2932

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 as contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements that are not statements of historical fact, including, but not limited to, statements regarding: our expectations with respect to our revenue, expenses, profitability, and other operating results; our growth plans; our ability to compete effectively in the markets in which we participate; the execution on our transformation initiatives; and the impact of certain macroeconomic factors, including inflationary and interest rate pressures, consumer spending patterns, global supply chain constraints, and global economic and geopolitical developments, on our business. Forward-looking and other statements in this Form 10-Q may also address our progress, plans, and goals with respect to sustainability initiatives, and the inclusion of such statements is not an indication that these contents are necessarily material to investors or required to be disclosed in our filings with the U.S. Securities and Exchange Commission (the “SEC”). Such plans and goals may change, and statements regarding such plans and goals are not guarantees or promises that they will be met. In addition, historical, current, and forward-looking sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future.

Such forward-looking statements can generally be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “intends,” “will,” “shall,” “should,” “anticipates,” “opportunity,” “illustrative”, or the negative thereof or other variations thereon or comparable terminology. Although we believe that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to be correct or that any forward-looking results will occur or be realized. Nothing contained in this Form 10-Q is, or should be relied upon as, a promise or representation or warranty as to any future matter, including any matter in respect of our operations or business or financial condition. All forward-looking statements are based on current expectations and assumptions about future events that may or may not be correct or necessarily take place and that are by their nature subject to significant uncertainties and contingencies, many of which are outside of our control.

Forward-looking statements are subject to many risks, uncertainties and other factors that could cause actual results or events to differ materially from the potential results or events discussed in such forward-looking statements, including, without limitation, those identified in this Form 10-Q as well as the following: (i) increased competition (including from multi-channel retailers and e-Commerce providers); (ii) reduced consumer demand for our products and/or services; (iii) our reliance on key vendors; (iv) our ability to attract and retain qualified employees; (v) risks arising from statutory, regulatory, and/or legal developments; (vi) macroeconomic pressures in the markets in which we operate, including ~~inflation;~~inflation and prevailing interest rates; (vii) failure to effectively manage our costs; (viii) our reliance on our information technology systems; (ix) our ability to prevent or effectively respond to a data privacy or security breach; (x) our ability to effectively manage or integrate strategic ventures, alliances, or acquisitions and realize the anticipated benefits of such transactions; (xi) economic or regulatory developments that might affect our ability to provide attractive promotional financing; (xii) business interruptions and other supply chain issues; (xiii) catastrophic events, political tensions, conflicts and wars (such as the ongoing conflict in Ukraine), health crises, and pandemics; (xiv) our ability to maintain positive brand perception and recognition; (xv) product safety and quality concerns; (xvi) changes to labor or employment laws or regulations; (xvii) our ability to effectively manage our real estate portfolio; (xviii) constraints in the capital markets or our vendor credit terms; (xix) changes in our credit ratings; (xx) impairments of the carrying value of our goodwill and ~~(xx)~~other intangible assets; (xxi) our ability to successfully implement our operational adjustments, achieve the expected benefits of our cost action plans and drive improved profitability; and (xxii) the other risks, uncertainties and other factors referred to under “Risk Factors” and identified elsewhere in this Form 10-Q and our other filings with the SEC. The occurrence of any such factors could significantly alter the results set forth in these statements.

We caution that the foregoing list of risks, uncertainties and other factors is not complete, and forward-looking statements speak only as of the date they are made. We undertake no duty to update publicly any such forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required by applicable law, regulation or other competent legal authority.

In addition, statements such as “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Form 10-Q. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or

review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)


	October 29, 2022			January 29, 2022			October 28, 2023			January 28, 2023
	(Unaudited)						(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	148,731		$	211,602		$	139,782		$	201,901
Receivables, less allowance for credit losses ($1,140 and $931, respectively)		46,446			55,618
Receivables, less allowance for credit losses ($1,897 and $952, respectively)								50,180			49,580
Merchandise inventories, net		723,424			675,111			730,148			652,430
Prepaid expenses		43,708			42,355			46,856			51,274
Other current assets		56,724			86,091			40,562			60,809
Total current assets		1,019,033			1,070,777			1,007,528			1,015,994
Fixed assets		1,937,804			1,745,691			2,142,520			1,987,560
Less accumulated depreciation		(1,146,217	)		(1,018,769	)		(1,314,721	)		(1,184,233	)
Fixed assets, net		791,587			726,922			827,799			803,327
Operating lease right-of-use assets		1,378,336			1,338,465			1,390,671			1,397,761
Goodwill		2,191,891			2,183,991			976,247			2,193,941
Trade name		1,025,000			1,025,000			1,025,000			1,025,000
Other long-term assets		171,045			152,786			199,316			176,806
Total assets	$	6,576,892		$	6,497,941		$	5,426,561		$	6,612,829
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and book overdrafts	$	384,595		$	403,976		$	486,634		$	381,213
Accrued salaries and employee benefits		125,113			150,630			100,997			89,929
Accrued expenses and other liabilities		220,055			210,872			215,875			217,556
Current portion of operating lease liabilities		304,789			265,897			305,975			309,766
Current portion of long-term debt and other lease liabilities		22,645			21,764			5,082			22,794
Total current liabilities		1,057,197			1,053,139			1,114,563			1,021,258
Senior secured credit facilities, net, excluding current portion		1,631,335			1,640,390			1,574,909			1,628,331
Operating lease liabilities, excluding current portion		1,131,081			1,096,133			1,148,958			1,148,155
Deferred taxes, net		298,380			318,355			270,841			303,121
Other long-term liabilities		130,990			134,105			124,436			130,487
Total liabilities		4,248,983			4,242,122			4,233,707			4,231,352
Commitments and contingencies (Notes 3 and 6)
Commitments and contingencies (Notes 4 and 8)
Stockholders' equity:
Class A common stock, $0.001 par value: Authorized - 1.0 billion shares; Issued and outstanding - 227.9 million and 227.2 million shares, respectively		228			227
Class A common stock, $0.001 par value: Authorized - 1.0 billion shares; Issued and outstanding - 230.3 million and 228.3 million shares, respectively								230			228
Class B-1 common stock, $0.001 par value: Authorized - 75.0 million shares; Issued and outstanding - 37.8 million shares		38			38			38			38
Class B-2 common stock, $0.000001 par value: Authorized - 75.0 million shares; Issued and outstanding - 37.8 million shares		—			—			—			—
Preferred stock, $0.001 par value: Authorized - 25.0 million shares; Issued and outstanding - none		—			—			—			—
Additional paid-in-capital		2,131,930			2,133,821			2,212,713			2,152,342
Retained earnings		200,235			142,166
Accumulated other comprehensive loss		(4,522	)		(2,238	)
(Accumulated deficit) retained earnings								(1,024,667	)		232,967
Accumulated other comprehensive income (loss)								4,540			(4,098	)
Total stockholders’ equity		2,327,909			2,274,014			1,192,854			2,381,477
Noncontrolling interest		—			(18,195	)
Total equity		2,327,909			2,255,819
Total liabilities and equity	$	6,576,892		$	6,497,941
Total liabilities and stockholders’ equity							$	5,426,561		$	6,612,829

See accompanying notes to consolidated financial statements.

PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts) (Unaudited)


	Thirteen weeks ended						Thirty-nine weeks ended						Thirteen weeks ended						Thirty-nine weeks ended
	October 29, 2022			October 30, 2021			October 29, 2022			October 30, 2021			October 28, 2023			October 29, 2022			October 28, 2023			October 29, 2022
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
Net sales:
Products													$	1,257,803		$	1,295,771		$	3,852,997		$	3,868,659
Services and other														236,363			205,449			727,811			589,349
Total net sales														1,494,166			1,501,220			4,580,808			4,458,008
Cost of sales:
Products														787,994			759,303			2,366,472			2,229,311
Services and other														156,171			144,240			466,849			428,869
Total cost of sales														944,165			903,543			2,833,321			2,658,180
Gross profit		597,677			594,709			1,799,828			1,791,104			550,001			597,677			1,747,487			1,799,828
Selling, general and administrative expenses		549,622			532,760			1,651,829			1,607,938			559,611			549,622			1,705,443			1,651,829
Operating income		48,055			61,949			147,999			183,166
Goodwill impairment														1,222,524			—			1,222,524			—
Operating (loss) income														(1,232,134	)		48,055			(1,180,480	)		147,999
Interest income		(130	)		(18	)		(287	)		(53	)		(1,139	)		(130	)		(3,079	)		(287	)
Interest expense		27,307			18,769			68,761			58,504			36,557			27,307			111,251			68,761
Loss on extinguishment and modification of debt		—			—			—			20,838
Loss on partial extinguishment of debt														174			—			920			—
Other non-operating (income) loss		(576	)		(19,773	)		9,369			(64,934	)		(113	)		(576	)		(4,727	)		9,369
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
(Loss) income before income taxes and income from equity method investees														(1,267,613	)		21,454			(1,284,845	)		70,156
Income tax (benefit) expense														(22,902	)		4,161			(17,178	)		20,799
Income from equity method investees		(2,627	)		(2,637	)		(7,821	)		(7,490	)		(3,574	)		(2,627	)		(10,032	)		(7,821	)
Net income		19,920			51,513			57,178			132,517
Net (loss) income														(1,241,137	)		19,920			(1,257,635	)		57,178
Net loss attributable to noncontrolling interest		—			(1,239	)		(891	)		(2,906	)		—			—			—			(891	)
Net income attributable to Class A and B-1 common stockholders	$	19,920		$	52,752		$	58,069		$	135,423
Net (loss) income attributable to Class A and B-1 common stockholders													$	(1,241,137	)	$	19,920		$	(1,257,635	)	$	58,069

Net income per Class A and B-1 common share:
Net (loss) income per Class A and B-1 common share:
Basic	$	0.07		$	0.20		$	0.22		$	0.51		$	(4.63	)	$	0.07		$	(4.71	)	$	0.22
Diluted	$	0.07		$	0.20		$	0.22		$	0.51		$	(4.63	)	$	0.07		$	(4.71	)	$	0.22

Weighted average shares used in computing net income per Class A and B-1 common share:
Weighted average shares used in computing net (loss) income per Class A and B-1 common share:
Basic		265,689			264,228			265,390			264,220			267,852			265,689			267,167			265,390
Diluted		265,935			265,322			265,824			265,189			267,852			265,935			267,167			265,824

See accompanying notes to consolidated financial statements.

PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands) (Unaudited)


	Thirteen weeks ended					Thirty-nine weeks ended						Thirteen weeks ended					Thirty-nine weeks ended
	October 29, 2022		October 30, 2021			October 29, 2022			October 30, 2021			October 28, 2023			October 29, 2022		October 28, 2023			October 29, 2022
Net income	$	19,920	$	51,513		$	57,178		$	132,517
Net (loss) income												$	(1,241,137	)	$	19,920	$	(1,257,635	)	$	57,178
Net loss attributable to noncontrolling interest		—		(1,239	)		(891	)		(2,906	)		—			—		—			(891	)
Net income attributable to Class A and B-1 common stockholders		19,920		52,752			58,069			135,423
Net (loss) income attributable to Class A and B-1 common stockholders													(1,241,137	)		19,920		(1,257,635	)		58,069

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		89		(1,056	)		(2,284	)		(1,053	)		407			89		2,571			(2,284	)
Unrealized gain on derivatives													2,628			—		5,559			—
(Gains) losses on derivatives reclassified to income													(286	)		—		508			—
Total other comprehensive income (loss), net of tax		89		(1,056	)		(2,284	)		(1,053	)		2,749			89		8,638			(2,284	)

Comprehensive income		20,009		50,457			54,894			131,464
Comprehensive (loss) income													(1,238,388	)		20,009		(1,248,997	)		54,894
Comprehensive loss attributable to noncontrolling interest		—		(1,239	)		(891	)		(2,906	)		—			—		—			(891	)
Comprehensive income attributable to Class A and B-1 common stockholders	$	20,009	$	51,696		$	55,785		$	134,370
Comprehensive (loss) income attributable to Class A and B-1 common stockholders												$	(1,238,388	)	$	20,009	$	(1,248,997	)	$	55,785

See accompanying notes to consolidated financial statements.

PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands) (Unaudited)

Common stock

Class
A
(shares)

Class
B-1
(shares)

Class
B-2
(shares)

Amount

Additional paid-in capital

Retained earnings

Accumulated
other
comprehensive
loss

Total
stockholders’
equity

Noncontrolling
interest

Total
equity

Balance at January 29, 2022

227,187

37,791

37,791

$
265

$
2,133,821

$
142,166

$
(2,238
)

$
2,274,014

$
(18,195
)

$
2,255,819

Equity-based compensation expense
   (Note 5)

—

—

—

—

12,055

—

—

12,055

—

12,055

Net income

—

—

—

—

—

24,693

—

24,693

(891
)

23,802

Foreign currency translation
   adjustment, net of tax

—

—

—

—

—

—

(1,598
)

(1,598
)

—

(1,598
)
Issuance of common stock,
   net of tax withholdings

291

—

—

—

(2,371
)

—

—

(2,371
)

—

(2,371
)
Balance at April 30, 2022

227,478

37,791

37,791

$
265

$
2,143,505

$
166,859

$
(3,836
)

$
2,306,793

$
(19,086
)

$
2,287,707

Equity-based compensation expense
   (Note 5)

—

—

—

—

13,422

—

—

13,422

—

13,422

Net income

—

—

—

—

—

13,456

—

13,456

—

13,456

Foreign currency translation
   adjustment, net of tax

—

—

—

—

—

—

(775
)

(775
)

—

(775
)
Investment in veterinary joint venture
   (Note 1)

—

—

—

—

(54,086
)

—

—

(54,086
)

19,086

(35,000
)
Issuance of common stock,
   net of tax withholdings

431

—

—

1

335

—

—

336

—

336

Balance at July 30, 2022

227,909

37,791

37,791

$
266

$
2,103,176

$
180,315

$
(4,611
)

$
2,279,146

$
—

$
2,279,146

Equity-based compensation expense
   (Note 5)

—

—

—

—

16,069

—

—

16,069

—

16,069

Net income

—

—

—

—

—

19,920

—

19,920

—

19,920

Foreign currency translation
   adjustment, net of tax

—

—

—

—

—

—

89

89

—

89

Deferred tax effect of investment
   in veterinary joint venture (Note 1)

—

—

—

—

12,807

—

—

12,807

—

12,807

Issuance of common stock,
   net of tax withholdings

34

—

—

—

(122
)

—

—

(122
)

—

(122
)
Balance at October 29, 2022

227,943

37,791

37,791

$
266

$
2,131,930

$
200,235

$
(4,522
)

$
2,327,909

$
—

$
2,327,909


	Common stock
	Class A (shares)		Class B-1 (shares)		Class B-2 (shares)		Amount		Additional paid-in capital			Retained earnings (Accumulated deficit)			Accumulated other comprehensive (loss) income			Total stockholders’ equity			Noncontrolling interest		Total equity
Balance at January 28, 2023		228,338		37,791		37,791	$	266	$	2,152,342		$	232,967		$	(4,098	)	$	2,381,477		$	—	$	2,381,477
Equity-based compensation expense (Note 7)		—		—		—		—		22,282			—			—			22,282			—		22,282
Net loss		—		—		—		—		—			(1,892	)		—			(1,892	)		—		(1,892	)
Foreign currency translation adjustment, net of tax		—		—		—		—		—			—			1,057			1,057			—		1,057
Unrealized loss on derivatives (Note 5), net of tax		—		—		—		—		—			—			(984	)		(984	)		—		(984	)
Losses on derivatives reclassified to income (Note 5), net of tax		—		—		—		—		—			—			433			433			—		433
Issuance of common stock, net of tax withholdings		727		—		—		1		(1,254	)		—			—			(1,253	)		—		(1,253	)
Balance at April 29, 2023		229,065		37,791		37,791	$	267	$	2,173,370		$	231,075		$	(3,592	)	$	2,401,120		$	—	$	2,401,120
Equity-based compensation expense (Note 7)		—		—		—		—		24,322			—			—			24,322			—		24,322
Net loss		—		—		—		—		—			(14,606	)		—			(14,606	)		—		(14,606	)
Foreign currency translation adjustment, net of tax		—		—		—		—		—			—			1,107			1,107			—		1,107
Unrealized gain on derivatives (Note 5), net of tax		—		—		—		—		—			—			3,915			3,915			—		3,915
Losses on derivatives reclassified to income (Note 5), net of tax		—		—		—		—		—			—			361			361			—		361
Issuance of common stock, net of tax withholdings		761		—		—		1		(1,457	)		—			—			(1,456	)		—		(1,456	)
Balance at July 29, 2023		229,826		37,791		37,791	$	268	$	2,196,235		$	216,470		$	1,791		$	2,414,764		$	—	$	2,414,764
Equity-based compensation expense (Note 7)		—		—		—		—		18,678			—			—			18,678			—		18,678
Net loss		—		—		—		—		—			(1,241,137	)		—			(1,241,137	)		—		(1,241,137	)
Foreign currency translation adjustment, net of tax		—		—		—		—		—			—			407			407			—		407
Unrealized gain on derivatives (Note 5), net of tax		—		—		—		—		—			—			2,628			2,628			—		2,628
Gains on derivatives reclassified to income (Note 5), net of tax		—		—		—		—		—			—			(286	)		(286	)		—		(286	)
Issuance of common stock, net of tax withholdings		467		—		—		—		(2,200	)		—			—			(2,200	)		—		(2,200	)
Balance at October 28, 2023		230,293		37,791		37,791	$	268	$	2,212,713		$	(1,024,667	)	$	4,540		$	1,192,854		$	—	$	1,192,854

Common stock

Class
A
(shares)

Class
B-1
(shares)

Class
B-2
(shares)

Amount

Additional paid-in capital

(Accumulated
deficit) retained earnings

Accumulated
other
comprehensive
loss

Total
stockholders’
equity

Noncontrolling
interest

Total
equity

Balance at January 30, 2021

226,424

37,791

37,791

$
264

$
2,092,110

$
(22,251
)

$
(1,275
)

$
2,068,848

$
(13,583
)

$
2,055,265

Equity-based compensation expense
(Note 5)

—

—

—

—

11,604

—

—

11,604

—

11,604

Net income

—

—

—

—

—

7,560

—

7,560

(1,411
)

6,149


	Common stock
	Class A (shares)		Class B-1 (shares)		Class B-2 (shares)		Amount		Additional paid-in capital			Retained earnings		Accumulated other comprehensive loss			Total stockholders’ equity			Noncontrolling interest			Total equity
Balance at January 29, 2022		227,187		37,791		37,791	$	265	$	2,133,821		$	142,166	$	(2,238	)	$	2,274,014		$	(18,195	)	$	2,255,819
Equity-based compensation expense (Note 7)	—		—		—		—			12,055		—		—				12,055		—				12,055
Net income	—		—		—		—		—				24,693	—				24,693			(891	)		23,802
Foreign currency translation adjustment, net of tax	—		—		—		—		—			—			(1,598	)		(1,598	)	—				(1,598	)
Issuance of common stock, net of tax withholdings		291	—		—		—			(2,371	)	—		—				(2,371	)	—				(2,371	)
Balance at April 30, 2022		227,478		37,791		37,791	$	265	$	2,143,505		$	166,859	$	(3,836	)	$	2,306,793		$	(19,086	)	$	2,287,707
Equity-based compensation expense (Note 7)	—		—		—		—			13,422		—		—				13,422		—				13,422
Net income	—		—		—		—		—				13,456	—				13,456		—				13,456
Foreign currency translation adjustment, net of tax	—		—		—		—		—			—			(775	)		(775	)	—				(775	)
Investment in veterinary joint venture	—		—		—		—			(54,086	)	—		—				(54,086	)		19,086			(35,000	)
Issuance of common stock, net of tax withholdings		431	—		—			1		335		—		—				336		—				336
Balance at July 30, 2022		227,909		37,791		37,791	$	266	$	2,103,176		$	180,315	$	(4,611	)	$	2,279,146		$	—		$	2,279,146
Equity-based compensation expense (Note 7)		—		—		—		—		16,069			—		—			16,069			—			16,069
Net income		—		—		—		—		—			19,920		—			19,920			—			19,920
Foreign currency translation adjustment, net of tax		—		—		—		—		—			—		89			89			—			89
Deferred tax effect of investment in veterinary joint venture		—		—		—		—		12,807			—		—			12,807			—			12,807
Issuance of common stock, net of tax withholdings		34		—		—		—		(122	)		—		—			(122	)		—			(122	)
Balance at October 29, 2022		227,943		37,791		37,791	$	266	$	2,131,930		$	200,235	$	(4,522	)	$	2,327,909		$	—		$	2,327,909

Foreign currency translation
   adjustment, net of tax

—

—

—

—

—

—

(786
)

(786
)

—

(786
)
Issuance of restricted stock awards

55

—

—

—

—

—

—

—

—

—

Balance at May 1, 2021

226,479

37,791

37,791

$
264

$
2,103,714

$
(14,691
)

$
(2,061
)

$
2,087,226

$
(14,994
)

$
2,072,232

Equity-based compensation expense
   (Note 5)

—

—

—

—

11,506

—

—

11,506

—

11,506

Net income

—

—

—

—

—

75,111

—

75,111

(256
)

74,855

Foreign currency translation
   adjustment, net of tax

—

—

—

—

—

—

789

789

—

789

Issuance of common stock

12

—

—

—

—

—

—

—

—

Balance at July 31, 2021

226,491

37,791

37,791

$
264

$
2,115,220

$
60,420

$
(1,272
)

$
2,174,632

$
(15,250
)

$
2,159,382

Equity-based compensation expense
   (Note 5)

—

—

—

—

11,087

—

—

11,087

—

11,087

Net income

—

—

—

—

—

52,752

—

52,752

(1,239
)

51,513

Foreign currency translation
   adjustment, net of tax

—

—

—

—

—

—

(1,056
)

(1,056
)

—

(1,056
)
Issuance of common stock,
   net of tax withholdings

1

—

—

—

(13
)

—

(13
)

—

(13
)
Balance at October 30, 2021

226,492

37,791

37,791

$
264

$
2,126,294

$
113,172

$
(2,328
)

$
2,237,402

$
(16,489
)

$
2,220,913

See accompanying notes to consolidated financial statements.

PETCO HEALTH AND WELLNESS COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)


	Thirty-nine weeks ended						Thirty-nine weeks ended
	October 29, 2022			October 30, 2021			October 28, 2023			October 29, 2022
Cash flows from operating activities:
Net income	$	57,178		$	132,517
Adjustments to reconcile net income to net cash provided by operating activities:
Net (loss) income							$	(1,257,635	)	$	57,178
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		143,599			125,637			148,593			143,599
Amortization of debt discounts and issuance costs		3,694			4,579			3,658			3,694
Provision for deferred taxes		(6,413	)		28,523			(35,164	)		(6,413	)
Equity-based compensation		40,892			36,491			64,431			40,892
Impairments, write-offs and losses on sale of fixed and other assets		2,299			5,918			2,202			2,299
Loss on extinguishment and modification of debt		—			20,838
Loss on partial extinguishment of debt								920			—
Amounts reclassified out of accumulated other comprehensive income (loss)								674			—
Income from equity method investees		(7,821	)		(7,490	)		(10,032	)		(7,821	)
Goodwill impairment								1,222,524			—
Non-cash operating lease costs		316,492			315,930			316,355			316,492
Other non-operating loss (income)		9,369			(64,934	)
Other non-operating (income) loss								(4,727	)		9,369
Changes in assets and liabilities:
Receivables		9,171			(3,652	)		(600	)		9,171
Merchandise inventories		(48,314	)		(105,682	)		(77,718	)		(48,314	)
Prepaid expenses and other assets		(2,536	)		(8,053	)		(6,004	)		(2,536	)
Accounts payable and book overdrafts		(19,381	)		47,973			105,421			(19,381	)
Accrued salaries and employee benefits		(16,160	)		27,673			11,586			(16,160	)
Accrued expenses and other liabilities		12,110			45,437			(1,098	)		12,110
Operating lease liabilities		(282,954	)		(314,620	)		(312,935	)		(282,954	)
Other long-term liabilities		(1,762	)		1,359			(1,755	)		(1,762	)
Net cash provided by operating activities		209,463			288,444			168,696			209,463
Cash flows from investing activities:
Cash paid for fixed assets		(212,074	)		(164,330	)		(176,532	)		(212,074	)
Cash paid for acquisitions, net of cash acquired		(7,750	)		(3,545	)		(4,495	)		(7,750	)
Cash paid for interest in veterinary joint venture		(35,000	)		—			—			(35,000	)
Proceeds from investment								24,878			—
Proceeds from sale of assets		2,127			105			—			2,127
Net cash used in investing activities		(252,697	)		(167,770	)		(156,149	)		(252,697	)
Cash flows from financing activities:
Borrowings under long-term debt agreements		123,000			1,700,000			—			123,000
Repayments of long-term debt		(135,750	)		(1,686,611	)		(75,000	)		(135,750	)
Debt refinancing costs		—			(24,665	)
Payments for finance lease liabilities		(4,174	)		(2,650	)		(4,627	)		(4,174	)
Proceeds from employee stock purchase plan and stock option exercises		3,472			2,920			3,324			3,472
Tax withholdings on stock-based awards		(13,581	)		(13	)		(7,737	)		(13,581	)
Payment of offering costs		—			(3,844	)
Net cash used in financing activities		(27,033	)		(14,863	)		(84,040	)		(27,033	)
Net (decrease) increase in cash, cash equivalents and restricted cash		(70,267	)		105,811
Net decrease in cash, cash equivalents and restricted cash								(71,493	)		(70,267	)
Cash, cash equivalents and restricted cash at beginning of period		221,890			119,540			213,727			221,890
Cash, cash equivalents and restricted cash at end of period	$	151,623		$	225,351		$	142,234		$	151,623
Supplemental cash flow disclosures:
Interest paid, net	$	59,608		$	47,006		$	107,229		$	59,608
Capitalized interest	$	954		$	642		$	806		$	954
Income taxes paid	$	9,598		$	13,718		$	31,261		$	9,598
Supplemental non-cash investing and financing activities disclosure:
Accounts payable and accrued expenses for capital expenditures	$	33,107		$	36,623		$	26,621		$	33,107

See accompanying notes to consolidated financial statements.

PETCO HEALTH AND WELLNESS COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

Petco Health and Wellness Company, Inc. (together with its consolidated subsidiaries, the “Company”) is a category-defining health and wellness company focused on improving the lives of pets, pet parents, and its own partners. The Company manages its business as one reportable operating segment.

In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary for a fair presentation as prescribed by accounting principles generally accepted in the United States (“GAAP”). All adjustments were comprised of normal recurring adjustments, except as noted in these Notes to Consolidated Financial Statements.

There have been no significant changes from the significant accounting policies disclosed in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January ~~29, 2022.~~28, 2023.

The accompanying consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Interim financial results are not necessarily indicative of results anticipated for the full year. The accompanying consolidated financial statements and these Notes to Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January ~~29, 2022,~~28, 2023, from which the prior year balance sheet information herein was derived.

Use of Estimates

The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates are based on information that is currently available and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.

Veterinary Joint Venture

The Company previously held a 50% investment in a joint venture with a domestic partner to build and operate veterinary clinics in Petco locations. The joint venture was a variable interest entity for which the Company was the primary beneficiary, and accordingly, the joint venture’s results of operations and statements of financial position ~~are~~were included in the Company’s consolidated financial ~~statements.~~statements during fiscal 2022. In May 2022, the Company completed the purchase of the remaining 50% of the issued and outstanding membership interests of the joint venture, which is now a wholly owned subsidiary of the Company, for cash consideration of $35.0 million. Direct transaction costs related to this purchase were not material. During the third quarter of fiscal 2022, the tax effects of the purchase were finalized, which resulted in a redetermination of the related deferred tax balances in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 – Income Taxes.

Derivative Instruments

In November 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~~relating to the three-month Secured Overnight Financing Rate as published by CME Group ~~exceeds~~ ~~4.5~~%("Term SOFR"). The interest rate caps ~~are forward-starting with an~~became effective ~~date of~~ December 30, 2022 and expire on December 31, ~~2024~~2024. The interest rate caps are.

accounted for as cash flow hedges, and changes in the fair value of the interest rate caps are reported as a component of accumulated other comprehensive income (loss) ("AOCI").

In March 2023, the Company entered into an interest rate collar agreement to limit the maximum interest on a portion of the Company’s variable-rate debt and decrease its exposure to interest rate variability relating to three-month Term SOFR. The interest rate collar became effective March 31, 2023 and expires on March 31, 2026. The interest rate collar is accounted for as a cash flow hedge, and changes in the fair value of the interest rate collar are reported as a component of AOCI.

In June 2023, the Company entered into an interest rate collar agreement to limit the maximum interest on a portion of the Company’s variable-rate debt and decrease its exposure to interest rate variability relating to three-month Term SOFR. The interest rate collar became effective September 30, 2023 and expires on December 31, 2026. The interest rate collar is accounted for as a cash flow hedge, and changes in the fair value of the interest rate collar are reported as a component of AOCI.

Cash and Cash Equivalents

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the consolidated balance sheets to the total amounts reported in the consolidated statements of cash flows (in thousands):


	October 29, 2022		January 29, 2022		October 28, 2023		January 28, 2023
Cash and cash equivalents	$	148,731	$	211,602	$	139,782	$	201,901
Restricted cash included in other current assets		2,892		10,288		2,452		11,826
Total cash, cash equivalents and restricted cash in the statement of cash flows	$	151,623	$	221,890	$	142,234	$	213,727

~~Recent Accounting Pronouncements~~

In March 2020, the FASB issued Accounting Standards Update No. 2020-04 – Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions affected by the anticipated transition from LIBOR. As a result of the reference rate reform initiative, certain widely used reference rates such as LIBOR are expected to be discontinued. The guidance is designed to simplify how entities account for contracts, such as receivables, debt, leases, derivative instruments and hedging, that are modified to replace LIBOR or other benchmark interest rates with new rates. The guidance is effective upon issuance and may be applied through December 31, 2022. The Company is currently evaluating the impact of this accounting standard, but does not expect for it to have a material impact on the consolidated financial statements and related disclosures.

2. Revenue Recognition

Net sales by product type and services were as follows (in thousands):


	Thirteen weeks ended				Thirty-nine weeks ended				Thirteen weeks ended				Thirty-nine weeks ended
	October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021		October 28, 2023		October 29, 2022		October 28, 2023		October 29, 2022
Consumables	$	720,512	$	643,125	$	2,093,510	$	1,850,203	$	733,277	$	720,512	$	2,230,405	$	2,093,510
Supplies and companion animals		575,259		635,278		1,775,149		1,957,022		524,526		575,259		1,622,592		1,775,149
Services and other		205,449		164,861		589,349		485,567		236,363		205,449		727,811		589,349
Net sales	$	1,501,220	$	1,443,264	$	4,458,008	$	4,292,792	$	1,494,166	$	1,501,220	$	4,580,808	$	4,458,008

3. Goodwill

The changes in the carrying amount of the Company’s goodwill were as follows (in thousands):


	Thirty-nine weeks ended
	October 28, 2023
Beginning balance:
Goodwill	$	3,001,904
Accumulated impairment		(807,963	)
Goodwill, net	$	2,193,941

Additions from acquisitions		4,830
Impairment		(1,222,524	)
Ending balance:
Goodwill	$	3,006,734
Accumulated impairment		(2,030,487	)
Goodwill, net	$	976,247

The Company has one reporting unit. The Company performs its annual impairment test during the fourth quarter of each fiscal year or more frequently when warranted by events or changes in circumstances. During the third quarter of fiscal 2023, the Company concluded that indicators of impairment existed due to declines in the Company's share price, as well as current macroeconomic conditions, and performed an interim impairment test. The fair value of the Company’s reporting unit was estimated by management with the assistance of a third-party valuation specialist. Fair value estimates used in the quantitative impairment test were calculated using a combination of discounted cash flow analysis and a public company analysis. The discounted cash flow analysis measures the value of an asset by the present value of its future estimated cash flows. The Company makes estimates and assumptions about sales, gross margins, selling, general and administrative percentages and profit margins, based on budgets and forecasts, business plans, economic projections, anticipated future cash flows, and marketplace data. The public company analysis analyzes transactional and financial data of publicly traded companies to develop valuation multiples. These multiples are then applied to the Company to develop an indication of fair value.

Significant assumptions used in the determination of fair value of the reporting unit generally include prospective financial information, discount rates, terminal growth rates and earnings multiples. The discounted cash flow model used to determine the fair value of the reporting unit during the third quarter of fiscal 2023 reflected the Company's most recent cash flow projections, a discount rate of 16.4% and a terminal growth rate of 3%. The reporting unit fair value measurement is classified as Level 3 in the fair value hierarchy because it involves significant unobservable inputs.

As a result of the impairment test, the Company concluded that the carrying value of the Company’s reporting unit exceeded its fair value and recorded a pre-tax goodwill impairment charge of $1,222.5 million for the thirteen week period ended October 28, 2023. This charge was recorded in goodwill impairment in the consolidated statements of operations.

4. Senior Secured Credit Facilities

~~The Company previously had a senior secured term loan facility (the “Amended Term Loan Facility”), which was fully repaid on~~ ~~March 4, 2021, and a senior secured asset-based revolving credit facility (the “Amended Revolving Credit Facility”), which was terminated on~~ ~~March 4, 2021~~. On March 4, 2021, the Company entered into a $1,700.0 million secured term loan facility maturing on March 4, 2028 (the “First Lien Term Loan”) and a secured asset-based revolving credit facility with availability of up to $500.0 million, subject to a borrowing base, maturing on March 4, 2026 (the “ABL Revolving Credit Facility”).

As of October ~~29, 2022,~~28, 2023, the Company was in compliance with its covenants under the First Lien Term Loan and the ABL Revolving Credit Facility.

Term Loan Facilities

On ~~March 4, 2021~~,December 12, 2022, the Company ~~entered into~~amended the First Lien Term Loan ~~and repaid all outstanding principal and~~to replace the LIBOR-based rate with a SOFR-based rate as the interest ~~on the Amended Term Loan Facility.~~rate benchmark. Interest on the First Lien Term Loan is based on, at the

Company’s option, either a base rate or Term SOFR plus the credit spread adjustment recommended by the Alternative Reference Rates Committee ("Adjusted ~~LIBOR,~~Term SOFR"), subject to a 0.75% floor, payable upon maturity of the ~~LIBOR~~SOFR 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~~Term SOFR 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~~Term SOFR loan. Principal and interest payments commenced on June 30, ~~2021~~.2021. Principal payments are normally $4.25 million quarterly.

~~In connection with the March 4, 2021 transaction described above, the~~The Company ~~recognized a loss on debt extinguishment and modification of~~voluntarily prepaid $~~19.6~~35.0 million, ~~on the term loan facilities, which consisted of a~~ $~~6.5~~25.0 million ~~write-off of unamortized debt discount and issuance costs on the Amended Term Loan Facility~~ and $~~13.1~~15.0 million ~~of third-party expenses.~~

~~Fees relating to the Company’s entry into the First Lien Term Loan consisted of arranger fees and other third-party expenses. Of those fees, $3.2~~ ~~million was capitalized as debt issuance costs, along with $4.3~~ million of original issue discount. The remaining portion of original issue discount and debt issuance costs of the Amended Term Loan Facility previously capitalized is being amortized over the contractual term of the First Lien Term Loan using existing cash on hand in March 2023, May 2023, and August 2023, respectively. The repayments were applied to ~~interest expense using~~ the ~~effective interest rate~~remaining principal payments in ~~effect~~order of scheduled payment date and, as a result, the entire remaining balance was included in senior secured credit facilities, net, excluding current portion in the consolidated balance sheets as of October 28, 2023. The Company accounted for the repayments as partial extinguishments and recognized losses on debt extinguishment of $0.2 million and $0.9 million during the ~~date of issuance, as these amounts represent the portion that was not substantially modified.~~thirteen and thirty-nine week periods ended October 28, 2023, respectively.

As of October ~~29, 2022,~~28, 2023, the outstanding principal balance of the First Lien Term Loan was $~~1,674.5~~1,595.3 million ($~~1,652.2~~1,577.6 million, net of the unamortized discount and debt issuance costs). As of January ~~29, 2022,~~28, 2023, the outstanding principal balance of the First Lien Term Loan was $~~1,687.3~~1,670.3 million ($~~1,662.1~~1,648.9 million, net of the unamortized discount and debt issuance costs). The weighted average interest rate on the borrowings outstanding was ~~7.0~~9.0% and ~~4.1~~8.2% as of October ~~29, 2022~~28, 2023 and January ~~29, 2022,~~28, 2023, respectively. Debt issuance costs are being amortized over the contractual term to interest expense using the effective interest rate in effect at issuance. As of October ~~29, 2022~~28, 2023 and January ~~29, 2022,~~28, 2023, the estimated fair value of the First Lien Term Loan was approximately $~~1,611.7~~1,553.4 million and $~~1,687.3~~1,649.4 million, respectively, based upon Level 2 fair value hierarchy inputs.

Revolving Credit Facilities

~~On March 4, 2021, the Company entered into the ABL Revolving Credit Facility and terminated the Amended Revolving Credit Facility. The ABL Revolving Credit Facility has availability of up to $500.0~~ ~~million, subject to a borrowing base.~~

~~Fees relating to the Company’s entry into the ABL Revolving Credit Facility consisted of arranger fees and other third-party expenses. Of those fees, $4.1~~ ~~million was capitalized as debt issuance costs. Unamortized debt issuance costs of $1.2~~ million were written off and recognized as a loss on debt extinguishment and modification in connection with this transaction. The remaining portion of debt issuance costs of the Amended Revolving Credit Facility previously capitalized is being amortized over the contractual term of the ABL Revolving Credit Facility as these amounts represent the portion that was not substantially modified.

As of October ~~29, 2022~~28, 2023 and January ~~29, 2022,~~28, 2023, no amounts were outstanding under the ABL Revolving Credit Facility. AtAs of October ~~29, 2022,~~28, 2023, $~~443.9~~446.6 million was available under the ABL Revolving Credit Facility, which is net of $~~56.1~~53.4 million of outstanding letters of credit issued in the normal course of business and no borrowing base reduction for a shortfall in qualifying assets. ~~Unamortized~~As of October 28, 2023 and January 28, 2023, unamortized debt issuance costs of $~~3.9~~2.7 million and $3.6 million, respectively, relating to the ABL Revolving Credit Facility were outstanding and were being amortized using the straight-line method over the remaining term of the ~~agreement as of October 29, 2022. Unamortized debt issuance costs of $4.7~~ ~~million relating to the ABL Revolving Credit Facility were outstanding and were being amortized using the straight-line method over the remaining term of the agreement as of January 29, 2022.~~agreement.

The ABL Revolving Credit Facility has availability of up to $500.0 million and a $150.0 million letter of credit sub-facility. The availability is limited to a borrowing base, which allows borrowings of up to 90% of eligible accounts receivable plus 90% of the net orderly liquidation value of eligible inventory plus up to $50.0 million of qualified cash of the Company to which the Company and guarantors have no access, less reserves as determined by the administrative agent. Letters of credit reduce the amount available to borrow under the ABL Revolving Credit Facility by their face value.

On December 12, 2022, the Company amended the ABL Revolving Credit Facility to replace the LIBOR-based rate with a SOFR-based rate as the interest rate benchmark. Interest on the ABL Revolving Credit Facility is based on, at the Company’s option, either the base rate or Adjusted ~~LIBOR~~Term SOFR subject to a floor of 0%, in either case, plus an applicable margin. The applicable margin is

currently equal to 25 basis points in the case of base rate loans and 125 basis points in the case of Adjusted ~~LIBOR~~Term SOFR loans.

The applicable margin is adjusted quarterly based on the average historical excess availability as a percentage of the Line Cap, which represents the lesser of the aggregate ABL Revolving Credit Facility and the borrowing base, as follows:


Average Historical Excess Availability	Applicable Margin for Adjusted LIBOR Loans			Applicable Margin for Base Rate Loans			Applicable Margin for Adjusted Term SOFR Loans			Applicable Margin for Base Rate Loans
Less than 33.3% of the Line Cap		1.75	%		0.75	%
Less than 66.7% but greater than or equal to 33.3% of the Line Cap		1.50	%		0.50	%
Greater than or equal to 66.7% of the Line Cap		1.25	%		0.25	%
Less than 33.3% of the Line Cap								1.75	%		0.75	%
Less than 66.7% but greater than or equal to 33.3% of the Line Cap								1.50	%		0.50	%
Greater than or equal to 66.7% of the Line Cap								1.25	%		0.25	%

The ABL Revolving Credit Facility is subject to an unused commitment fee. If the actual daily utilized portion exceeds 50%, the unused commitment fee is 0.25%. Otherwise, the unused commitment fee is 0.375% and is not dependent upon excess availability.

4.5. Derivative Instruments

The interest rate caps and collars are accounted for as cash flow hedges because they are expected to be highly effective in hedging variable rate interest payments. Changes in the fair value of the cash flow hedges are reported as a component of AOCI. As of October 28, 2023, AOCI included unrealized gains of $5.3 million ($4.0 million, net of tax). Approximately $0.4 million of pre-tax gains deferred in AOCI were reclassified to interest expense during the thirteen week period ended October 28, 2023. Approximately $0.7 million of pre-tax losses deferred in AOCI were reclassified to interest expense during the thirty-nine week period ended October 28, 2023. As of January 28, 2023, AOCI included unrealized losses of $2.7 million ($2.1 million, net of tax). The Company currently estimates that $3.2 million of losses related to trade date costs on its cash flow hedges that are currently deferred in AOCI will be reclassified to interest expense in the consolidated statement of operations within the next twelve months. This estimate could vary based on actual amounts as a result of changes in market conditions.

The cash flow hedges are reflected in the Company’s consolidated balance sheets as follows (in thousands):


Assets (Liabilities)	Balance sheet location	October 28, 2023		January 28, 2023
Current asset portion of cash flow hedges	Other current assets	$	5,057	$	—
Non-current asset portion of cash flow hedges	Other long-term assets		1,691		—
Current liability portion of cash flow hedges	Accrued expenses and other liabilities		—		(1,176	)
Non-current liability portion of cash flow hedges	Other long-term liabilities		—		(1,717	)
Total cash flow hedges		$	6,748	$	(2,893	)

6. Fair Value Measurements

Assets and Liabilities Measured on a Recurring Basis

The following table presents information about assets and liabilities that are measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value (in thousands):


	October 29, 2022							October 28, 2023
	Level 1		Level 2			Level 3		Level 1		Level 2			Level 3
Assets (liabilities):
Money market mutual funds	$	88,416	$	—		$	—	$	85,965	$	—		$	—
Investments of officers' life insurance	$	—	$	12,041		$	—	$	—	$	12,362		$	—
Non-qualified deferred compensation plan	$	—	$	(17,252	)	$	—	$	—	$	(18,184	)	$	—
Investment in Rover Group, Inc.	$	23,449	$	—		$	—

January 29, 2022

Level 1

Level 2

Level 3

Assets (liabilities):

Money market mutual funds

$
167,277

$
—

$
—

Investments of officers' life insurance

$
—

$
14,575

$
—

Non-qualified deferred compensation plan

$
—

$
(17,453
)

$
—

Investment in Rover Group, Inc.

$
32,819

$
—

$
—


	January 28, 2023
	Level 1		Level 2			Level 3
Assets (liabilities):
Money market mutual funds	$	156,626	$	—		$	—
Investments of officers' life insurance	$	—	$	13,112		$	—
Non-qualified deferred compensation plan	$	—	$	(18,464	)	$	—
Investment in Rover Group, Inc.	$	20,152	$	—		$	—

The fair value of money market mutual funds is based on quoted market prices, such as quoted net asset values published by the fund as supported in an active market. Money market mutual funds included in the Company’s cash and cash equivalents were $~~86.5~~85.0 million and $~~158.0~~145.5 million as of October ~~29, 2022~~28, 2023 and January ~~29, 2022,~~28, 2023, respectively. Also included in the Company’s money market mutual funds balances were $~~1.9~~1.0 million and $~~9.3~~11.1 million as of October ~~29, 2022~~28, 2023 and January ~~29, 2022,~~28, 2023, respectively, which relate to the Company’s restricted cash, and are included in other current assets in the consolidated balance sheets.

The Company maintains a deferred compensation plan for key executives and other members of management, which is funded by investments in officers’ life insurance. The fair value of this obligation is based on participants’ elected investments, which reflect the closing market prices of similar assets.

~~The~~In April 2023, the Company ~~previously held an equity investment,~~sold its interest in ~~the form of multiple series of preferred stock, in A Place for Rover, Inc., an online marketplace for pet care, which was historically accounted for as an equity security~~

without a readily determinable fair value. In July 2021, A Place for Rover, Inc. completed a business combination with Nebula Caravel Acquisition Corp., a publicly-traded special purpose acquisition company. The combined entity was renamed to Rover Group, Inc. ~~(“Rover”), and the Company’s equity investment was converted into shares of Rover Class A common stock. In September 2021, the Company received additional shares of Rover~~ Class A common stock to a buyer at a price determined based on the daily volume weighted average price, in ~~accordance~~addition to a premium, over an agreed upon period. The cash proceeds were received throughout fiscal 2023, with ~~certain earnout provisions from~~ the ~~July 2021 business combination.~~final payment being received in August 2023. The ~~Company now remeasures~~Company's interest in the unsettled cash proceeds were remeasured at fair value ~~of its investment on a quarterly basis,~~at each reporting period, and the resulting gains or losses ~~are~~were included in other non-operating income in the consolidated statements of operations. ~~On November 23, 2021, the Company completed the sale of approximately~~ 11~~% of its Rover Class A common stock for net proceeds of $6.1~~ ~~million in cash as part of its participation in an underwritten secondary offering by certain Rover shareholders.~~

In February 2022, the Company amended a collaboration agreement with a vendor, and as part of the amendment the Company was granted a right to receive equity and warrants for common shares of the vendor that is subject to certain performance conditions and other contingencies. The Company evaluated the agreement under FASB ASC 705-20, Consideration Received from a Vendor, and no material consideration was recognized during the thirty-nine week period ended October 29, 2022.

Assets Measured on a Non-Recurring Basis

The Company’s non-financial assets, which primarily consist of goodwill, other intangible assets, fixed assets and equity and other investments, are reported at carrying value, or at fair value as of the date of the Company’s acquisition of Petco Holdings, Inc. LLC on January 26, 2016, and are not required to be measured at fair value on a recurring basis. However, on a periodic basis (at least annually for goodwill and indefinite-lived intangibles or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable), non-financial assets are assessed for impairment. If impaired, the carrying values of the assets are written down to fair value using Level 3 inputs.

The Company’s trade name has an indefinite life. The Company performs its annual impairment test during the fourth quarter of each fiscal year, or more frequently when warranted by events or changes in circumstances. During the third quarter of fiscal 2023, the Company concluded that indicators of impairment existed due to declines in the Company's share price, as well as current macroeconomic conditions, and performed interim impairment tests of its goodwill and indefinite-lived trade name. Refer to Note 3 for further discussion of the results of impairment testing performed on the Company’s goodwill.

The fair value of the Company’s trade name was estimated by management with the assistance of a third-party valuation specialist using the relief from royalty valuation method, which estimates the hypothetical royalties that would have to be paid if the trade name was not owned. The fair value of the Company's trade name reflected the Company's most recent revenue projections, a discount rate of 17.4% and a terminal growth rate of 3%. The Company concluded that the fair value of its trade name exceeded its carrying value, and therefore no trade name impairment charge was recorded during the third quarter of fiscal 2023. The Company's trade name fair value measurement is classified as Level 3 in the fair value hierarchy because it involves significant unobservable inputs.

There were no indications of impairment of the Company’s other intangible assets or equity and other investments during the thirteen or thirty-nine week periods ended October 28, 2023. There were no triggering events identified and no indication of impairment of the Company’s goodwill, indefinite-lived trade name, other intangible assets or equity and other investments during the thirteen or thirty-nine week periods ended October 29, ~~2022 and October 30, 2021.~~2022. During the thirteen and thirty-nine week periods ended October 28, 2023, the Company recorded fixed asset and right-of-use asset impairment charges of $1.0 million and $2.1 million, respectively. During the thirteen and thirty-

nine week periods ended October 29, 2022, the Company recorded fixed asset and right-of-use asset impairment charges of $0.8 million and $1.8 million, respectively. ~~During the thirteen and thirty-nine week periods ended October 30, 2021, the Company recorded fixed asset and right-of-use asset impairment charges of $2.9~~ ~~million and $5.4~~ ~~million, respectively.~~

5.7. Stockholders’ Equity

Equity-Based Compensation

Equity-based compensation awards under the Company’s current equity incentive plan (the “2021 Equity Incentive Plan”) include restricted stock units (“RSUs,” which include performance-based stock units), restricted stock awards (“RSAs”), non-qualified stock options, and other equity compensation awards. The Company also has an employee stock purchase plan (“ESPP”).

The Company’s controlling parent, Scooby LP, also maintains an incentive plan (the “2016 Incentive Plan”) under which it has awarded partnership unit awards to certain current and former employees, consultants, and non-employee directors of the Company that are restricted profit interests in Scooby LP subject to a distribution threshold (“Series C Units”).

The following table summarizes the Company’s equity-based compensation expense by award type (in thousands):


	Thirteen weeks ended				Thirty-nine weeks ended				Thirteen weeks ended				Thirty-nine weeks ended
	October 29, 2022		October 30, 2021		October 29, 2022		October 30, 2021		October 28, 2023		October 29, 2022		October 28, 2023		October 29, 2022
RSUs and RSAs	$	9,602	$	6,189	$	24,759	$	19,013	$	12,917	$	9,602	$	44,191	$	24,759
Options		1,820		1,892		5,666		6,029		4,098		1,820		14,100		5,666
ESPP		315		343		927		734		264		315		1,118		927
Other awards		4,038		4,957		9,540		10,715		904		4,038		5,022		9,540
Total equity-based compensation expense	$	15,775	$	13,381	$	40,892	$	36,491	$	18,183	$	15,775	$	64,431	$	40,892

Activity under the 2021 Equity Incentive Plan was as follows (shares and dollars in thousands):

RSUs and RSAs

Options

Nonvested/outstanding, January 29, 2022

2,587

3,327

Granted

5,411

503

Vested and delivered/exercised

(1,040
)

(45
)
Forfeited/expired

(766
)

(475
)
Nonvested/outstanding, October 29, 2022

6,192

3,310

Unrecognized compensation expense as of October 29, 2022

$
85,405

$
10,681

Weighted average remaining expense period as of October 29, 2022

2.3 Years

1.6 Years


	RSUs and RSAs			Options
Nonvested/outstanding, January 28, 2023		7,802			7,814
Granted		7,368			—
Vested and delivered/exercised		(2,582	)		—
Forfeited/expired		(1,680	)		(560	)
Nonvested/outstanding, October 28, 2023		10,908			7,254
Unrecognized compensation expense as of October 28, 2023	$	91,974		$	15,654
Weighted average remaining expense period as of October 28, 2023	1.9 years			1.1 years

RSA activity has not been material and relates to an RSA of Class A common stock granted to an executive in March 2021. For this grant, 50% of the RSA ~~becomes~~ vested on each of the first two anniversaries of the grant date. Unvested RSAs ~~are~~were not considered participating securities for earnings per share purposes, as any related dividends ~~are~~were forfeitable.

The ESPP allows eligible employees to contribute up to 15% of their base earnings towards purchases of Class A common stock, subject to an annual maximum. The purchase price will be 85% of the lower of (i) the fair

market value of the stock on the associated lookback date and (ii) the fair market value of the stock on the last day of the related purchase period.

Series C Unit activity under the 2016 Incentive Plan was as follows (in thousands):


	Units
Outstanding, January ~~29, 2022~~28, 2023		~~207,178~~		201,359
Granted		—
Forfeited		(~~5,701~~1,557	)
Outstanding, October ~~29, 2022~~28, 2023		~~201,477~~		199,802
Vested, October ~~29, 2022~~28, 2023		~~148,225~~		175,829

No additional Series C Units have been or will be awarded following the Company’s initial public offering. As of October ~~29, 2022,~~28, 2023, unrecognized compensation expense related to the unvested portion of Scooby LP’s Series C Units was $~~10.8~~4.3 million, which is expected to be recognized over a weighted average period of ~~1.5~~0.9 years. In addition to acceleration upon a change in control, a portion of grantees’ Series C Units may vest upon certain levels of direct or indirect sales by Scooby LP of the Company’s Class A common stock, and all unvested Series C Units will fully accelerate in the event Scooby LP sells 90% ~~or more~~ of its direct or indirect holdings of the Company’s Class A common stock.

~~Earnings~~ (Loss) Income Per Share

Potentially dilutive securities include potential Class A common shares related to outstanding stock options, unvested RSUs and RSAs, and the ESPP, calculated using the treasury stock method. The calculation of diluted shares outstanding excludes securities where the combination of the exercise or purchase price (in the case of

options and the ESPP) and the associated unrecognized compensation expense is greater than the average market price of Class A common shares because the inclusion of these securities would be anti-dilutive.

All outstanding equity awards were excluded from the calculation of diluted loss per Class A and B-1 common share in the thirty-nine weeks ended October 28, 2023, as their effect would be antidilutive in a net loss period.

There were approximately 5.3 ~~million and~~ ~~3.5~~ million potential shares that were anti-dilutive and excluded from the computation of diluted shares outstanding during the thirty-nine weeks ended October 29, ~~2022 and October 30, 2021, respectively.~~2022.

6.8. Commitments and Contingencies

The Company is involved in legal proceedings and is subject to other claims and litigation ~~in each case,~~ arising in the ordinary course of its business. The Company has made accruals with respect to certain of these matters, where appropriate, which are reflected in the Company’s consolidated financial statements but are not, individually or in the aggregate, considered material. For other matters, the Company has not made accruals because management has not yet determined that a loss is probable or because the amount of loss cannot be reasonably estimated. While the ultimate outcome of the matters cannot be determined, the Company currently does not expect that these matters will have a material adverse effect on its consolidated financial statements. The outcome of any litigation is inherently uncertain, however, and if decided adversely to the Company, or if the Company determines that settlement of particular litigation is appropriate, the Company may be subject to liability that could have a material adverse effect on its consolidated financial statements.

1516

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 ended January ~~29, 2022~~28, 2023 (the ~~“2021~~“2022 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 the U.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 the U.S., Mexico, and Puerto Rico, including a growing network of more than ~~225~~275 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 Premier membership program. From the nutrition and supplies pets need each day, to the services that keep them at optimal health, Vital Care Premier makes it easier and more affordable for pet parents to care for their pet’s whole health all in one place. Vital Care Premier memberships are at the top of our integrated loyalty programs, followed by Vital Care Core and our perks programs that provide rewards for frequent ~~purchasing and our Pals Rewards loyalty program.~~purchasing.

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 the Petco Foundation), an~~a life-changing 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~~nearly 7 million animals.

Macroeconomic factors, including ~~the prolonged COVID-19 pandemic,~~rising interest rates, inflationary pressures, supply chain constraints, and global economic and geopolitical developments have varying impacts on our results of operations, such as decreases in sales of discretionary items like supplies, 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:

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~~Comparing the thirteen weeks ended October 28, 2023 with the thirteen weeks ended October 29, 2022 reflect continued business and customer growth and operational execution, while investing in strategic growth initiatives. Comparing the thirteen weeks ended October 29, 2022 with the thirteen weeks ended October 30, 2021 (unless otherwise noted), our results included the following:

•

~~an increase~~a decrease in net sales from ~~$1.44~~$1.50 billion to ~~$1.50~~$1.49 billion, representing period-over-period ~~growth~~decrease of ~~4.0%~~0.5%;

•

~~comparable sales growth~~an operating loss of ~~4.1%;~~$1,232.1 million resulting primarily from goodwill impairment of $1,222.5 million, compared to operating income of $48.1 million in the prior year period;

•

~~a decrease in operating income from $61.9~~net loss attributable to Class A and B-1 common stockholders of $1,241.1 million impacted by goodwill impairment, compared to ~~$48.1 million, representing a period-over-period decrease of 22.4%;~~

•

~~a decrease in~~ net income attributable to Class A and B-1 common stockholders ~~from $52.8 million to~~of $19.9 million ~~representing a period-over-period decrease of 62.2%, which was inclusive of a $19.2 million lower remeasurement of~~in 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;~~prior year period; and

•

a decrease in Adjusted EBITDA from ~~$138.5~~$120.2 million to ~~$137.6 million, representing a period-over-period decrease of 0.7%.~~$72.2 million.

1718

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,
2022

October 30,
2021

October 29,
2022

October 30,
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 28, 2023			October 29, 2022			October 28, 2023			October 29, 2022
Net sales:
Products	$	1,257,803		$	1,295,771		$	3,852,997		$	3,868,659
Services and other		236,363			205,449			727,811			589,349
Total net sales		1,494,166			1,501,220			4,580,808			4,458,008
Cost of sales:
Products		787,994			759,303			2,366,472			2,229,311
Services and other		156,171			144,240			466,849			428,869
Total cost of sales		944,165			903,543			2,833,321			2,658,180
Gross profit		550,001			597,677			1,747,487			1,799,828
Selling, general and administrative expenses		559,611			549,622			1,705,443			1,651,829
Goodwill impairment		1,222,524			—			1,222,524			—
Operating (loss) income		(1,232,134	)		48,055			(1,180,480	)		147,999
Interest income		(1,139	)		(130	)		(3,079	)		(287	)
Interest expense		36,557			27,307			111,251			68,761
Loss on partial extinguishment of debt		174			—			920			—
Other non-operating (income) loss		(113	)		(576	)		(4,727	)		9,369
(Loss) income before income taxes and income from equity method investees		(1,267,613	)		21,454			(1,284,845	)		70,156
Income tax (benefit) expense		(22,902	)		4,161			(17,178	)		20,799
Income from equity method investees		(3,574	)		(2,627	)		(10,032	)		(7,821	)
Net (loss) income		(1,241,137	)		19,920			(1,257,635	)		57,178
Net loss attributable to noncontrolling interest		—			—			—			(891	)
Net (loss) income attributable to Class A and B-1 common stockholders	$	(1,241,137	)	$	19,920		$	(1,257,635	)	$	58,069

Thirteen weeks ended

Thirty-nine weeks ended

October 29,
2022

October 30,
2021

October 29,
2022

October 30,
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,
2022

October 30,
2021

October 29,
2022

October 30,
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

1819


	Thirteen weeks ended						Thirty-nine weeks ended
	October 28, 2023			October 29, 2022			October 28, 2023			October 29, 2022
Net sales:
Products		84.2	%		86.3	%		84.1	%		86.8	%
Services and other		15.8			13.7			15.9			13.2
Total net sales		100.0			100.0			100.0			100.0
Cost of sales:
Products		52.7			50.6		51.7				50.0
Services and other		10.5			9.6		10.2			9.6
Total cost of sales		63.2			60.2		61.9			59.6
Gross profit		36.8			39.8			38.1			40.4
Selling, general and administrative expenses		37.5			36.6		37.2			37.1
Goodwill impairment		81.8			—			26.7			—
Operating (loss) income		(82.5	)		3.2			(25.8	)		3.3
Interest income		(0.1	)		(0.0	)		(0.1	)		(0.0	)
Interest expense		2.4			1.8			2.5			1.5
Loss on partial extinguishment of debt		0.0			—			0.0			—
Other non-operating (income) loss		(0.0	)		(0.0	)		(0.2	)		0.2
(Loss) income before income taxes and income from equity method investees		(84.8	)		1.4			(28.0	)		1.6
Income tax (benefit) expense		(1.5	)		0.3			(0.4	)		0.5
Income from equity method investees		(0.2	)		(0.2	)		(0.1	)		(0.2	)
Net (loss) income		(83.1	)		1.3			(27.5	)		1.3
Net loss attributable to noncontrolling interest		—			—			—			(0.0	)
Net (loss) income attributable to Class A and B-1 common stockholders		(83.1	)%		1.3	%		(27.5	)%		1.3	%


	Thirteen weeks ended						Thirty-nine weeks ended
	October 28, 2023			October 29, 2022			October 28, 2023			October 29, 2022
Operational Data:
Comparable sales change		0.0	%		4.1	%		2.8	%		4.3	%
Total pet care centers at end of period		1,429			1,428			1,429			1,428
Total veterinarian practices at end of period		282			229			282			229
Adjusted EBITDA (in thousands)	$	72,159		$	120,188		$	295,763		$	372,880

Thirteen and Thirty-nine Weeks Ended October ~~29, 2022~~28, 2023 Compared with Thirteen and Thirty-nine Weeks Ended October ~~30, 2021~~29, 2022

Net Sales and Comparable Sales


	Thirteen weeks ended										Thirty-nine weeks ended										Thirteen weeks ended										Thirty-nine weeks ended
(dollars in thousands)	October 29, 2022		October 30, 2021		$ Change			% Change			October 29, 2022		October 30, 2021		$ Change			% Change			October 28, 2023		October 29, 2022		$ Change			% Change			October 28, 2023		October 29, 2022		$ Change			% Change
Consumables	$	720,512	$	643,125	$	77,387			12.0	%	$	2,093,510	$	1,850,203	$	243,307			13.2	%	$	733,277	$	720,512	$	12,765			1.8	%	$	2,230,405	$	2,093,510	$	136,895			6.5	%
Supplies and companion animals		575,259		635,278		(60,019	)		(9.4	%)		1,775,149		1,957,022		(181,873	)		(9.3	%)		524,526		575,259		(50,733	)		(8.8	%)		1,622,592		1,775,149		(152,557	)		(8.6	%)
Services and other		205,449		164,861		40,588			24.6	%		589,349		485,567		103,782			21.4	%		236,363		205,449		30,914			15.0	%		727,811		589,349		138,462			23.5	%
Net sales	$	1,501,220	$	1,443,264	$	57,956			4.0	%	$	4,458,008	$	4,292,792	$	165,216			3.8	%	$	1,494,166	$	1,501,220	$	(7,054	)		(0.5	%)	$	4,580,808	$	4,458,008	$	122,800			2.8	%

Net sales ~~increased $58.0~~decreased $7.1 million, or ~~4.0%~~0.5%, to $1.49 billion in the thirteen weeks ended October 28, 2023 compared to net sales of $1.50 billion in the thirteen weeks ended October 29, ~~2022~~2022. Net sales increased $122.8 million, or 2.8%, to $4.58 billion in the thirty-nine weeks ended October 28, 2023 compared to net sales of ~~$1.44 billion in the thirteen weeks ended October 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 ended October 29, 2022, ~~compared to net sales of $4.29 billion in the thirty-nine weeks ended October 30, 2021,~~ driven by a ~~4.3%~~2.8% 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 continuedWe continue to experience momentum in consumables and services, ~~whose customers shop more frequently and~~although we have ~~among our highest long-term value. This growth is slightly offset by~~also experienced 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 ended October 29, 2022.~~environment.

The increase in consumables sales between the periods was driven in part by ~~the increase~~our investment in ~~new pets,~~bringing additional brands into 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.~~assortment. The decrease in supplies and companion animals sales is due ~~in part~~ to ~~a strong stimulus driven thirty-nine week period ended October 30, 2021 and~~ a decrease in spending on certain non-essential items. The increase in services and other was due to growth in ~~part to the increase~~our grooming services and veterinary business in ~~new pets,~~which we now operate over 275 veterinary hospitals as well as growth in our membership offerings like Vital ~~Care, and growth in our grooming services and veterinary hospital business in~~Care.

Service-related sales, which ~~we now operate over 225~~include veterinary hospitals, ~~– an increase of over 55 since October 30, 2021.~~

~~For the thirteen~~increased 14.0% and thirty-nine weeks ended October 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%14.6% during the thirteen and thirty-nine weeks ended October ~~29, 2022,~~28, 2023, respectively, reflecting expansion and maturity of our veterinary hospital footprint and growth in our veterinary and grooming business. E-commerce and digital sales increased 4.7% and 8.4% during the thirteen and thirty-nine weeks ended October 28, 2023, 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~~and our digital pharmacy.

We are unable to quantify certain factors impacting sales ~~which include veterinary hospitals, increased 14.4% and 15.4% during~~described above due to the ~~thirteen and thirty-nine weeks ended October 29, 2022, respectively, reflecting expansion of our veterinary hospital footprint and strong growth in veterinary and grooming customers.~~fact that such factors are based on input measures or qualitative information that do not lend themselves to quantification.

Gross Profit

Gross profit ~~increased $3.0~~decreased $47.7 million, or ~~0.5%~~8.0%, to ~~$597.7~~$550.0 million in the thirteen weeks ended October ~~29, 2022~~28, 2023 compared to gross profit of ~~$594.7~~$597.7 million for the thirteen weeks ended October ~~30, 2021.~~29, 2022. As a percentage of sales, our gross profit rate was 36.8% for the thirteen weeks ended October 28, 2023 compared with 39.8% for the thirteen weeks ended October 29, ~~2022 compared with 41.2% for the thirteen weeks ended October 30, 2021.~~2022. Gross profit ~~increased $8.7~~decreased $52.3 million, or ~~0.5%~~2.9%, to ~~$1,799.8~~$1,747.5 million in the thirty-nine weeks ended October ~~29, 2022~~28, 2023 compared to gross profit of ~~$1,791.1~~$1,799.8 million for the thirty-nine weeks ended October ~~30, 2021.~~29, 2022. As a percentage of sales, our gross profit rate was 38.1% for the thirty-nine weeks ended October 28, 2023 compared with 40.4% for the thirty-nine weeks ended October 29, ~~2022 compared with 41.7% for the thirty-nine weeks ended October 30, 2021.~~2022. The decrease in gross profit rate between the periods was primarily due to the mix impact of ~~strong~~higher consumables sales and ~~lower~~softer supplies and companion animal sales as well as investments made in bringing additional brands into our consumables assortment during the thirteen and thirty-nine weeks ended October ~~29, 2022.~~28, 2023. Sales channel impacts driven by strength in our digital and services business ~~moderate increases in distribution costs, and one-time integration costs relating to~~(which includes the ~~purchase of the remaining stake in our veterinary joint venture~~vet business) also contributed to the decrease in gross profit rate during the thirteen and thirty-nine weeks ended October ~~29, 2022~~28, 2023 as compared to the prior year periods. We are unable to quantify the factors impacting gross profit rate described above due to the fact that such factors are based on input measures or qualitative information that do not lend themselves to quantification.

Selling, General and Administrative (“SG&A”) Expenses

SG&A expenses increased ~~$16.9~~$10.0 million, or ~~3.2%~~1.8%, to $559.6 million for the thirteen weeks ended October 28, 2023 compared to $549.6 million for the thirteen weeks ended October 29, ~~2022 compared to $532.8 million for the thirteen weeks ended October 30, 2021.~~2022. As a percentage of net sales, SG&A expenses were 37.5% for the thirteen weeks ended October 28, 2023 compared with 36.6% for the thirteen weeks ended October 29, ~~2022 compared with 36.9% for the thirteen weeks ended October 30, 2021.~~2022. 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~~people. The increase included higher ~~variable costs on increased sales.~~depreciation expense and higher equity-based compensation expense driven by additional awards issued throughout the past year.

SG&A expenses increased ~~$43.9~~$53.6 million, or ~~2.7%~~3.2%, to $1,705.4 million for the thirty-nine weeks ended October 28, 2023 compared to $1,651.8 million for the thirty-nine weeks ended October 29, ~~2022 compared to $1,607.9 million for the thirty-nine weeks ended October 30, 2021.~~2022. As a percentage of net sales, SG&A expenses were 37.2% for the thirty-nine weeks ended October 28, 2023 compared with 37.1% for the thirty-nine weeks ended October 29, ~~2022 compared with 37.5% for the thirty-nine weeks ended October 30, 2021, reflecting operating leverage from net sales growth.~~2022. 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 included higher equity-based compensation expense driven by additional awards issued throughout the past year. This increase was partially offset by a decrease in advertising ~~expenses, primarily~~expenses.

Goodwill Impairment

Goodwill impairment consisted of a $1.22 billion charge during the thirteen weeks ended October 29, 2022 as a result of performing an interim impairment test in the third quarter of fiscal 2023 due to ~~investments that were made during~~ the ~~thirty-nine week period ended October 30, 2021 for our rebranding campaign, inclusive~~identification of ~~a TV launch and associated advertisements.~~

certain triggering events. For more information on this charge, refer to Note 3, "Goodwill," to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Interest Expense

Interest expense increased ~~$8.5~~$9.3 million, or ~~45.5%~~33.9%, to $36.6 million in the thirteen weeks ended October 28, 2023 compared with $27.3 million in the thirteen weeks ended October 29, ~~2022 compared with $18.8~~2022. Interest expense increased $42.5 million, or 61.8%, to $111.3 million in the ~~thirteen~~thirty-nine weeks ended October ~~30, 2021. Interest expense increased $10.3 million, or 17.5%, to~~28, 2023 compared with $68.8 million in the thirty-nine weeks ended October 29, ~~2022 compared with $58.5 million in the thirty-nine weeks ended October 30, 2021.~~2022. 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~~4, “Senior Secured Credit Facilities,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Loss on Partial Extinguishment ~~and Modification~~ of Debt

Loss on partial extinguishment ~~and modification~~ of debt was ~~$20.8~~$0.2 million and $0.9 million for the thirteen and thirty-nine weeks ended October ~~30, 2021.~~28, 2023, respectively. This loss was recognized in conjunction with the ~~March 2021 refinancing of~~$35.0 million, $25.0 million and $15.0 million repayments on the ~~Amended~~First Lien Term Loan ~~Facility~~in March 2023, May 2023 and ~~Amended Revolving Credit Facility.~~August 2023, respectively. There was no loss on debt extinguishment and modification for the ~~thirteen weeks ended October 30, 2021 or the thirteen and~~ thirty-nine weeks ended October 29, 2022. For more information regarding these activities, refer to Note 3,4, “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 $0.1 million and $4.7 million for the thirteen and thirty-nine weeks ended October 28, 2023, respectively. Other non-operating income was $0.6 million for the thirteen weeks ended October 29, 2022, and other non-operating loss was $9.4 million for the thirty-nine weeks ended October 29, 2022. Other non-operating income was $19.8 million and $64.9 million for the thirteen and thirty-nine weeks ended October 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, 6, ““Fair Value Measurements,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Income Tax (Benefit) Expense

Our effective tax rates were 1.8% and 1.3%, resulting in income tax benefit of $22.9 million and $17.2 million for the thirteen and thirty-nine weeks ended October 28, 2023, respectively, compared to effective tax rates of 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 ended October 29, 2022, ~~respectively, compared to~~respectively. The decrease in 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 ended October ~~30, 2021, respectively. The decrease in effective tax rate for the thirteen weeks ended October 29, 2022 is~~28, 2023 was primarily driven by ~~an increase~~non-deductible goodwill impaired during the third quarter in ~~federal~~addition to a shortfall in tax ~~credits. The increase in effective tax rate~~deductions resulting from the exercise and vesting of equity-based compensation awards for the thirty-nine weeks ended October 29, 2022 is primarily driven by a decrease in earnings in the thirty-nine weeks ended October 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 ended October 30, 2021.periods.

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 (loss) 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~~2022 Form 10-K for more information regarding how we define Adjusted EBITDA.

2123

The table below reflects the calculation of Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented:


	Thirteen weeks ended						Thirty-nine weeks ended						Thirteen weeks ended						Thirty-nine weeks ended
(dollars in thousands)	October 29, 2022			October 30, 2021			October 29, 2022			October 30, 2021			October 28, 2023			October 29, 2022			October 28, 2023			October 29, 2022
Net income attributable to Class A and B-1 common stockholders	$	19,920		$	52,752		$	58,069		$	135,423
Net (loss) income attributable to Class A and B-1 common stockholders													$	(1,241,137	)	$	19,920		$	(1,257,635	)	$	58,069
Interest expense, net		27,177			18,751			68,474			58,451			35,418			27,177			108,172			68,474
Income tax expense		4,161			14,095			20,799			43,784
Income tax (benefit) expense														(22,902	)		4,161			(17,178	)		20,799
Depreciation and amortization		48,029			42,792			143,599			125,637			50,674			48,029			148,593			143,599
Income from equity method investees		(2,627	)		(2,637	)		(7,821	)		(7,490	)		(3,574	)		(2,627	)		(10,032	)		(7,821	)
Loss on debt extinguishment and modification		—			—			—			20,838
Loss on partial extinguishment of debt														174			—			920			—
Goodwill impairment														1,222,524			—			1,222,524			—
Asset impairments and write offs		930			3,228			2,299			5,918			1,167			930			2,202			2,299
Equity-based compensation		15,775			13,381			40,892			36,491			18,183			15,775			64,431			40,892
Other non-operating (income) loss		(576	)		(19,773	)		9,369			(64,934	)		(113	)		(576	)		(4,727	)		9,369
Mexico joint venture EBITDA (1)		7,040			6,661			20,319			18,523			9,189			7,040			26,467			20,319
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
Acquisition-related integration costs (2)														—			1,592			—			14,687
Other costs (3)														2,556			(1,233	)		12,026			2,194
Adjusted EBITDA	$	137,555		$	138,509		$	412,061		$	419,328		$	72,159		$	120,188		$	295,763		$	372,880
Net sales	$	1,501,220		$	1,443,264		$	4,458,008		$	4,292,792		$	1,494,166		$	1,501,220		$	4,580,808		$	4,458,008
Net margin (5)		1.3	%		3.7	%		1.3	%		3.2	%
Adjusted EBITDA Margin (5)		9.2	%		9.6	%		9.2	%		9.8	%
Net margin (4)														(83.1	)%		1.3	%		(27.5	)%		1.3	%
Adjusted EBITDA Margin														4.8	%		8.0	%		6.5	%		8.4	%

(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 our Mexico joint venture on an Adjusted EBITDA basis to ensure consistency. The table below presents a reconciliation of Mexico joint venture net income to Mexico joint venture EBITDA:


	Thirteen weeks ended						Thirty-nine weeks ended						Thirteen weeks ended					Thirty-nine weeks ended
(dollars in thousands)	October 29, 2022			October 30, 2021			October 29, 2022			October 30, 2021			October 28, 2023		October 29, 2022			October 28, 2023		October 29, 2022
Net income	$	5,251		$	5,274		$	14,448		$	14,987		$	7,149	$	5,251		$	20,064	$	14,448
Depreciation		4,861			3,660			13,866			10,461			6,920		4,861			19,071		13,866
Income tax expense		2,957			3,277			8,344			8,688			2,470		2,957			8,908		8,344
Foreign currency gain		(395	)		(60	)		(15	)		(547	)
Foreign currency loss (gain)														441		(395	)		963		(15	)
Interest expense, net		1,406			1,171			3,994			3,457			1,397		1,406			3,927		3,994
EBITDA	$	14,080		$	13,322		$	40,637		$	37,046		$	18,377	$	14,080		$	52,933	$	40,637
50% of EBITDA	$	7,040		$	6,661		$	20,319		$	18,523		$	9,189	$	7,040		$	26,467	$	20,319

(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~~company’s operations. For the thirteen weeks ended October 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 ended October 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)~~(3)

Other costs ~~include: severance;~~include, as incurred: restructuring costs and restructuring-related severance costs; legal reserves ~~and related fees; one-time consulting and other costs~~ associated with ~~our strategic transformation initiatives; discontinuation and liquidation costs;~~significant, non-ordinary course legal or regulatory matters; and costs related to ~~our initial public offering and refinancing.~~certain significant strategic transactions.

~~(5)~~(4)

We define net margin as net (loss) 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

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						Thirty-nine weeks ended
	October 29, 2022			October 30, 2021			October 28, 2023			October 29, 2022
(dollars in thousands)
Net cash provided by operating activities	$	209,463		$	288,444		$	168,696		$	209,463
Cash paid for fixed assets		(212,074	)		(164,330	)		(176,532	)		(212,074	)
Free Cash Flow	$	(2,611	)	$	124,114		$	(7,836	)	$	(2,611	)

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~~28, 2023 was ~~$592.6~~$586.4 million, inclusive of cash and cash equivalents of ~~$148.7~~$139.8 million and ~~$443.9~~$446.6 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						Thirty-nine weeks ended
(dollars in thousands)	October 29, 2022			October 30, 2021			October 28, 2023			October 29, 2022
Total cash provided by (used in):
Operating activities	$	209,463		$	288,444		$	168,696		$	209,463
Investing activities		(252,697	)		(167,770	)		(156,149	)		(252,697	)
Financing activities		(27,033	)		(14,863	)		(84,040	)		(27,033	)
Net (decrease) increase in cash, cash equivalents and restricted cash	$	(70,267	)	$	105,811
Net decrease in cash, cash equivalents and restricted cash							$	(71,493	)	$	(70,267	)

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 (loss) 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); loss; and the effect of changes in operating assets and liabilities.

Net cash provided by operating activities was $168.7 million in the thirty-nine weeks ended October 28, 2023 compared with net cash provided by operating activities of $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.~~2022. The decrease in operating cash flow was ~~due to~~driven by lower ~~operating income,~~earnings, an increase in cash paid for inventory,

higher payroll and fringe benefits ~~including payouts of prior year accrued incentive bonuses.~~as well as increases in cash paid for interest, income taxes and operating leases. This was partially offset by ~~timing differences in~~effective management of accounts payable ~~as well as~~and lower cash ~~payments on operating leases due to the timing of rent payments.~~paid for advertising.

Investing Activities

Cash used in investing activities consists of capital expenditures, which in the thirty-nine weeks ended October ~~29, 2022~~28, 2023 and the thirty-nine weeks ended October ~~30, 2021~~29, 2022 primarily supported our ~~transformation initiatives.~~initiatives including the continued build-out of our veterinary hospitals. Net cash used in investing activities was ~~$252.7~~$156.1 million and ~~$167.8~~$252.7 million for the thirty-nine weeks ended October 28, 2023 and October 29, 2022, ~~and October 30, 2021,~~ respectively. ~~The increase~~This change was primarily driven by reductions in capital ~~expenditures between~~spend and proceeds received from the ~~periods was predominantly due to the expansion~~sale of our ~~veterinary hospitals, investments~~investment in ~~digital assets and innovation in response to our sales growth. In addition, in May~~Rover Group, Inc. during the thirty-nine weeks ended October 28, 2023. Additionally, during the thirty-nine weeks ended October 29, 2022, we ~~completed the purchase of~~paid $35.0 million for the remaining 50% stake in our veterinary joint ~~venture for $35.0 million, which is now a wholly owned subsidiary.~~venture.

Financing Activities

Net cash used in financing activities was ~~$27.0~~$84.0 million for the thirty-nine weeks ended October ~~29, 2022,~~28, 2023, compared with ~~$14.9~~$27.0 million used in financing activities in the thirty-nine weeks ended October ~~30, 2021.~~29, 2022.

Financing cash flows in the thirty-nine weeks ended October 28, 2023 primarily consisted of $75.0 million in principal repayments on the term loan.

Financing cash flows in the thirty-nine weeks ended October 29, 2022 primarily consisted of ~~borrowings and~~the scheduled quarterly repayments ~~under~~on 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 ended October 30, 2021 primarily consisted~~Sources of borrowings and repayments of debt in connection with the March 4, 2021 debt refinancing transaction discussed under “Sources of Liquidity” below. For more information regarding these activities, refer to Note 3 “Liquidity

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~~

On March 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 on March 4, 2028 (the “First Lien Term Loan”) and the ABL Revolving Credit Facility, which matures on March 4, 2026 and has availability of up to $500.0 million, subject to a borrowing base. Interest ~~under~~on the First Lien Term Loan is based on, at the Company’s option, either a base rate or Adjusted ~~LIBOR,~~Term SOFR, subject to a 0.75% floor, payable upon maturity of the ~~LIBOR~~SOFR 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~~Term SOFR 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~~Term SOFR loan. Principal and interest payments ~~are $4.25 million quarterly and~~ commenced on June 30, 2021. ~~The terms under~~Principal payments are typically $4.25 million quarterly. In March 2023, May 2023 and August 2023, the ~~ABL Revolving Credit Facility are substantially similar to those~~Company repaid $35.0 million, $25.0 million and $15.0 million in principal, respectively, of the ~~Amended Revolving~~First Lien Term Loan using existing cash on hand. The repayments were applied to remaining principal payments in order of scheduled payment date.

For more information regarding this indebtedness, refer to Note 4, “Senior Secured Credit ~~Facility.~~Facilities,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Derivative Instruments

In November 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~~relating to three-month ~~Secured Overnight Financing Rate as published by CME Group exceeds 4.5%.~~Term SOFR. The interest rate caps ~~are forward-starting with an~~became effective ~~date of~~ December 30, 2022 and expire on December 31, 2024.

three-month Term SOFR. The interest rate collar became effective September 30, 2023 and expires on December 31, 2026.

For more information regarding ~~this indebtedness,~~derivative instruments, refer to Note ~~3, “~~5, ~~Senior Secured Credit Facilities~~“Derivative Instruments,” ,” 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 the United States (“GAAP”) requires us to make assumptions and estimates about future results and

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.

Goodwill is not amortized but is tested annually for impairment during the fourth quarter of each fiscal year, or more frequently when warranted by events or changes in circumstances. The Company has the option to first perform a qualitative assessment of its goodwill to determine whether it is necessary to perform a quantitative impairment test. If the carrying value of net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we would record an impairment loss equal to the difference. In cases where the quantitative test is performed, the fair value of the Company's reporting unit is estimated by a third party valuation firm. If a quantitative assessment is performed, the evaluation includes management estimates of cash flow projections based on internal future projections and/or use of a market approach by reviewing transactional and financial data of publicly traded companies. The assumptions used in the impairment analysis are inherently subject to uncertainty and small changes in these assumptions could have a significant impact on the concluded value. The Company's market capitalization is also considered as part of the analysis, in order to further validate the reasonableness of the fair values concluded for the reporting unit. Factors that may trigger an interim impairment test may include, but are not limited to, current economic and market conditions or a significant decline in the Company's stock price and market capitalization compared to net book value.

The Company's trade name has an indefinite life and is tested annually for impairment during the fourth quarter of each fiscal year, or more frequently when warranted by events or changes in circumstances. The Company also has the option to first perform a qualitative assessment of its trade name to determine whether it is necessary to perform a quantitative impairment test. An impairment charge is recorded for the amount by which the carrying amount of the trade name exceeds its fair value. In cases where the quantitative test is performed, the fair value of the Company's trade name is estimated by a third party valuation firm. Factors that may trigger an interim impairment test may include, but are not limited to, a significant decline in the Company's stock price and market capitalization compared to net book value, or changes in the pattern of utilization of the intangible asset.

There have been no other material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in the ~~2021~~2022 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are subject to market risks arising from transactions in the normal course of our business. These risks are primarily associated with interest rate fluctuations, as well as changes in our credit standing, based on the capital and credit markets, which are not predictable. We do not currently hold any instruments for trading purposes.

Interest Rate Risk

We are subject to interest rate risk in connection with the First Lien Term Loan and the ABL Revolving Credit Facility. As of October ~~29, 2022,~~28, 2023, we had ~~$1,674.5~~$1,595.3 million outstanding under the First Lien Term Loan and no

amounts outstanding under the ABL Revolving Credit Facility. The First Lien Term Loan and the ABL Revolving Credit Facility each bear interest at variable rates. An increase of 100 basis points in the variable rates on the First Lien Term Loan and the ABL Revolving Credit Facility as of October ~~29, 2022~~28, 2023 would have increased annual cash interest in the aggregate by approximately ~~$17.0~~$16.2 million. ~~In November 2022,~~Additionally, we entered into ~~a series of interest rate cap agreements~~cash flow hedges to limit the maximum interest rate on a portion of our variable-rate debt and ~~decrease~~limit our exposure to interest rate variability, ~~when~~refer to Note 4, “Derivative Instruments,” to 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~~Notes to Consolidated Financial Statements included in Part I, Item 1 of ~~December 30, 2022 and expire on December 31, 2024.~~this Form 10-Q.

We cannot predict market fluctuations in interest rates and their impact on our debt, nor can there be any assurance that long-term fixed-rate debt will be available at favorable rates, if at all. Consequently, future results may differ materially from estimated results due to adverse changes in interest rates or debt availability.

Credit Risk

As of October ~~29, 2022,~~28, 2023, our cash and cash equivalents were maintained at major financial institutions in the United States, and our current deposits are likely in excess of insured limits. We believe these institutions have sufficient assets and liquidity to conduct their operations in the ordinary course of business with little or no credit risk to us.

Foreign Currency Risk

Substantially all of our business is currently conducted in U.S. dollars. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar as compared to other currencies would have a material effect on our operating results.

Item 4. Controls and Procedures.

Management’s Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the

~~“Exchange~~ “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.

As of the end of the period covered by this Form 10-Q, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of October ~~29, 2022.~~28, 2023.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended October ~~29, 2022,~~28, 2023 which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Management does not expect, however, that our disclosure controls and procedures will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

See Note 6,8, “Commitments and Contingencies,” to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for a description of legal proceedings, which is incorporated herein by reference.

Item 1A. Risk Factors.

Reference is made to Part I, Item 1A, “Risk Factors” included in the ~~2021~~2022 Form 10-K for information concerning risk factors. ~~There~~Except as set forth below, there have been no material changes with respect to the risk factors disclosed in the ~~2021~~2022 Form 10-K. The risk factor set forth below updates, and should be read together with, the risk factors in our 2022 Form 10-K. You should carefully consider such factors, which could materially and adversely affect our business, financial condition and/or results of operations. The risks described in this Form 10-Q and in the ~~2021~~2022 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or results of operations.

General Risk Factors

Additional impairments of the carrying value of our goodwill or other intangible assets could adversely affect our financial condition and results of operations.

Our goodwill and other intangible assets represent a significant portion of our total assets. We test our goodwill and our indefinite-lived intangible assets for impairment at least annually and whenever events or changes in circumstances indicate that their carrying value may not be recoverable. A significant amount of judgment is involved in determining if an indication of impairment exists. Factors indicating impairment of goodwill or other intangible assets may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; changes in the macroeconomic environment, increases in interest rates, a significant adverse change in legal factors or in the business climate; unanticipated or changing competition; and reduced growth rates. There are inherent uncertainties in management’s estimates, judgments, and assumptions used in the impairment evaluation process. To the extent that business conditions deteriorate or there are any material changes in key assumptions and estimates, it may be necessary to record additional impairment charges in the future which could have a material adverse effect on our financial condition and results of operations.

During the third quarter of fiscal 2023, we concluded indicators of impairment existed due to declines in the Company's share price, as well as current macroeconomic conditions, and performed an interim impairment test of our goodwill and indefinite-lived trade name, which resulted in a pre-tax goodwill impairment charge of $1,222.5 million for the thirteen week period ended October 28, 2023 as discussed in Note 3, "Goodwill," to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. For further information on our evaluation of impairment of our goodwill and indefinite-lived trade name, please read the discussion under "Management’s Discussion and Analysis of Financial Condition and Results of Operations– Critical Accounting Policies and Estimates."

Item 2. Unregistered Sales of Equity Securities, ~~and~~ Use of ~~Proceeds.~~Proceeds, and Issuer Purchases of Equity Securities.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

~~None.~~None of our directors or Section 16 officers adopted or terminated a Rule 10b5-1 trading arrangement (as defined in Item 408(a) of Regulation S-K) or a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K) during the quarterly period covered by this Form 10-Q.

2730

Item 6. Exhibits.

The following is a list of exhibits filed as part of this ~~Quarterly Report on~~ Form 10-Q:


Exhibit Number		Description

~~10.1†~~10.1		First Lien Credit Agreement, dated March 4, 2021, by and among Petco Health and Wellness Company, Inc., the Lenders party thereto, and Citibank, N.A., as Administrative Agent and Collateral Agent, as amended by the First Amendment to Credit Agreement, dated December 12, 2022, by and between Petco Health and Wellness Company, Inc. ~~Executive Severance Plan~~ and ~~Form of Participation Agreement (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K, filed on September 30, 2022)~~Citibank, N.A., as administrative agent

~~10.2†~~10.2		~~Separation~~ABL Revolving Credit Agreement, dated March 4, 2021, by and ~~General Release of Claims~~ among Petco ~~Animal Supplies Stores,~~Health and Wellness Company, Inc., ~~Michael Nuzzo,~~the Lenders party thereto, and ~~Scooby LP~~Citibank, N.A., as Administrative Agent and Collateral Agent, as amended by the First Amendment to ABL Revolving Credit Agreement, dated ~~August 30,~~December 12, 2022, by and between Petco Health and Wellness Company, Inc. and Citibank, N.A., as administrative agent

31.1		Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


†*	~~Management contract~~Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or ~~compensatory plan~~incorporated by reference into any filing under the Securities Act of 1933, as amended, or ~~arrangement.~~the Securities Exchange Act of 1934, as amended.

* Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

2831

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		Petco Health and Wellness Company, Inc.

Date: December ~~8, 2022~~7, 2023	By:		/s/ Brian LaRose
			Brian LaRose
			Chief Financial Officer (Principal Financial and Accounting Officer)

2932


Foreign currency translation adjustment, net of tax	—	—	—		—		—			—			(786	)		(786	)		—			(786	)
Issuance of restricted stock awards	55	—	—		—		—			—			—			—			—			—
Balance at May 1, 2021	226,479	37,791	37,791	$	264	$	2,103,714		$	(14,691	)	$	(2,061	)	$	2,087,226		$	(14,994	)	$	2,072,232
Equity-based compensation expense (Note 5)	—	—	—		—		11,506			—			—			11,506			—			11,506
Net income	—	—	—		—		—			75,111			—			75,111			(256	)		74,855
Foreign currency translation adjustment, net of tax	—	—	—		—		—			—			789			789			—			789
Issuance of common stock	12	—	—		—		—			—						—			—			—
Balance at July 31, 2021	226,491	37,791	37,791	$	264	$	2,115,220		$	60,420		$	(1,272	)	$	2,174,632		$	(15,250	)	$	2,159,382
Equity-based compensation expense (Note 5)	—	—	—		—		11,087			—			—			11,087			—			11,087
Net income	—	—	—		—		—			52,752			—			52,752			(1,239	)		51,513
Foreign currency translation adjustment, net of tax	—	—	—		—		—			—			(1,056	)		(1,056	)		—			(1,056	)
Issuance of common stock, net of tax withholdings	1	—	—		—		(13	)		—						(13	)		—			(13	)
Balance at October 30, 2021	226,492	37,791	37,791	$	264	$	2,126,294		$	113,172		$	(2,328	)	$	2,237,402		$	(16,489	)	$	2,220,913


	January 29, 2022
	Level 1		Level 2			Level 3
Assets (liabilities):
Money market mutual funds	$	167,277	$	—		$	—
Investments of officers' life insurance	$	—	$	14,575		$	—
Non-qualified deferred compensation plan	$	—	$	(17,453	)	$	—
Investment in Rover Group, Inc.	$	32,819	$	—		$	—


	RSUs and RSAs			Options
Nonvested/outstanding, January 29, 2022		2,587			3,327
Granted		5,411			503
Vested and delivered/exercised		(1,040	)		(45	)
Forfeited/expired		(766	)		(475	)
Nonvested/outstanding, October 29, 2022		6,192			3,310
Unrecognized compensation expense as of October 29, 2022	$	85,405		$	10,681
Weighted average remaining expense period as of October 29, 2022	2.3 Years			1.6 Years