PETCO HEALTH AND WELLNESS COMPANY, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q (this "Form 10-Q"), as well as the corresponding Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year endedJanuary 30, 2021 (the "2020 Form 10-K"). The discussion and analysis below contains certain forward-looking statements about our business and operations that are subject to the risks, uncertainties, and other factors referred to in Part II, Item 1A, "Risk Factors" of this Form 10-Q. These risks, uncertainties, and other factors could cause our actual results to differ materially from those expressed in, or implied by, the forward-looking statements. The risks described in this Form 10-Q and in other documents we file from time to time with theU.S. Securities and Exchange Commission (the "SEC"), including the section entitled "Forward-Looking Statements" in this Form 10-Q, should be carefully reviewed. All amounts herein are unaudited. OverviewPetco 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. Since our founding in 1965, we have been striving to set new standards in pet care, delivering comprehensive wellness solutions through our products and services, and creating communities that deepen the pet-pet parent bond. Over the last three years, our world-class leadership team and our dedicated and passionate partners have transformed our business from a successful yet traditional retailer to a disruptive, fully integrated, digital-focused provider of premium nutrition, products, services and veterinary care. We operate more than 1,500 Petco locations across theU.S. ,Mexico , andPuerto Rico , including a growing network of more than 150 in-store veterinary hospitals, and offer a complete online resource for pet health and wellness at petco.com and on the Petco app. Our go-to-market strategy is powered by a multi-channel platform that integrates our digital presence with a nationwide physical network. 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 an extensive physical network, we are able to offer a comprehensive product and service offering in a localized manner with a meaningful last-mile delivery advantage over the competition. We strive to be a truly unique company, one that is saving and improving millions of pet lives and tangibly improving the lives of pet parents and the partners who work for us, while at the same time executing our differentiated strategy with excellence. In tandem with Petco Love (formerly thePetco Foundation ), an independent nonprofit organization, we work with and support thousands of local animal welfare groups across the country and, through in-store adoption events, we have helped find homes for more than 6.5 million animals. Impact of the COVID-19 Pandemic on Our Business The COVID-19 pandemic has impacted every aspect of the economy. As an essential retailer, all of our pet care centers have remained open, some with limited or suspended services, as we are the grocery store, pharmacy, and doctor's office for many of our nation's pets. Market data indicates that with more of the working population staying home, there has been an increase in pet ownership and the percentage of disposable income spent on home-related goods and services, including pet care, relative to pre-pandemic levels. Overall, this macroeconomic trend has continued to favorably impact our business results to date with millions of additional new pets that need to be fed, groomed and vaccinated for years to come, but the possible continued spread of COVID-19, and any government response thereto, increases the uncertainty regarding potential economic conditions that could impact our business in the future. We cannot predict the duration or ultimate severity of COVID-19 or its ultimate impact on the broader economy or our operations and liquidity. Please refer to the risk factors referred to in Part II, Item 1A, "Risk Factors" of this Form 10-Q. How We Assess the Performance of Our Business
In assessing our performance, we consider a variety of performance and financial measures, including the following:
16
--------------------------------------------------------------------------------Comparable Sales Comparable sales is an important measure throughout the retail industry and includes both retail and digital sales of products and services. A new location or digital site is included in comparable sales beginning on the first day of the fiscal month following 12 full fiscal months of operation and is subsequently compared to like time periods from the previous year. Relocated pet care centers become comparable pet care centers on the first day of operation if the original pet care center was open longer than 12 full fiscal months. If, during the period presented, a pet care center was closed, sales from that pet care center are included up to the first day of the month of closing. There may be variations in the way in which some of our competitors and other retailers calculate comparable sales. As a result, data in this filing regarding our comparable sales may not be comparable to similar data made available by other retailers. Comparable sales allow us to evaluate how our overall ecosystem is performing by measuring the change in period-over-period net sales from locations and digital sites that have been open for the applicable period. We intend to improve comparable sales by continuing initiatives aimed to increase customer retention, frequency of visits, and basket size. General macroeconomic and retail business trends are also a key driver of changes in comparable sales.
Non-GAAP Financial Measures
Management and our board of directors review, in addition to GAAP (as defined
herein) measures, certain non-GAAP financial measures, including Adjusted
EBITDA, Free Cash Flow and Net Debt, 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
Our business transformation initiatives, accelerated by an increase in pet
ownership and a shift in customer discretionary spend toward the pet category,
have driven strong top and bottom-line growth in our business. Comparing the
thirteen weeks ended October 30, 2021 with the thirteen weeks ended October 31,
2020 (unless otherwise noted), we achieved the following results:
• an increase in net sales from $1.26 billion to $1.44 billion ,
representing period-over-period growth of 14.5%;
• comparable sales growth of 15.5%;
• an increase in operating income from $46.0 million to $61.9 million ,
representing period-over-period growth of 34.6%;
• an increase in net income attributable to Class A and B-1 common
stockholders from $3.4 million to $52.8 million , representing a
period-over-period improvement of 1,450.2%;
• an increase in Adjusted EBITDA from $118.1 million to $138.5 million ,
representing period-over-period growth of 17.3%; and
• an improvement in net cash flows provided by operating activities from
$201.5 million during the thirty-nine weeks endedOctober 31, 2020 to$288.4 million during the thirty-nine weeks endedOctober 30, 2021 . 17
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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 30, October 31, October 30, October 31,
2021 2020 2021 2020
Net sales $ 1,443,264 $ 1,259,997 $ 4,292,792 $ 3,582,489
Cost of sales 848,555 718,559 2,501,688 2,045,016
Gross profit 594,709 541,438 1,791,104 1,537,473
Selling, general and administrative
expenses 532,760 495,401 1,607,938 1,410,024
Operating income 61,949 46,037 183,166 127,449
Interest income (18 ) (49 ) (53 ) (332 )
Interest expense 18,769 53,795 58,504 169,096
Loss on extinguishment and modification
of debt - - 20,838 -
Other non-operating income (19,773 ) - (64,934 ) -
Income (loss) before income taxes and
income
from equity method investees 62,971 (7,709 ) 168,811 (41,315 )
Income tax expense (benefit) 14,095 (7,940 ) 43,784 (13,537 )
Income from equity method investees (2,637 ) (1,875 ) (7,490 ) (2,952 )
Net income (loss) 51,513 2,106 132,517 (24,826 )
Net loss attributable to noncontrolling
interest (1,239 ) (1,297 ) (2,906 ) (4,502 )
Net income (loss) attributable to Class
A and B-1
common stockholders $ 52,752 $ 3,403 $ 135,423 $ (20,324 )
Thirteen weeks ended Thirty-nine weeks ended
October 30, October 31, October 30, October 31,
2021 2020 2021 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 58.8 57.0 58.3 57.1
Gross profit 41.2 43.0 41.7 42.9
Selling, general and administrative
expenses 36.9 39.3 37.5 39.4
Operating income 4.3 3.7 4.2 3.5
Interest income (0.0 ) (0.0 ) (0.0 ) (0.0 )
Interest expense 1.3 4.3 1.3 4.7
Loss on extinguishment and modification
of debt - - 0.5 -
Other non-operating income (1.4 ) - (1.5 ) -
Income (loss) before income taxes and
income
from equity method investees 4.4 (0.6 ) 3.9 (1.2 )
Income tax expense (benefit) 1.0 (0.7 ) 1.0 (0.4 )
Income from equity method investees (0.2 ) (0.1 ) (0.2 ) (0.1 )
Net income (loss) 3.6 0.2 3.1 (0.7 )
Net loss attributable to noncontrolling
interest (0.1 ) (0.1 ) (0.1 ) (0.1 )
Net income (loss) attributable to Class
A and B-1
common stockholders 3.7 % 0.3 % 3.2 % (0.6 )%
Thirteen weeks ended Thirty-nine weeks ended
October 30, October 31, October 30, October 31,
2021 2020 2021 2020
Operational Data:
Comparable sales increase (decrease) 15.5 % 16.3 % 20.9 % 9.6 %
Total pet care centers (U.S. and Puerto
Rico) at end of period 1,449 1,468 1,449 1,468
Total veterinarian practices at end of
period 172 105 172 105
Adjusted EBITDA (in thousands) $ 138,509 $ 118,101 $ 419,328 $ 335,749
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Thirteen and Thirty-Nine Weeks Ended
Thirty-Nine Weeks Ended October 31, 2020
Thirteen weeks ended Thirty-nine weeks ended
(dollars in October 30, October 31, $ % October 30, October 31, $ %
thousands) 2021 2020 Change Change 2021 2020 Change Change
Consumables
21.3 %$ 1,850,203 $ 1,548,015 $ 302,188 19.5 % Supplies and companion animals 635,278 601,520 33,758 5.6 % 1,957,022 1,707,884 249,138 14.6 % Services and other 164,861 128,488 36,373 28.3 % 485,567 326,590 158,977 48.7 %
Net sales
14.5 %$ 4,292,792 $ 3,582,489 $ 710,303 19.8 % Net sales increased$183.3 million , or 14.5%, to$1.44 billion in the thirteen weeks endedOctober 30, 2021 compared to net sales of$1.26 billion in the thirteen weeks endedOctober 31, 2020 , driven by a 15.5% increase in our comparable sales. Net sales increased$710.3 million , or 19.8%, to$4.29 billion in the thirty-nine weeks endedOctober 30, 2021 compared to net sales of$3.58 billion in the thirty-nine weeks endedOctober 31, 2020 , driven by a 20.9% 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, coupled with an increase in new pet ownership and a resulting increase in sales to meet the needs of these pet parents. Net sales during the thirteen and thirty-nine weeks endedOctober 30, 2021 were impacted by inflation, as we have taken pricing actions to offset cost increases on some vendor-supplied product. In the aggregate, we have not experienced a decrease on unit sales of impacted product as a result of these actions. The increase in consumables and supplies and companion animals sales between the periods was driven by the increase in new pets, our strategic investments in customer acquisition and retention along with continued expansion of our product assortment. The increase in services and other was due to the increase in new pets as well as growth in our veterinary hospital business with the addition of 67 new hospitals period-over-period, coupled with headwinds experienced during the thirteen and thirty-nine weeks endedOctober 31, 2020 while stay-at-home orders were in place and some of our services were limited or suspended temporarily. For the thirteen and thirty-nine weeks endedOctober 30, 2021 , pet care center merchandise delivered growth of 10.6% and 17.0%, respectively, with higher retail traffic and strong growth in all major categories, including consumables, supplies and companion animals. Our e-commerce and digital sales increased 31.9% and 22.2% during the thirteen and thirty-nine weeks endedOctober 30, 2021 , respectively, reflecting our expanded brand assortment and enhanced personalization. This digital sales growth excludes the impact associated with the closure of our Live Aquaria business during the thirteen and thirty-nine weeks endedOctober 31, 2020 . Gross Profit Gross profit increased$53.3 million , or 9.8%, to$594.7 million in the thirteen weeks endedOctober 30, 2021 compared to gross profit of$541.4 million for the thirteen weeks endedOctober 31, 2020 . As a percentage of sales, our gross profit rate was 41.2% for the thirteen weeks endedOctober 30, 2021 compared with 43.0% for the thirteen weeks endedOctober 31, 2020 . Gross profit increased$253.6 million , or 16.5%, to$1,791.1 million in the thirty-nine weeks endedOctober 30, 2021 compared to gross profit of$1,537.5 million for the thirty-nine weeks endedOctober 31, 2020 . As a percentage of sales, our gross profit rate was 41.7% for the thirty-nine weeks endedOctober 30, 2021 compared with 42.9% for the thirty-nine weeks endedOctober 31, 2020 . The decrease in gross profit rate between the periods was primarily due to the mix impact of strong consumables sales during the thirteen and thirty-nine weeks endedOctober 30, 2021 . While the strong consumables mix impacts the gross margin rate, the average consumables customer has a higher lifetime value than most other categories of customer. Sales channel impacts driven by strength in our digital, services and vet business, and moderate increases in distribution costs also contributed to the decrease in gross profit rate during the thirteen and thirty-nine weeks endedOctober 30, 2021 as compared to the prior year periods.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses increased$37.4 million , or 7.5%, to$532.8 million for the thirteen weeks endedOctober 30, 2021 compared to$495.4 million for the thirteen weeks endedOctober 31, 2020 . As a percentage of net sales, SG&A expenses were 36.9% for the thirteen weeks endedOctober 30, 2021 compared with 39.3% for the thirteen weeks endedOctober 31, 2020 , reflecting operating leverage from net sales growth. The increase in SG&A expenses period-over-period was to support our growth as we continue to invest in marketing, infrastructure and people. 19
-------------------------------------------------------------------------------- G&A expenses increased$14.8 million between the periods, with the majority of the increase due to stock-based compensation expense driven by our initial public offering. The remainder of the increase in SG&A expenses was predominately due to higher incentive compensation for corporate and field partners along with increased variable costs associated with our higher sales growth. In addition, advertising expense increased$8.1 million between the thirteen weeks endedOctober 30, 2021 compared to the thirteen weeks endedOctober 31, 2020 to support the acceleration of our sales growth. SG&A expenses increased$197.9 million , or 14.0%, to$1,607.9 million for the thirty-nine weeks endedOctober 30, 2021 compared to$1,410.0 million for the thirty-nine weeks endedOctober 31, 2020 . As a percentage of net sales, SG&A expenses were 37.5% for the thirty-nine weeks endedOctober 30, 2021 compared with 39.4% for the thirty-nine weeks endedOctober 31, 2020 , reflecting operating leverage from net sales growth. The increase in SG&A expenses period-over-period was driven by a$53.6 million increase in advertising expenses to support the acceleration of our sales growth. The remainder of the increase was predominately due to an increase in stock-based compensation expense driven by our initial public offering, higher incentive compensation for corporate and field partners, a legal settlement accrual for class action matters, along with increased variable costs associated with our higher sales growth. Interest Expense Interest expense decreased$35.0 million , or 65.1%, to$18.8 million in the thirteen weeks endedOctober 30, 2021 compared with$53.8 million in the thirteen weeks endedOctober 31, 2020 . Interest expense decreased$110.6 million , or 65.4%, to$58.5 million in the thirty-nine weeks endedOctober 30, 2021 compared with$169.1 million in the thirty-nine weeks endedOctober 31, 2020 . The decrease was primarily driven by the redemption/cancellation of the Floating Rate Senior Notes and the 3.00% Senior Notes and repayment of a portion of our then-outstanding Amended Term Loan Facility (each as defined in Note 4, "Senior Notes," and Note 3, "Senior Secured Credit Facilities," to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q) in connection with our initial public offering. InMarch 2020 , we borrowed$250.0 million on our then-outstanding senior secured asset-based revolving credit facility (the "Amended Revolving Credit Facility") as a precautionary measure given the uncertainty of the macroeconomic environment at the start of the COVID-19 pandemic. We subsequently repaid the amount in full in the second quarter of fiscal 2020 and had no borrowings outstanding on the Amended Revolving Credit Facility as ofJanuary 30, 2021 .
Loss on Extinguishment and Modification of Debt
Loss on extinguishment and modification of debt was$20.8 million for the thirty-nine weeks endedOctober 30, 2021 . This loss was recognized in conjunction with theMarch 2021 refinancing of the Amended Term Loan Facility and Amended Revolving Credit Facility. There was no loss on debt extinguishment and modification for the thirteen weeks endedOctober 30, 2021 or the thirteen and thirty-nine weeks endedOctober 31, 2020 . For more information regarding these activities, refer to Note 3, "Senior Secured Credit Facilities," to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Other Non-Operating Income Other non-operating income was$19.8 million and$64.9 million for the thirteen and thirty-nine weeks endedOctober 30, 2021 , respectively. This income relates to non-cash gains from the remeasurement of the fair value of our investment in Rover Group, Inc. There was no other non-operating income recognized during the thirteen or thirty-nine weeks endedOctober 31, 2020 . For more information regarding this activity, refer to Note 6, "Fair Value Measurements," to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Income Tax Expense (Benefit) Our effective tax rates were 21.1% and 24.4% resulting in income tax expense of$14.1 million and$43.8 million for the thirteen and thirty-nine weeks endedOctober 30, 2021 , respectively, compared to effective tax rates of 174.8% and 40.2% resulting in income tax benefit of$7.9 million and$13.5 million for the thirteen and thirty-nine weeks endedOctober 31, 2020 , respectively. The decrease in effective tax rate for the thirty-nine weeks endedOctober 30, 2021 is primarily driven by the inclusion of third party legal, consulting, accounting, and other transaction costs incurred by the Company in connection with our initial public offering, which resulted in a benefit of$5.2 million during the thirteen and thirty-nine weeks endedOctober 30, 2021 . In addition, deferred tax assets 20
-------------------------------------------------------------------------------- were remeasured in the thirty-nine weeks endedOctober 31, 2020 related to$67.4 million of net operating losses available under the CARES Act that were carried back to fiscal year(s) before the Tax Act was enacted, which resulted in a benefit of$8.5 million . Reconciliation of Non-GAAP Financial Measures to GAAP Measures The following information provides definitions and reconciliations of certain non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP. Such non-GAAP financial measures are not calculated in accordance with GAAP and should not be considered superior to, as a substitute for or alternative to, and should be considered in conjunction with, the most comparable GAAP measures. The non-GAAP financial measures presented may differ from similarly-titled measures used by other companies.
Adjusted EBITDA
We present Adjusted EBITDA, a non-GAAP financial measure, because we believe it
enhances an investor's understanding of our financial and operational
performance by excluding certain material non-cash items, unusual or
non-recurring items that we do not expect to continue in the future, and certain
other adjustments we believe are or are not reflective of our ongoing operations
and performance. Adjusted EBITDA enables operating performance to be reviewed
across reporting periods on a consistent basis. We use Adjusted EBITDA as one of
the principal measures to evaluate and monitor our operating financial
performance and to compare our performance to others in our industry. We also
use Adjusted EBITDA in connection with establishing discretionary annual
incentive compensation targets, to make budgeting decisions, to make strategic
decisions regarding the allocation of capital, and to report our quarterly
results as defined in our debt agreements, although under such agreements the
measure is calculated differently and is used for different purposes.
Adjusted EBITDA is not a substitute for net income (loss), the most comparable
GAAP measure, and is subject to a number of limitations as a financial measure,
so it should be used in conjunction with GAAP financial measures and not in
isolation. There can be no assurances that we will not modify the presentation
of Adjusted EBITDA in the future. 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 2020 Form 10-K for more information regarding how we define
Adjusted EBITDA.
21
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The table below reflects the calculation of Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented:
Thirteen weeks ended Thirty-nine weeks ended
October 30, October 31, October 30, October 31,
(dollars in thousands) 2021 2020 2021 2020
Net income (loss) attributable to Class
A and B-1
common stockholders $ 52,752 $ 3,403 $ 135,423 $ (20,324 )
Interest expense, net 18,751 53,746 58,451 168,764
Income tax expense (benefit) 14,095 (7,940 ) 43,784 (13,537 )
Depreciation and amortization 42,792 42,923 125,637 128,961
Income from equity method investees (2,637 ) (1,875 ) (7,490 ) (2,952 )
Loss on debt extinguishment and
modification - - 20,838 -
Asset impairments and write offs 3,228 1,390 5,918 7,651
Equity-based compensation 13,381 2,847 36,491 7,464
Other non-operating income (19,773 ) - (64,934 ) -
Mexico joint venture EBITDA (1) 6,661 4,917 18,523 12,419
Store pre-opening expenses 4,222 3,625 11,739 7,010
Store closing expenses 1,264 2,311 3,329 5,947
Non-cash occupancy-related costs (2) 1,540 3,920 5,564 17,089
Non-recurring costs (3) 2,233 8,834 26,055 17,257
Adjusted EBITDA $ 138,509 $ 118,101 $ 419,328 $ 335,749
Net sales $ 1,443,264 $ 1,259,997 $ 4,292,792 $ 3,582,489
Net margin (4) 3.7 % 0.3 % 3.2 % (0.6 )%
Adjusted EBITDA Margin (4) 9.6 % 9.4 % 9.8 % 9.4 %
(1)
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
joint venture net income to Mexico joint venture EBITDA:
Thirteen weeks ended Thirty-nine weeks ended
October 30, October 31, October 30, October 31,
(dollars in thousands) 2021 2020 2021 2020
Net income $ 5,274 $ 4,053 $ 14,987 $ 7,165
Depreciation 3,660 2,915 10,461 8,771
Income tax expense 3,277 2,103 8,688 4,527
Foreign currency (gain) loss (60 ) (395 ) (547 ) 867
Interest expense, net 1,171 1,158 3,457 3,508
EBITDA $ 13,322 $ 9,834 $ 37,046 $ 24,838
50% of EBITDA $ 6,661 $ 4,917 $ 18,523 $ 12,419 (2) Non-cash occupancy-related costs include the difference between cash and
straight-line rent for all periods.
(3) Non-recurring costs include: severance; legal reserves and related fees;
one-time consulting and other costs associated with the Company's strategic
transformation initiatives; discontinuation and liquidation costs; and costs
related to our initial public offering and refinancing. While we have
incurred significant costs associated with the COVID-19 pandemic during
fiscal 2020 and 2021, we have not classified any of these costs as
non-recurring due to the uncertainty surrounding the pandemic's length and
long-term impact on the macroeconomic operating environment.
(4) We define net margin as net income (loss) 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.
22
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The table below reflects the calculation of Free Cash Flow for the periods
presented:
Thirty-nine weeks ended
October 30, October 31,
2021 2020
(dollars in thousands)
Net cash provided by operating activities $ 288,444 $ 201,480
Cash paid for fixed assets (164,330 ) (96,289 )
Free Cash Flow $ 124,114 $ 105,191
Net Debt
Net Debt is a non-GAAP financial measure that is calculated as the sum of
current and non-current debt, less cash and cash equivalents. Management
considers this adjustment useful because it reduces the volatility of total debt
caused by fluctuations between cash paid against the Company's revolving credit
facility and cash held on hand in cash and cash equivalents.
The table below reflects the calculation of Net Debt for the periods presented:
October 30, October 31,
(dollars in thousands) 2021 2020
Total debt:
Senior secured credit facilities, net, including
current portion $ 1,660,423 $ 2,355,426
Senior notes, net -
868,624
Finance leases, including current portion 14,828
13,615
Total debt$ 1,675,251 $
3,237,665
Less: cash and cash equivalents (221,484 ) (195,832 ) Net Debt$ 1,453,767 $ 3,041,833 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 maturingMarch 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 ofOctober 30, 2021 was$662.6 million , inclusive of cash and cash equivalents of$221.5 million and$441.1 million of availability on the ABL Revolving Credit Facility. 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. 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. There have been no material changes to our contractual obligations as compared to those described in the 2020 Form 10-K, except for the debt refinancing transaction that occurred onMarch 4, 2021 . Refer to Note 3, "Senior Secured Credit Facilities," to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for more information regarding our primary obligations, including amounts outstanding as ofOctober 30, 2021 related to our debt. Also refer to further discussion on our debt refinancing transaction in "Sources of Liquidity" below. 23 --------------------------------------------------------------------------------
Cash Flows
The following table summarizes our consolidated cash flows:
Thirty-nine weeks ended
October 30, October 31,
(dollars in thousands) 2021 2020
Total cash provided by (used in):
Operating activities $ 288,444 $ 201,480
Investing activities (167,770 ) (95,920 )
Financing activities (14,863 ) (51,124 )
Net increase in cash, cash equivalents
and restricted cash$ 105,811 $ 54,436 Operating Activities Our primary source of operating cash is sales of products and services to customers, which are substantially all on a cash basis, and therefore provide us with a significant source of liquidity. Our primary uses of cash in operating activities include: purchases of inventory; freight and warehousing costs; employee-related expenditures; occupancy-related costs for our pet care centers, distribution centers and corporate support centers; credit card fees; interest under our debt agreements; and marketing expenses. Net cash provided by operating activities is impacted by our net income (loss) 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 income; and the effect of changes in operating assets and liabilities. Net cash provided by operating activities was$288.4 million in the thirty-nine weeks endedOctober 30, 2021 compared with net cash provided by operating activities of$201.5 million in the thirty-nine weeks endedOctober 31, 2020 . The increase in operating cash flow was due to strong operating performance and working capital benefit generated by higher sales as well as lower interest payments due to the reduction of debt balances in connection with the initial public offering and related recapitalization, and the refinancing transaction that occurred onMarch 4, 2021 discussed under "Sources of Liquidity" below. The increase in operating cash flows between the periods was partially offset by an increase in cash paid for inventory driven by higher inventory turns, higher payroll, bonus and fringe benefits driven by operating performance and pet care center appreciation bonuses, an increase in advertising spend, an increase in cash paid for income taxes, and an increase in cash paid on operating leases due to the timing of rent payments.
Investing Activities
Cash used in investing activities consists of capital expenditures, which in the thirty-nine weeks endedOctober 30, 2021 and the thirty-nine weeks endedOctober 31, 2020 primarily supported our transformation initiatives. Net cash used in investing activities was$167.8 million and$95.9 million for the thirty-nine weeks endedOctober 30, 2021 andOctober 31, 2020 , respectively. The increase in capital expenditures between the periods was due to our investments in digital assets, the build-out of our veterinary hospitals, innovation and enhanced supply chain capacity in response to our sales growth.
Financing Activities
Net cash used in financing activities was
Financing cash flows in the thirty-nine weeks endedOctober 30, 2021 primarily consisted of borrowings and repayments of debt in connection with theMarch 4, 2021 debt refinancing transaction discussed under "Sources of Liquidity" below. For more information regarding these activities, refer to Note 3 "Senior Secured Credit Facilities," to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Financing cash flows in the thirty-nine weeks endedOctober 31, 2020 included a precautionary draw on the Amended Revolving Credit Facility of$250.0 million inMarch 2020 at the start of the COVID-19 pandemic.As 24 --------------------------------------------------------------------------------
operations stabilized and financial results improved, the balance was repaid in full in the second quarter of fiscal 2020.
Sources of Liquidity
As of
OnMarch 4, 2021 , the Company completed a refinancing transaction by entering into a$1,700 million secured term loan facility maturing onMarch 4, 2028 (the "First Lien Term Loan") and the ABL Revolving Credit Facility, which matures onMarch 4, 2026 and has availability of up to$500.0 million , subject to a borrowing base. The refinancing transaction, in combination with the application of the proceeds from the Company's initial public offering and other recapitalization transactions in connection therewith, reduced the Company's total debt by 48.3% as compared withOctober 31, 2020 . Net Debt as a result of these transactions decreased$1,588.0 million or 52.2% to$1,453.8 million atOctober 30, 2021 . Interest under the First Lien Term Loan is based on, at the Company's option, either a base rate or Adjusted LIBOR, subject to a 0.75% floor, payable upon maturity of the LIBOR contract, in either case plus the applicable rate. The base rate is the greater of the bank prime rate, federal funds effective rate plus 0.5% or Adjusted LIBOR plus 1.0%. The applicable rate is 2.25% per annum for a base rate loan or 3.25% per annum for an Adjusted LIBOR loan. Principal payments are$4.25 million quarterly and commenced onJune 30, 2021 . The terms under the ABL Revolving Credit Facility are substantially similar to those of the Amended Revolving Credit Facility.
For more information regarding this indebtedness, refer to Note 3, "Senior Secured Credit Facilities," to the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in 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.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in the 2020 Form 10-K.
Recent Accounting Pronouncements
Refer to Note 1, "Summary of Significant Accounting Policies," to the Notes to
Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q
for information regarding recently issued accounting pronouncements.
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