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Dynamic quotes 
OFFON

PETCO HEALTH AND WELLNESS COMPANY, INC.

(WOOF)
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PETCO HEALTH & WELLNESS COMPANY, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

12/01/2021 | 08:34am EST
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 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 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

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. 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 the U.S., Mexico, and Puerto 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 the Petco
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

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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 ended October 31, 2020 to
          $288.4 million during the thirty-nine weeks ended October 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




                                       18
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Thirteen and Thirty-Nine Weeks Ended October 30, 2021 Compared with Thirteen and

                    Thirty-Nine Weeks Ended October 31, 2020

Net Sales and Comparable Sales



                                           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 $ 643,125 $ 529,989 $ 113,136

            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 $ 1,443,264 $ 1,259,997 $ 183,267

           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 ended October 30, 2021 compared to net sales of $1.26 billion in the
thirteen weeks ended October 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 ended October 30, 2021 compared to net sales of $3.58
billion in the thirty-nine weeks ended October 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 ended October 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 ended October 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 ended October 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 ended October 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 ended October 31, 2020.

Gross Profit

Gross profit increased $53.3 million, or 9.8%, to $594.7 million in the thirteen
weeks ended October 30, 2021 compared to gross profit of $541.4 million for the
thirteen weeks ended October 31, 2020. As a percentage of sales, our gross
profit rate was 41.2% for the thirteen weeks ended October 30, 2021 compared
with 43.0% for the thirteen weeks ended October 31, 2020. Gross profit increased
$253.6 million, or 16.5%, to $1,791.1 million in the thirty-nine weeks ended
October 30, 2021 compared to gross profit of $1,537.5 million for the
thirty-nine weeks ended October 31, 2020. As a percentage of sales, our gross
profit rate was 41.7% for the thirty-nine weeks ended October 30, 2021 compared
with 42.9% for the thirty-nine weeks ended October 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 ended October
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 ended October 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 ended October 30, 2021 compared to $495.4 million for the
thirteen weeks ended October 31, 2020. As a percentage of net sales, SG&A
expenses were 36.9% for the thirteen weeks ended October 30, 2021 compared with
39.3% for the thirteen weeks ended October 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
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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 ended October 30, 2021 compared to the thirteen weeks ended
October 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 ended October 30, 2021 compared to $1,410.0 million for the
thirty-nine weeks ended October 31, 2020. As a percentage of net sales, SG&A
expenses were 37.5% for the thirty-nine weeks ended October 30, 2021 compared
with 39.4% for the thirty-nine weeks ended October 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 ended October 30, 2021 compared with $53.8 million in the
thirteen weeks ended October 31, 2020. Interest expense decreased $110.6
million, or 65.4%, to $58.5 million in the thirty-nine weeks ended October 30,
2021 compared with $169.1 million in the thirty-nine weeks ended October 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. In March 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 of January 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 ended October 30, 2021. This loss was recognized in
conjunction with the March 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 ended October 30, 2021 or the thirteen
and thirty-nine weeks ended October 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 ended October 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 ended October 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 ended
October 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 ended October 31, 2020, respectively. The
decrease in effective tax rate for the thirty-nine weeks ended October 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 ended October 30, 2021.  In addition,
deferred tax assets

                                       20
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were remeasured in the thirty-nine weeks ended October 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) 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
                                           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 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 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 on March 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 of October 30, 2021 related to our debt. Also refer to further
discussion on our debt refinancing transaction in "Sources of Liquidity" below.

                                       23

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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 ended October 30, 2021 compared with net cash provided by operating
activities of $201.5 million in the thirty-nine weeks ended October 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 on March 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 ended October 30, 2021 and the thirty-nine weeks ended October
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 ended October 30, 2021 and October 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 $14.9 million for the thirty-nine weeks ended October 30, 2021, compared with $51.1 million used in financing activities in the thirty-nine weeks ended October 31, 2020.


Financing cash flows in the thirty-nine weeks ended October 30, 2021 primarily
consisted 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 "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 ended October 31, 2020 included a
precautionary draw on the Amended Revolving Credit Facility of $250.0 million in
March 2020 at the start of the COVID-19 pandemic. As

                                       24

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operations stabilized and financial results improved, the balance was repaid in full in the second quarter of fiscal 2020.

Sources of Liquidity

As of January 30, 2021, the Company had $1,678.1 million outstanding on the Amended Term Loan Facility and no balance on the Amended Revolving Credit Facility, which provided for senior secured financing of up to $500.0 million, subject to a borrowing base.


On March 4, 2021, the Company completed a refinancing transaction by entering
into a $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. 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 with October 31, 2020. Net Debt as a result of
these transactions decreased $1,588.0 million or 52.2% to $1,453.8 million at
October 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 on June 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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