Petco Health and Wellness Company, Inc. (NASDAQ:WOOF) Q2 2023 Earnings Call Transcript

Operator: Our next question comes from Steven Zaccone from Citi. Please go ahead with your question.

Steven Zaccone: Great. Good morning. Thanks for taking my question. So to follow up on Michael’s question, what do you think is the optimal mix of discretionary for this business? Because on the one hand, yes, it’s challenging from a cyclical perspective. But on the other hand, some of your growth drivers in the business since you’ve come public, right, are premiumization in food and then services, which are lower gross margin rate businesses. So I’m curious for what’s the optimal mix of discretionary over time and if it continues to trend lower, how do you think about the margin drivers to improve EBITDA margin rate over the next couple of years?

Ron Coughlin: Thanks for the question. We like our discretionary business, our supplies business, companion animal business, they are high-margin businesses. So outside of an economic cycle like the one we’re in, they help drive our strong profitability and our customer delighters, and we have differentiation from our own brands. And in that category, actually roughly 50% plus is own brands. So it is a very attractive profit driver for us on a timeless basis. As you cited, things like digital, things like services are gross margin dilutive. But in both those cases, we are driving margin enhancements within those silos, which help offset that. And as Brian has cited, from a services standpoint, gross margin is impacted by the labor. If you look at it on an EBITDA basis in the mid to long term, it’s equivalent to — roughly equivalent to our total enterprise.

Steven Zaccone: Okay. But to follow up on that then. So if we think about the vet hospital side of the business right now, which is getting some scale, can you say whether that’s EBITDA margin accretive to the business today? Will it be EBITDA margin accretive in the next couple of years? Thank you.

Brian LaRose: Yeah, Steve, thanks for the question. Today, it is not. So if you think about the vet model, the great news about the vet model is the unit economics continue to track along with or ahead of our model depending on the cohort. Our most recent cohorts are ahead of model. That model has EBITDA dollars and gross margin dollars as dilutive in the first year, roughly breakeven in year two on a path to 20% EBITDA in year five. We’re on track with that. If you look at our overall cohorts with 269 hospitals, we’ve added roughly 150 to 175 of those in the last two-plus years, which means the average age of our hospital is just over two years, meaning the average EBITDA rate of those hospitals is just over that breakeven amount. Now the good news with that is they are maturing. As those hospitals mature, the cost that model will be accretive to our overall model. And at that inflection point become actually accretive to the overall enterprise EBITDA rate.

Steven Zaccone: Okay. Thanks very much.

Ron Coughlin: Thank you.

Operator: [Operator Instructions] Our next question comes from Greg Sommer from Gordon Haskett. Please go ahead with your question.

Greg Sommer: I just wanted to follow up on the vets. I was wondering if you’re still seeing in store, like center store lit from the vet that’s similar to past quarters? And then is that mainly traffic driven? And then just a follow-up. What was the biggest bucket out of that [$150] (ph) million savings of the various buckets that you laid out? Thank you.