With its Q4 2024 update, Petco announced that CEO Ron Coughlin was stepping down and leaving the board and that Mike Mohan (a Best Buy alum) would be filling in as the Board searches for a permanent CEO. On the call, Mohan shared the following:
"With the only full-service pet health and wellness ecosystem, Petco sits at the forefront of the industry and is uniquely positioned to win for the long term. While we have made progress...I recognize we have not been executing the way we need to in a number of areas to deliver on our full potential. Most critically, we have not adapted quickly enough to recent changes in consumer preferences. First, we did not anticipate the magnitude of the shift to value in both our consumables and discretionary business; and second, we did not expect customers to pull back as quickly as they have and for this duration when spending on discretionary items. As a result, our in-store and omnichannel offering was not appropriately aligned with our customers' needs. This has led to two fundamental problems that we need to address with speed. One, an erosion of market share as customers sought out alternatives and two, a significant decline in profitability. Our work here has already begun with the reintroduction of value brands in our consumable business and adjusting our discretionary offering to provide more balanced price points. Simply reintroducing these products into our assortment is not enough. This more balanced assortment must be supportive of a stronger retail and online customer experiences and more disciplined execution. This starts with effective marketing to both existing and potential customers. It builds with strong in-store and online merchandising. It is further supported by the education of Petco partners to ensure they can effectively sell our complete offering. And finally, it needs to be supported by effective supply chain management that delivers inventory profitability with high-end stocks across our store base and efficient delivery to omnichannel customers...If our comprehensive ecosystem is the engine that drives Petco's success, then the trust and advocacy of our customers, vendors and partners is the fuel that powers it. This principle will sit at the heart of everything we do, beginning with our employee experience…On capital allocation, we remain focused on our balance sheet as we navigate the environment, leading to a deceleration in our pace of [our mobile clinic] build-out and a balanced approach between investments and cash flow. To close, our focal points this year are disciplined execution, operating in a more efficient manner with a focus on expenses, stabilizing margins and cash.”
We highlight advertising because Petco has cut advertising by double-digits each of the past two years and we’ve noticed a bifurcation opening between retail brands that are spending more on advertising and effectively using social media to connect with consumers and drive traffic, and those that are not. We also see evidence of this in the large market share gains that mass merchants like Walmart and Target have made in the pet food category and by the comments from the manufacturers. We strongly suspect that the traffic declines at PetSmart are also due to reduced advertising and less savvy use of social media. The reduction in advertising was to stem profit declines, but that has come to bite because of declines in sales and margin of the basket. Petco’s gross margin of 38% is down 500 basis points from the pre-pandemic level, which has reduced the EBITDA margin from 11% to 6%.
CFO Brian LaRose said, “I don't think at the holistic level the competitive environment has changed materially...This is a super attractive market has been for 30-plus years and will be in the future that happens to be very fragmented. Our job is to make sure that we stabilize our own business, improve market share and do so profitably. We are fundamentally focused on those things--market share, profit, and cash.”
Incidentally, General Mills (which owns pet food brand Blue Buffalo) reported February-end results this week; volume for its pet business was down -5%, but that was a notable improvement from previous quarters as its two-year CAGR improved to +1% from the -15% prior trend. CEO Jeff Harmening said, “I think it's probably a little bit early to say kind of what's going to happen from here on out but we do see some green shoots in pet…And then working with the pet specialty channel, in particular, where Wilderness has had a challenge (value offering Life Protection was up +8%). They want to work with us and we want to work with them. And so that's positive. But we have some more work to do in that channel.“
