Item 1. Financial Statements
Item 1. Financial Statements.
PETCO HEALTH AND WELLNESS COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
July 31,
2021
January 30,
2021
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
203,404
$
111,402
Receivables, less allowance for credit losses ($ 1,802 and $ 3,267 , respectively)
39,889
41,827
Merchandise inventories, net
628,491
538,675
Prepaid expenses
41,990
40,032
Other current assets
30,381
45,613
Total current assets
944,155
777,549
Fixed assets
1,586,677
1,487,987
Less accumulated depreciation
( 932,283
)
( 860,440
)
Fixed assets, net
654,394
627,547
Operating lease right-of-use assets
1,314,533
1,328,108
Goodwill
2,182,465
2,179,310
Trade name
1,025,000
1,025,000
Other intangible assets
4,793
4,793
Less accumulated amortization
( 4,251
)
( 4,079
)
Other intangible assets, net
542
714
Other long-term assets
194,092
137,474
Total assets
$
6,315,181
$
6,075,702
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and book overdrafts
$
406,685
$
339,485
Accrued salaries and employee benefits
123,721
129,484
Accrued expenses and other liabilities
210,517
145,846
Current portion of operating lease liabilities
248,631
258,289
Current portion of long-term debt and other lease liabilities
20,235
2,203
Total current liabilities
1,009,789
875,307
Senior secured credit facilities, net, excluding current portion
1,646,463
1,646,281
Operating lease liabilities, excluding current portion
1,070,063
1,083,575
Deferred taxes, net
293,611
280,920
Other long-term liabilities
135,873
134,354
Total liabilities
4,155,799
4,020,437
Commitments and contingencies (Notes 3, 4 and 8)
Stockholders' equity:
Class A common stock, $ 0.001 par value: Authorized - 1.0 billion shares;
Issued and outstanding - 226.5 million shares as of July 31, 2021
and 226.4 million shares as of January 30, 2021
226
226
Class B-1 common stock, $ 0.001 par value: Authorized - 75.0 million shares;
Issued and outstanding - 37.8 million shares
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
2,115,220
2,092,110
Retained earnings (accumulated deficit)
60,420
( 22,251
)
Accumulated other comprehensive loss
( 1,272
)
( 1,275
)
Total stockholders’ equity
2,174,632
2,068,848
Noncontrolling interest
( 15,250
)
( 13,583
)
Total equity
2,159,382
2,055,265
Total liabilities and equity
$
6,315,181
$
6,075,702
See accompanying notes to consolidated financial statements.
2
PETCO HEALTH AND WELLNESS COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts) (Unaudited)
Thirteen weeks ended
Twenty-six weeks ended
July 31,
2021
August 1,
2020
July 31,
2021
August 1,
2020
Net sales
$
1,434,534
$
1,208,971
$
2,849,528
$
2,322,492
Cost of sales
835,124
679,218
1,653,133
1,326,457
Gross profit
599,410
529,753
1,196,395
996,035
Selling, general and administrative expenses
525,942
464,706
1,075,178
914,623
Operating income
73,468
65,047
121,217
81,412
Interest income
( 13
)
( 99
)
( 34
)
( 283
)
Interest expense
19,206
54,493
39,735
115,301
Loss on extinguishment and modification of debt
—
—
20,838
—
Other non-operating income
( 45,162
)
—
( 45,162
)
—
Income (loss) before income taxes and income
from equity method investees
99,437
10,653
105,840
( 33,606
)
Income tax expense (benefit)
27,011
4,958
29,690
( 5,597
)
Income from equity method investees
( 2,429
)
( 745
)
( 4,854
)
( 1,077
)
Net income (loss)
74,855
6,440
81,004
( 26,932
)
Net loss attributable to noncontrolling interest
( 256
)
( 1,001
)
( 1,667
)
( 3,205
)
Net income (loss) attributable to Class A and B-1
common stockholders
$
75,111
$
7,441
$
82,671
$
( 23,727
)
Net income (loss) per Class A and B-1 common share (1):
Basic
$
0.28
$
0.04
$
0.31
$
( 0.11
)
Diluted
$
0.28
$
0.04
$
0.31
$
( 0.11
)
Weighted average shares used in computing net
income (loss) per Class A and B-1 common share (1):
Basic
264,216
209,015
264,216
209,015
Diluted
265,217
209,015
265,123
209,015
(1)
Amounts for periods prior to the Company’s conversion to a Delaware corporation have been retrospectively adjusted to give effect to the organizational transactions described in Note 1. See Note 7 for further discussion.
See accompanying notes to consolidated financial statements.
3
PETCO HEALTH AND WELLNESS COMPANY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands) (Unaudited)
Thirteen weeks ended
Twenty-six weeks ended
July 31,
2021
August 1,
2020
July 31,
2021
August 1,
2020
Net income (loss)
$
74,855
$
6,440
$
81,004
$
( 26,932
)
Net loss attributable to noncontrolling interest
( 256
)
( 1,001
)
( 1,667
)
( 3,205
)
Net income (loss) attributable to Class A and B-1
common stockholders
75,111
7,441
82,671
( 23,727
)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment
789
281
3
( 4,689
)
Unrealized loss on derivatives
—
( 9
)
—
( 61
)
Losses on derivatives reclassified to income
—
2,021
—
3,749
Total other comprehensive income (loss), net of tax
789
2,293
3
( 1,001
)
Comprehensive income (loss)
75,644
8,733
81,007
( 27,933
)
Comprehensive loss attributable to noncontrolling
interest
( 256
)
( 1,001
)
( 1,667
)
( 3,205
)
Comprehensive income (loss) attributable to Class A and
B-1 common stockholders
$
75,900
$
9,734
$
82,674
$
( 24,728
)
See accompanying notes to consolidated financial statements.
4
PETCO HEALTH AND WELLNESS COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ / MEMBERS’ EQUITY
(In thousands) (Unaudited)
Common stock
Members’
interest (1)
Class
A
(shares)
Class
B-1
(shares)
Class
B-2
(shares)
Amount
Additional paid-in capital
(Accumulated
deficit) retained earnings (1)
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 7)
—
—
—
—
—
11,604
—
—
11,604
—
11,604
Net income
—
—
—
—
—
—
7,560
—
7,560
( 1,411
)
6,149
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 7)
—
—
—
—
—
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
Common stock
Members’
interest (1)
Class
A
(shares)
Class
B-1
(shares)
Class
B-2
(shares)
Amount
Additional paid-in capital
Accumulated
deficit (1)
Accumulated
other
comprehensive
loss
Total
members’
equity
Noncontrolling
interest
Total
equity
Balance at February 1, 2020
$
1,358,130
—
—
—
$
—
$
—
$
( 780,466
)
$
( 8,273
)
$
569,391
$
( 8,330
)
$
561,061
Equity-based compensation expense
(Note 7)
2,305
—
—
—
—
—
—
—
2,305
—
2,305
Net loss
—
—
—
—
—
—
( 31,168
)
—
( 31,168
)
( 2,204
)
( 33,372
)
Foreign currency translation
adjustment, net of tax
—
—
—
—
—
—
—
( 4,970
)
( 4,970
)
—
( 4,970
)
Unrealized loss on derivatives,
net of tax
—
—
—
—
—
—
—
( 52
)
( 52
)
—
( 52
)
Losses on derivatives reclassified to
income, net of tax
—
—
—
—
—
—
—
1,728
1,728
—
1,728
Balance at May 2, 2020
$
1,360,435
—
—
—
$
—
$
—
$
( 811,634
)
$
( 11,567
)
$
537,234
$
( 10,534
)
$
526,700
Equity-based compensation expense
(Note 7)
2,312
—
—
—
—
—
—
—
2,312
—
2,312
Repurchase of equity
( 104
)
—
—
—
—
—
—
—
( 104
)
—
( 104
)
Net income
—
—
—
—
—
—
7,441
—
7,441
( 1,001
)
6,440
Foreign currency translation
adjustment, net of tax
—
—
—
—
—
—
—
281
281
—
281
Unrealized loss on derivatives,
net of tax
—
—
—
—
—
—
—
( 9
)
( 9
)
—
( 9
)
Losses on derivatives reclassified to
income, net of tax
—
—
—
—
—
—
—
2,021
2,021
—
2,021
Balance at August 1, 2020
$
1,362,643
—
—
—
$
—
$
—
$
( 804,193
)
$
( 9,274
)
$
549,176
$
( 11,535
)
$
537,641
(1)
Balances prior to the Company's conversion to a Delaware corporation were reclassified to additional paid-in capital to give effect to the organizational transactions described in Note 1 .
See accompanying notes to consolidated financial statements.
5
PETCO HEALTH AND WELLNESS COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Twenty-six weeks ended
July 31,
2021
August 1,
2020
Cash flows from operating activities:
Net income (loss)
$
81,004
$
( 26,932
)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization
82,845
86,038
Amortization of debt discounts and issuance costs
3,369
12,125
Provision for deferred taxes
12,691
( 21,753
)
Equity-based compensation
23,110
4,617
Impairments, write-offs and losses on sale of fixed and other assets
2,690
6,261
Loss on extinguishment and modification of debt
20,838
—
Income from equity method investees
( 4,854
)
( 1,077
)
Amounts reclassified out of accumulated other comprehensive income
(Note 5)
—
5,066
Change in contingent consideration obligation
—
( 391
)
Non-cash operating lease costs
210,490
216,729
Other non-operating income
( 45,162
)
—
Changes in assets and liabilities:
Receivables
1,937
( 5,208
)
Merchandise inventories
( 89,784
)
( 11,056
)
Prepaid expenses and other assets
3,294
( 9,153
)
Accounts payable and book overdrafts
74,466
( 18,955
)
Accrued salaries and employee benefits
( 6,017
)
3,116
Accrued expenses and other liabilities
51,145
35,747
Operating lease liabilities
( 220,655
)
( 196,700
)
Other long-term liabilities
997
13,915
Net cash provided by operating activities
202,404
92,389
Cash flows from investing activities:
Cash paid for fixed assets
( 99,883
)
( 50,043
)
Cash paid for acquisitions, net of cash acquired
( 2,807
)
—
Distributions from equity investees
—
73
Proceeds from sale of assets
105
1,296
Net cash used in investing activities
( 102,585
)
( 48,674
)
Cash flows from financing activities:
Borrowings under long-term debt agreements
1,700,000
440,000
Repayments of long-term debt
( 1,682,361
)
( 456,625
)
Debt refinancing costs
( 24,665
)
—
Payments for finance lease liabilities
( 2,044
)
( 2,089
)
Proceeds from employee stock purchase plan
1,721
—
Repurchase of equity
—
( 105
)
Payment of contingent consideration
—
( 250
)
Payment of offering costs
( 3,844
)
—
Net cash used in financing activities
( 11,193
)
( 19,069
)
Net increase in cash, cash equivalents and restricted cash
88,626
24,646
Cash, cash equivalents and restricted cash at beginning of year
119,540
154,718
Cash, cash equivalents and restricted cash at end of year
$
208,166
$
179,364
Supplemental cash flow disclosures:
Interest paid, net
$
29,463
$
95,284
Capitalized interest
$
181
$
174
Income taxes paid
$
5,195
$
1,344
Supplemental non-cash investing and financing activities disclosure:
Accounts payable and accrued expenses for capital expenditures
$
28,105
$
22,370
See accompanying notes to consolidated financial statements.
6
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 condensed 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 30, 2021 .
The results of operations for the thirteen and twenty-six weeks ended July 31, 2021 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending January 29, 2022.
Corporate Conversion and Public Offerings
The Company previously operated as a Delaware limited liability company under the name PET Acquisition LLC. In January 2021, the Company converted to a Delaware corporation pursuant to a statutory conversion and changed its name to Petco Health and Wellness Company, Inc. The existing balances of members’ interest and accumulated deficit prior to this conversion were reclassified to additional paid-in capital in the condensed consolidated balance sheets. This reclassification had no effect on the Company’s results of operations.
On January 19, 2021, the Company completed its initial public offering of 55.2 million newly-issued shares of its Class A common stock. The offering price was $ 18.00 per share. The net proceeds from the initial public offering were used to pay a portion of the principal amount and accrued interest on the Company’s debt obligations. Refer to Note 3 and Note 4 for further discussion on the Company’s use of proceeds from the initial public offering.
In June 2021, Scooby Aggregator, LP, the Company’s principal stockholder, completed the sale of 25.3 million existing shares of Class A common stock in connection with a secondary offering. The offering price to the public was $ 24.00 per share . The Company received no proceeds from the secondary offering. Expenses incurred by the Company related to the secondary offering were not material.
Use of Estimates
The preparation of these condensed 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 condensed 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.
7
Cash and Cash Equivalents
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the condensed consolidated balance sheets to the total amounts reported in the condensed consolidated statements of cash flows.
July 31,
2021
January 30,
2021
Cash and cash equivalents
$
203,404
$
111,402
Restricted cash included in other current assets
4,762
8,138
Total cash, cash equivalents and restricted cash in
the statement of cash flows
$
208,166
$
119,540
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the accounting for recognizing impairments of financial assets. Under the new accounting guidance, credit losses for financial assets held at amortized cost will be estimated based on expected losses rather than the current incurred loss impairment model. The new accounting guidance also modifies the impairment model for available-for-sale debt securities. The Company adopted this accounting policy on February 2, 2020 . The adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
In August 2018, FASB issued Accounting Standards Update No. 2018-15 – Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40), which amends ASC 350-40 to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The Company adopted this accounting policy on February 2, 2020 . The adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
2. Revenue Recognition
Net sales by product type and services were as follows (in thousands):
Thirteen weeks ended
Twenty-six weeks ended
July 31,
2021
August 1,
2020
July 31,
2021
August 1,
2020
Consumables
$
611,946
$
492,274
$
1,207,078
$
1,018,026
Supplies and companion animals
663,572
612,630
1,321,744
1,106,364
Services and other
159,016
104,067
320,706
198,102
Net sales
$
1,434,534
$
1,208,971
$
2,849,528
$
2,322,492
3. Senior Secured Credit Facilities
As of January 30, 2021, the Company 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”). The Amended Term Loan Facility, the Amended Revolving Credit Facility, the First Lien Term Loan, and the ABL Revolving Credit Facility are collectively referred to as the “Senior Secured Credit Facilities.”
8
As of July 31, 2021, the Company was in compliance with its covenants under the First Lien Term Loan and the ABL Revolving Credit Facility.
Term Loan Facilities
On January 19, 2021, the Company repaid $ 727.0 million of the Amended Term Loan Facility using a portion of the proceeds from its initial public offering , in addition to existing cash on hand. The repayment was applied to the remaining principal payments in order of scheduled payment date and, as a result, no quarterly principal payments remained under the Amended Term Loan Facility, other than the remaining principal balance due at maturity. As such, the entire remaining balance was included in senior secured credit facilities, net, excluding current portion in the condensed consolidated balance sheets as of January 30, 2021.
On March 4, 2021 , the Company entered into the $ 1,700.0 million First Lien Term Loan and repaid all outstanding principal and interest on the Amended Term Loan Facility. Interest under the First Lien Term Loan is 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 and interest payments commenced on June 30, 2021 . Principal payments are $ 4.25 million quarterly.
In connection with the March 4, 2021 transaction, the Company recognized a loss on debt extinguishment and modification of $ 19.6 million on the term loan facilities, which consisted of a $ 6.5 million write-off of unamortized debt discount and issuance costs on the Amended Term Loan Facility and $ 13.1 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 to interest expense using the effective interest rate in effect on the date of issuance, as these amounts represent the portion that was not substantially modified.
As of July 31, 2021, the outstanding principal balance of the First Lien Term Loan was $ 1,695.8 million ($ 1,668.8 million, net of the unamortized discount and debt issuance costs). As of January 30, 2021, the outstanding principal balance of the Amended Term Loan Facility was $ 1,678.1 million ($ 1,649.4 million, net of the unamortized discount and debt issuance costs). The weighted average interest rate on the borrowings outstanding was 4.1 % and 4.3 % as of July 31, 2021 and January 30, 2021, 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 July 31, 2021, the estimated fair value of the First Lien Term Loan was approximately $ 1,687.3 million, based upon Level 2 fair value hierarchy inputs. As of January 30, 2021, the estimated fair value of the Amended Term Loan Facility was approximately $ 1,673.9 million, based upon Level 2 fair value hierarchy inputs.
Revolving Credit Facilities
On March 4, 2021, the Company entered into an agreement establishing the ABL Revolving Credit Facility and terminated the Amended Revolving Credit Facility. The ABL Revolving Credit Facility has availability 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 July 31, 2021, no amounts were outstanding under the ABL Revolving Credit Facility. As of January 30, 2021, no amounts were outstanding under the Amended Revolving Credit Facility. At July 31, 2021, $ 441.1 million was available under the ABL Revolving Credit Facility, which is net of $ 58.9 million of outstanding letters of credit issued in the normal course of business and no borrowing base reduction for a shortfall in qualifying assets.
9
Unamortized debt issuance costs of $ 5.3 mil lion 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 July 31, 2021 . Unamortized debt issuance costs of $ 3.1 million relating to the Amended Revolving Credit Facility were outstanding and were being amortized using the straight-line method over the remaining term of the agreement as of January 30, 2021 .
The ABL Revolving Credit Facility has availability 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.
Interest on the ABL Revolving Credit Facility is based on either the base rate or Adjusted LIBOR 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 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
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. Senior Notes
Floating Rate Senior Notes
On January 26, 2016, the Company issued $ 750.0 million of unsecured senior notes maturing on January 26, 2024 in a private offering (the “Floating Rate Senior Notes”). Debt issuance costs of $ 26.2 million related to the Floating Rate Senior Notes were being amortized over the contractual term to interest expense using the effective interest rate in effect at issuance. The Floating Rate Senior Notes bore interest at a floating rate equal to three-month LIBOR, subject to a 1.00 % floor, plus 8.0 % per annum (the “Applicable Margin”) payable quarterly in arrears.
On January 19, 2021, in connection with the Company’s initial public offering, the holders of the outstanding Floating Rate Senior Notes exchanged $ 450.0 million of the aggregate principal amount of the Floating Rate Senior Notes for a new series of notes with a principal amount of $ 450.0 million issued by Scooby Aggregator, LP, the Company’s principal stockholder. Scooby Aggregator, LP, as the new holder of $ 450.0 million of Floating Rate Senior Notes, contributed the principal balance to the Company. This contribution, offset by approximately $ 7.4 million of unamortized deferred financing costs associated with the principal balance contributed, was recorded as an adjustment to additional paid-in capital.
On January 19, 2021, the Company repaid the remaining $ 300.0 million principal balance of the Floating Rate Senior Notes using a portion of the proceeds from its initial public offering , in addition to existing cash on hand.
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3.00% Senior Notes
On January 26, 2016, the Company issued senior unsecured notes maturing on January 25, 2019 in a private offering to its members. Interest on the notes was originally 0.75 % per annum, payable semi-annually either in cash or by means of capitalizing such interest and adding it to the then outstanding principal amount of the notes.
On April 6, 2019, the Company amended the notes to extend their maturity to July 25, 2019 . Interest under these notes (the “3.00% Senior Notes”) was 3.00 % per annum, payable upon maturity. On July 25, 2019, February 3, 2020, and September 28, 2020, the Company further amended the notes to extend their maturity to January 25, 2020 , January 25, 2021 , and January 25, 2023 , respectively.
On January 19, 2021, in connection with its initial public offering, the Company repaid $ 4.0 million of the principal balance of the 3.00% Senior Notes. The remaining $ 127.7 million of principal and $ 3.6 million of accrued interest was then contributed to the Company.
5. Derivative Instruments
In March 2016, the Company entered into a series of five interest rate cap agreements with four counterparties with a total notional value of $ 1,950.0 million to limit the maximum interest rate on a portion of the Company’s variable-rate debt and limit its exposure to interest rate variability when the three-month LIBOR exceeds 2.25 %.
The interest rate caps were accounted for as cash flow hedges because the interest rate caps were expected to be highly effective in hedging variable rate interest payments. Changes in the fair value of the interest rate caps were reported as a component of AOCI. The interest rate caps expired and were settled in accordance with their contractual terms on January 29, 2021 .
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):
July 31, 2021
Level 1
Level 2
Level 3
Assets (liabilities):
Money market mutual funds
$
146,512
$
—
$
—
Investments of officers' life insurance
$
—
$
15,783
$
—
Non-qualified deferred compensation plan
$
—
$
( 17,879
)
$
—
January 30, 2021
Level 1
Level 2
Level 3
Assets (liabilities):
Money market mutual funds
$
63,798
$
—
$
—
Investments of officers' life insurance
$
—
$
14,140
$
—
Non-qualified deferred compensation plan
$
—
$
( 15,526
)
$
—
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 $ 143.0 million and $ 56.0 million as of July 31, 2021 and January 30, 2021, respectively. Also included in the Company’s money market mutual funds balances were $ 3.5 million and $ 7.8 million as of July 31, 2021 and January 30, 2021, respectively, which relate to the Company’s restricted cash, and are included in other current assets in the condensed 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.
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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 previously held an equity investment, in the form of multiple series of preferred stock, in A Place for Rover, Inc. (“Rover”), an online marketplace for pet care, which was historically accounted for as an equity security without a readily determinable fair value. In July 2021, Rover 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., and the Company’s equity investment was converted into a common stock investment in the combined entity. The business combination was considered to be an observable transaction, and the Company recognized a $ 45.2 million gain from the remeasurement of the fair value of its investment, which is included in other non-operating income in the consolidated statements of operations. The fair value of the investment was $ 49.6 million as of July 31, 2021 and is included within other long-term assets on the consolidated balance sheets.
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 twenty-six week periods ended July 31, 2021 and August 1, 2020. During the thirteen and twenty-six week periods ended July 31, 2021, the Company recorded fixed asset and right-of-use asset impairment charges of $ 1.4 million and $ 2.5 million, respectively. During the thirteen and twenty-six week periods ended August 1, 2020, the Company recorded fixed asset and right-of-use asset impairment charges of $ 2.7 million and $ 5.8 million, respectively.
7. Stockholders’ Equity
Equity-Based Compensation
Equity-based compensation awards under the Company’s current incentive plan (the “2021 Equity Incentive Plan”) include restricted stock units (“RSUs”), restricted stock awards (“RSAs”), stock options, and other equity compensation awards. The Company also has an employee stock purchase plan (“ESPP”).
Scooby LP, the direct owner of Scooby Aggregator, LP, also maintains an incentive plan (the “2016 Incentive Plan”) under which it has awarded partnership unit awards to 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
Twenty-six weeks ended
July 31,
2021
August 1,
2020
July 31,
2021
August 1,
2020
RSUs and RSAs
$
6,353
$
—
$
12,825
$
—
Options
2,045
—
4,137
—
ESPP
317
—
390
—
Partnership units of Scooby LP under the 2016 Incentive
Plan
2,791
2,312
5,758
4,617
Total equity-based compensation expense
$
11,506
$
2,312
$
23,110
$
4,617
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Activity under the 2021 Equity Incentive Plan was as follows (shares and dollars in thousands):
RSUs and RSAs
Options
Nonvested RSUs and RSAs/options outstanding, January 30, 2021
3,414
3,482
Granted
226
—
RSUs and RSAs vested/options exercised
( 12
)
—
Forfeited/expired
( 164
)
( 49
)
Nonvested RSUs and RSAs/options outstanding, July 31, 2021
3,464
3,433
Unrecognized compensation expense as of July 31, 2021
$
48,669
$
19,510
Weighted average remaining expense period as of July 31, 2021
2.3 Years
2.5 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 not considered participating securities for earnings per share purposes, as any related dividends are forfeitable.
Enrollment in the ESPP began in April 2021. The ESPP will allow 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 30, 2021
214,006
Granted
—
Forfeited
( 3,704
)
Outstanding, July 31, 2021
210,302
Vested, July 31, 2021
110,548
No additional Series C Units have been or will be awarded since the Company’s initial public offering. As of July 31, 2021, unrecognized compensation expense related to the unvested portion of Scooby LP’s Series C Units was $ 21.8 million, which is expected to be recognized over a weighted average period of 2.7 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 % of its direct or indirect holdings of the Company’s Class A common stock.
Earnings (Loss) 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.
There were approximately 3.4 million potential shares that were anti-dilutive and excluded from the computation of diluted shares outstanding during the twenty-six weeks ended July 31, 2021. There were no potentially dilutive securities outstanding during the twenty-six weeks ended August 1, 2020.
For periods prior to the Company’s conversion to a Delaware corporation in January 2021, the Company has retrospectively presented net loss per share as if the conversion had occurred at the beginning of the earliest period presented. The weighted average shares used in computing net loss per Class A and B-1 common share in these periods are based on the number of Common Series A and Common Series B Units of PET Acquisition LLC held by members. For periods prior to the conversion, these calculations do not include the 55.2 million shares of Class A common stock issued in the Company’s initial public offering.
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8. Commitments and Contingencies
COVID-19
The COVID-19 pandemic has been a highly disruptive economic and societal event that has affected the Company’s business and has had a significant impact on consumer shopping behavior. To serve pet parents while also providing for the safety of employees, the Company has adapted certain aspects of the business. Throughout the pandemic, the Company has monitored the rapidly evolving situation and will continue to adapt its operations to (i) address federal, state and local standards, (ii) meet the needs of pets and pet parents, and (iii) implement standards that the Company believes to be in the best interests of the safety and well-being of its employees and customers. The duration and severity of the pandemic remains uncertain.
Litigation
The Company is involved in legal proceedings and is subject to other claims and litigation 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 condensed 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 condensed 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 a particular litigation matter is appropriate, the Company may be subject to liability that could have a material adverse effect on its condensed consolidated financial statements.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.