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Item 7. Management’s Discussion and Analysis

2022-03-24 compared with 2021-04-05 · 180 added, 242 removed, 296 unchanged (59% of the section changed)

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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.

Please read the section entitled “Cautionary Note Regarding Forward-Looking Statements.”

We are a beloved brand in the U.S.

pet care industry with more than 55 years of service to pets and the people who love and care for them.

Since our founding in 1965, we have been developing new standards in pet care, delivering comprehensive wellness solutions through our products and services, and creating communities that deepen the pet-parent bond.

Over the last three years, we have transformed the business from a successful traditional retailer to a disruptive, fully integrated, digital-focused provider of pet health and wellness offerings.

We revamped our leadership team and invested over $375 million to build out leading capabilities across e-commerce and digital, owned brands, data analytics, and a full suite of on-site services including veterinary care.

Our go-to-market strategy is powered by a multi-channel platform that integrates our strong digital presence with our nationwide physical network.

Our data-driven digital footprint, consisting of an entirely redesigned e-commerce site and personalized mobile app, delivers an exceptional customer experience and serves as a hub for pet parents to manage their pets’ health, wellness, and merchandise needs, while enabling them to shop wherever, whenever, and however they want.

By strategically leveraging our extensive physical network consisting of approximately 1,454 pet care centers located within three miles of 53 % of our customers, we are able to offer our comprehensive product and service offering in a localized manner with a meaningful last-mile advantage over our competition.

Through our connected platform, we serve our customers in a differentiated manner by offering the convenience of ship-from-store, BOPUS, curbside pick-up and same day delivery.

Multi-channel customers, who spend between 3x to 7x more with us compared to single-channel customers, increased by double-digits in fiscal 2020.

Through our multi-channel platform, we provide a comprehensive offering of differentiated products and services that fulfill all the needs of pet parents and their pets.

Our product offering leverages our owned brand portfolio and partnerships with premium third-party brands to deliver high quality food that avoids artificial ingredients, complemented by a wide variety of premium pet care supplies.

We augment this product offering with a broad suite of professional services, including grooming as well as in-store and online training.

Our service offering is further enhanced by a rapidly expanding, affordable veterinary service platform, which includes full-service veterinary hospitals, Vetco clinics, and tele-veterinarian services.

In addition, we are increasingly linking our offerings with subscription programs such as membership and pet health insurance that create deeper engagement with our customers, and with our Pals Rewards loyalty program members specifically, which members accounted for approximately 80% of transactions in fiscal 2020.

At the end of fiscal 2020, we launched our Vital Care membership program, the industry’s first broad-scale, comprehensive membership program covering items including vaccinations, grooming, services and merchandise discounts.

The risks described in documents we file from time to time with the U.S.

Securities and Exchange Commission (the “SEC”), including the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in this Annual Report on Form 10-K, should be carefully reviewed.

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.

In recent 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, omnichannel provider of holistic pet health and wellness offerings, including premium 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 nearly 200 in-store veterinary hospitals, and offer a complete online resource for pet health and wellness at petco.com and on the Petco app.

Our multichannel, go-to-market strategy integrates our strong digital assets with our nationwide physical footprint to meet the needs of pet parents who are looking for a single source for all their pet’s needs.

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 our extensive physical network of 1,433 pet care centers across the U.S.

and Puerto Rico, we are able to offer our comprehensive product and service offering in a localized manner with a meaningful last-mile advantage over much of our 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.

Through our multi-channel platform, we provide a comprehensive offering of differentiated products and services that fulfill the needs of pet parents and their pets.

Our product offering leverages a broad, carefully curated assortment of owned brand and exclusive merchandise and partnerships with premium third-party brands to provide customers with high quality nutrition without artificial ingredients, complemented by a wide variety of premium pet care supplies and companion animals.

While we offer pet parents a full spectrum of product choices within our high standards of nutrition and quality, our assortment is differentially weighted towards premium products to address the needs of the growing number of health-conscious pet parents.

We integrate this differentiated product offering with our services business in order to build on the foundation of treating the whole pet, including their physical, mental and social well-being.

Our service offering includes a broad suite of pet health services, including veterinary care, grooming and training.

This offering is further enhanced by a rapidly expanding, high quality, accessible, comprehensive veterinary care platform, which includes full-service veterinary hospitals, Vetco mobile clinics, and tele-health services.

The full value of our health and wellness ecosystem is realized for customers through our Vital Care membership program.

From the nutrition and supplies pets need each day, to the services that keep them at optimal heath, Vital Care makes it easier and more affordable for pet parents to care for their pet’s health all in one place.

We are increasingly linking our offerings with membership programs such as Vital Care and pet health insurance that create deeper engagement with our customers, and with our Pals Rewards loyalty program members specifically, which members accounted for over 80% of transactions in fiscal 2021.

In addition to providing differentiated products and services, our over 24,000 knowledgeable, passionate partners provide important high-quality advice to our customers in our pet care centers.

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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.

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.

Additionally, our comparable sales exclude the impact of the wind-down and migration of our Drs.

Foster & Smith digital site to Petco.com in fiscal 2018 and f iscal 2019.

There may be variations in the way in which some of our competitors and other retailers calculate comparable sales.

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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 a key driver of changes in comparable sales.

General macroeconomic and retail business trends are also a key driver of changes in comparable sales.

Non-GAAP Financial Measures

Management and the Board of Directors review certain non-GAAP financial measures, along with GAAP measures (as defined herein), to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital.

Our key non-GAAP financial measures are Adjusted EBITDA, Adjusted Net income, Adjusted EPS, Free Cash Flow and Net Debt.

Further explanation on our non-GAAP measures, along with reconciliations to their most comparable GAAP measures, is presented below under “Reconciliation of Non-GAAP Financial Measures to GAAP 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.”

Factors Affecting Our Business

We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section titled “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K.

We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section titled “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K.

Pet Industry Trends

In 2020, the U.S.

pet care industry served more than 72 million households with pets and represented a total addressable market of $97 billion, growing by over 3 million pets driven by heightened adoption activity through the COVID-19 pandemic.

Due to its non-discretionary nature, the market has demonstrated a long-term track record of consistent growth and resilience throughout economic cycles.

From 2020 to 2024, the industry is expected to grow at a 7% CAGR, driven by steady, predictable growth in the underlying pet population coupled with strong tailwinds associated with pet humanization and COVID-19.

pet care industry is large and growing, serving millions of households with pets, and represented a total addressable market of $119 billion in 2021.

Since 2008, the industry has exhibited steady growth driven by an increase in the underlying pet population coupled with strong tailwinds associated with pet humanization.

Due to the essential, repeat nature of pet care, the industry has demonstrated resilience across economic cycles, as evidenced by the strong industry performance during the Great Recession from 2008 to 2010.

In addition, as a result of the COVID-19 pandemic, the industry experienced a significant increase in household pets and therefore demand, which is expected to be a tailwind for years to come.

In fiscal 2020 and fiscal 2021, U.S.

households welcomed millions of incremental new pets into their homes that will need to be fed, groomed, vaccinated, and treated during their lives.

Customer Pet Purchase Trends

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Customer Acquisition, Retention, and Spend

Our business is impacted by our ability to successfully attract new customers to any one of our channels, build their loyalty to engender return visits, and expand their spend with Petco across multiple purchase channels (e.g., pet care centers, e-commerce, and services) and categories (e.g., pet food, supplies, and companion animal).

This is the primary focus of all our customer engagement efforts from digital, to performance marketing campaigns, to new product introductions, and to Petco partner cross-selling activities in pet care centers.

The ability to convert more of our customers to loyal, multi-channel shoppers will affect business performance.

Our business is impacted by our ability to successfully attract new customers to any one of our channels, build their loyalty to encourage return visits, and expand their spend with Petco across multiple purchase channels (e.g., pet care centers, e-commerce, and services) and categories (e.g., pet food, supplies, and companion animal).

This is the primary focus of all our customer engagement efforts from digital, to performance marketing campaigns, to new product introductions, and to Petco partner cross- and up-selling activities in pet care centers.

The ability to convert more of our customers to loyal, multi-channel shoppers will positively affect business performance.

As pet care demand continues to grow, we believe we are well-positioned to capture an outsized portion of the growing market as a fully-integrated, comprehensive pet care provider.

Innovation and Transformation

Our operating results over the last two years reflect significant investments made to support innovation and business transformation strategies.

Our operating results reflect significant investments made to support innovation and business transformation strategies.

These investments include:

digital and e-commerce integration and expansion;

enhanced supply chain capacity;

data analytical capabilities;

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Approximately $125.6 million of capital investments in fiscal 2021 and fiscal 2020 related to digital and information technology, specifically the development of integration capabilities with our pet care center locations, our Petco App, and the development and deployment of data analytical and reporting capabilities.

Approximately $51.6 million of capital investments in fiscal 2021 and fiscal 2020 related to supply chain enhancements and expansion including capital spend on a new distribution center in fiscal 2021.

A $59.5 million increase in advertising in fiscal 2021 compared to fiscal 2020 to further adapt our advertising footprint to support the acceleration of our e-commerce and digital sales growth.

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Our operating results are impacted by our ability to convert revenue growth into higher gross margin and operating margin.

The sales mix related to consumables, supplies, and services, with services typically having lower margins, as well as customer shopping preferences, impacts our gross margin results.

The sales mix related to consumables, supplies, and services, with services typically having lower gross margins (though attractive operating margins), as well as customer shopping preferences, impacts our gross margin results.

We focus gross margin and expense management on achieving a balance between ensuring adequate resource spend to grow sales with attention to driving increased profitability.

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and engender a positive, collaborative, and respectful working environment.

Our partners represent the strength of our brand every day and are key to ongoing growth.

Our partners represent the strength of our brand every day and are key to our ongoing growth.

Impact of the COVID-19 Pandemic on Our Business

The COVID-19 pandemic has impacted every aspect of the economy in fiscal 2020.

As an essential retailer, all of our pet care centers have remained open, 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.

Overall, this macroeconomic trend has favorably impacted our business results to date, but the possible sustained spread or resurgence of the pandemic, and any government response thereto, increases the uncertainty regarding future economic conditions that could impact our business in the future.

We quickly adapted our business and operations since the start of the pandemic to ensure, first and foremost, the health and safety of our partners, the animals in our care, and the customers we serve.

These adaptations include:

providing additional paid-time off and five cycles of appreciation bonuses to our frontline partners;

establishing a $2 million employee support fund to assist our partners and their families impacted by the pandemic;

investing in sanitation, plexiglass barriers, signage, and personal protective equipment;

and adopting strict safety protocols that limit direct human interactions and promote social distancing.

We were well-positioned to meet the increasing and evolving needs of pets and their parents at the onset of the pandemic.

Initially, we experienced significant increases in customer pet food purchases, but as the months progressed, our sales growth shifted to our supplies category, due to an increase in pet ownership and shifts in disposable income spending toward pets.

In services, we temporarily suspended our training services and vaccination clinic operations, and we reduced our grooming capacity while stay-at-home orders were in place.

Although we had experienced increasing customer demand for services before the pandemic, sales attributable to such services declined significantly from March through May 2020 as a result of the suspension.

We have experienced a significant acceleration of our e-commerce business, particularly as it relates to the integrated offering with our pet care centers.

Our ship-from-store capability enabled us to maintain regular shipping timelines , and we capitalized on our BOPUS capability and rolled out curbside pick-up in a matter of weeks, enabling us to get products to customers faster and at a higher margin than online retailers that incur costs to ship products to their customers.

Additionally, in the fourth quarter of fiscal 2020, we implemented same day delivery.

We have incurred additional expenses to support this business growth .

To preserve liquidity during the pandemic, we temporarily suspended capital expenditures, but as our financial results surpassed earlier expectations, we returned to our initial capital plan in the second half of fiscal 2020.

In efforts to control expenses, we negotiated discounts and concessions with landlords and vendors and temporarily furloughed or implemented temporary pay cuts for non-frontline partners.

The COVID-19 pandemic has impacted every aspect of the economy.

As an essential retailer, all of our pet care centers 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.

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 long-term impact on the broader economy or our operations and liquidity.

Please refer to the risk factors in Part I, Item 1A of this Annual Report on Form 10-K.

Significant Components of Results of Operations

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advertising costs;

other administrative costs.

other selling and administrative costs.

SG&A includes both fixed and variable costs and therefore is not directly correlated with net sales.

We expect that our SG&A expenses will increase in future periods due to additional expenses we expect to incur as a result of being a public company, including stock-based compensation.

Goodwill and Indefinite-Lived Intangible Impairment

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Interest Expense

Our interest expense is primarily associated with the senior secured credit facilities, the Floating Rate Senior Notes, the 3.00% Senior Notes (as defined herein), and interest rate caps.

Our interest expense in fiscal 2019, fiscal 2020, and a portion of fiscal 2021 was primarily associated with a term loan facility, a revolving credit facility, the Floating Rate Senior Notes (as defined herein), the 3.00% Senior Notes (as defined herein), and interest rate caps.

In January 2021, the Floating Rate Senior Notes and the 3.00% Senior Notes were exchanged, canceled, and/or redeemed in connection with the initial public offering, and our interest rate caps were settled in accordance with their contractual terms.

Additionally, on March 4, 2021, we borrowed $1,700.0 million under a new first lien term loan facility, repaid all outstanding principal and interest on the existing term loan facility, and replaced our existing revolving credit facility with a new revolving credit facility.

Please read discussion under “—Liquidity and Capital Resources—Sources of Liquidity” for further information.

Income Tax Benefit

On March 4, 2021, we borrowed $1,700.0 million under a new first lien term loan facility, repaid all outstanding principal and interest on the existing term loan facility, and replaced our existing revolving credit facility with a new revolving credit facility.

Please read the discussion under “Liquidity and Capital Resources—Sources of Liquidity” for further information.

Income Tax Expense (Benefit)

Income taxes consist of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for allowable credits, deductions, and the valuation allowance against deferred tax assets, as applicable.

(Income) Loss from Equity Method Investees

Income from Equity Method Investees

Our equity method investments prior to fiscal 2019 consisted primarily of our 50% owned veterinary joint venture and our 50% owned Mexico joint venture.

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Executive Summary

Our business transformation initiatives, accelerated by an increase in pet ownership and a shift in customer discretionary spend on pets, have driven strong top- and bottom-line growth in our business.

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 fiscal 2021 and fiscal 2020, we achieved the following results:

increase in net sales from $4.43 billion to $4.92 billion, representing period-over-period growth of 11.0%;

an increase in net sales from $4.92 billion to $5.81 billion, representing period-over-period growth of 18.0%;

comparable sales growth of 18.9%;

increase in operating income from $110.6 million to $194.4 million, representing period-over-period growth of 75.8%;

a decrease in net loss attributable to Class A and B-1 common stockholders from $95.9 million to $26.5 million, representing a period-over-period improvement of 72.4%;

an increase in Adjusted EBITDA from $424.5 million to $484.3 million, representing period-over-period growth of 14.1%;

Net cash provided by operating activities increased from $110.3 million in fiscal 2019 to $268.6 million in fiscal 2020.

For a description of our non-GAAP measures and reconciliations to their most comparable GAAP measures, please read the section below titled “Reconciliation of Non-GAAP Financial Measures to GAAP Measures.”

an increase in operating income from $194.4 million to $266.1 million, representing period-over-period growth of 36.9%;

net income attributable to Class A and B-1 common stockholders of $164.4 million, compared to net loss attributable to Class A and B-1 common stockholders of $26.5 million in the prior year;

an improvement in net cash flows provided by operating activities from $268.6 million in fiscal 2020 to $358.2 million in fiscal 2021.

Results of Operations

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Selling, general and administrative expenses

Goodwill and indefinite-lived intangible impairment

Operating income (loss)

Indefinite-lived intangible impairment

Operating income

Interest income

Interest expense

Loss on extinguishment of debt

Loss before income taxes and (income) loss from

Loss on extinguishment and modification of debt

Other non-operating income

Income (loss) before income taxes and income from

equity method investees

Income tax benefit

(Income) loss from equity method investees

Income tax expense (benefit)

Income from equity method investees

Net income (loss)

Net loss attributable to noncontrolling interest

Net loss attributable to Class A and B-1 common

Net income (loss) attributable to Class A and B-1 common

Fiscal years ended

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Selling, general and administrative expenses

Goodwill and indefinite-lived intangible impairment

Operating income (loss)

Indefinite-lived intangible impairment

Operating income

Interest income

Interest expense

Loss on extinguishment of debt

Loss before income taxes and (income) loss from

Loss on extinguishment and modification of debt

Other non-operating income

Income (loss) before income taxes and income from

equity method investees

Income tax benefit

(Income) loss from equity method investees

Income tax expense (benefit)

Income from equity method investees

Net income (loss)

Net loss attributable to noncontrolling interest

Net loss attributable to Class A and B-1 common

Net income (loss) attributable to Class A and B-1 common

Fiscal years ended

Operational Data:

Comparable sales increase (decrease)

Total pet care centers at end of period

Total pet care centers with veterinarian practices at

end of period

Comparable sales increase

Total pet care centers (U.S.

and Puerto Rico) at end of period

Total veterinarian practices at end of period

Adjusted EBITDA (in thousands)

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Net Sales and Comparable Sales

Fiscal years ended

(dollars in thousands)

Supplies and companion animals

Services and other

Net sales increased $886.9 million, or 18.0%, to $5.81 billion in fiscal 2021 compared to net sales of $4.92 billion in fiscal 2020, driven by a 18.9% increase in our comparable sales.

With our investments in our business over the past two years, we were, and continue to be, well-positioned to meet the increasing and evolving needs of pets and their parents.

Our sales growth period-over-period was a result of these investments, coupled with an increase in pet ownership and a shift in consumer spending toward the pet category as a result of the COVID-19 pandemic.

Our e-commerce and digital sales increased 103% from fiscal 2019 to fiscal 2020 driven by a change in consumer shopping preferences.

With an integrated offering that includes BOPUS, curbside pick-up, ship-from-store, and same day delivery, we were able to quickly get products to customers in a safe manner regardless of their delivery or pick-up preference.

Supplies and companion animal sales increased 20.1% from fiscal 2019 to fiscal 2020 d ue to increases in pet ownership and shifts in disposable income toward pets.

Dog and cat food sales increased 3.4% and services and other sales increased 6.1% from fiscal 2019 to fiscal 2020, respectively.

The increase in services was primarily due to growth in the hospital business due to the addition of 44 new hospitals period-over-period partially offset by the temporary suspension of our training, grooming and vaccination clinic services while stay-at-home orders were in place.

Cost of Goods Sold and Gross Profit

Our sales growth period-over-period was driven by our strong execution and differentiated product 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 fiscal 2021 were impacted by inflation, as we have taken pricing actions to offset cost increases on some vendor-supplied product.

Where possible, we have worked with our merchant partners to help offset cost input increases.

In the aggregate, we have not experienced a material impact on units 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 along with continued expansion of our product assortment.

The increase in services and other was due to the increase in new pets, the continued growth in our veterinary hospital business with the addition of 72 new hospitals period-over-period, and the expansion of our membership and subscription programs, coupled with headwinds experienced during fiscal 2020 while stay-at-home orders were in place and some of our services were limited or suspended temporarily.

In fiscal 2021, pet care center merchandise delivered growth of 15.4% with higher retail traffic and strong growth in all major categories, including consumables, supplies, and companion animals.

Our e-commerce and digital sales increased 21.1% from fiscal 2020 to fiscal 2021, reflecting our expanded brand assortment, enhanced personalization and extended fulfillment options.

Gross profit increased $319.9 million, or 15.2%, to $2.43 billion in fiscal 2021 compared to gross profit of $2.11 billion for fiscal 2020.

As a percentage of sales, our gross profit rate decreased slightly at 42.8% for fiscal 2020 compared to 43.0% for fiscal 2019.

As a percentage of sales, our gross profit rate was 41.8% for fiscal 2021 compared to 42.8% for fiscal 2020.

The increase in gross profit was due to the overall increase in net sales.

The slight decrease in gross profit rate was primarily due to a shift in sales to e-commerce, which typically carries lower margins than pet care center sales.

E-commerce sales margins benefitted by the growth in BOPUS, curbside delivery, and ship-from-store, which typically carry higher margins as they reduce or eliminate shipping costs associated with online sales.

Approximately 83% of Petco.com orders were fulfilled by our pet care centers during fiscal 2020.

Also contributing to the decrease in gross profit rate period-over-period were $9.6 million of COVID-19 related expenses and a lower year-over-year actuarial true-up benefit of $7.3 million.

COVID-19 related expenses in fiscal 2020 included approximately $7.9 million of appreciation bonuses for our frontline services partners, including groomers, trainers and veterinarians, and distribution center partners and approximately $1.7 million of increased sanitation costs at our distribution centers and for purchases of personal protective equipment.

The decrease in gross profit rate was primarily due to the mix impact of strong consumables sales during fiscal 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 fiscal 2021 as compared to fiscal 2020.

Selling, General and Administrative Expenses

SG&A expenses increased $248.2 million, or 13.0%, to $2.16 billion for fiscal 2021 compared to $1.91 billion for fiscal 2020.

As a percentage of net sales, SG&A expenses decreased from 40.1% in fiscal 2019 to 38.9% in fiscal 2020 reflecting operating leverage from net sales growth.

The increase in expense period-over-period was driven by a $70.7 million increase in advertising expenses to support the acceleration of our e-commerce and digital sales growth;

$18.4 million of COVID-19 related appreciation bonuses for our frontline pet care center partners;

$11.7 million of COVID-19 related expenses for sanitation, safety-related costs, personal protective equipment and the establishment of our employee assistance fund;

and $8.7 million of professional fees expensed in connection with the initial public offering.

Depreciation expense increased $10.6 million due to increased capital spend to support e-commerce and digital initiatives.

Goodwill and Indefinite-lived Intangible Impairment

Our annual impairment test in fiscal 2020 and fiscal 2019 indicated that the fair value of our single reporting unit exceeded the carrying value, and therefore no goodwill impairment charge was recorded.

The annual impairment analysis of our indefinite-lived trade name in fiscal 2020 indicated that the fair value of the asset exceeded the carrying value, and therefore no trade name impairment charge was recorded in fiscal 2020.

In fiscal 2019, an impairment charge of $19.0 million was recorded driven by a combination of market conditions, increased competition from online competitors, and financial performance.

As a percentage of net sales, SG&A expenses decreased from 38.9% in fiscal 2020 to 37.2% in

fiscal 2021 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.

The increase in SG&A expense s period-over-period included a $ 59.5 million increase in advertising expenses to support the acceleration of our sales growth and a $36.4 million increase in equity-based compensation expense driven by awards issued in conjunction with our initial public offering.

The remainder of the increase was predominantly due to higher incentive compensation for corporate and field partners attributable to our strong financial performance , a legal settlement accrual for class action matters, and increased variable costs associated with our higher sales growth .

Interest Expense

Interest expense decreased $141.7 million, or 64.7%, to $77.4 million in fiscal 2021 compared with $219.1 million in fiscal 2020.

The decrease was primarily driven by lower interest rates between the periods.

In addition, interest expense decreased by approximately $3.5 million due to the redemption/cancellation of the Floating Rate Senior Notes and the 3.00% Senior Notes and repayment of a portion of the Amended Term Loan Facility in connection with the initial public offering.

In March 2020, we borrowed $250.0 million on the 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 revolving credit facility as of January 30, 2021.

Income Tax Benefit

Our effective tax rate was 11.2% for fiscal 2020, resulting in income tax benefit of $3.3 million, compared to an effective tax rate of 27.3% and income tax benefit of $35.7 million for fiscal 2019.

The decrease in effective tax rate in fiscal 2020 as compared to fiscal 2019 is driven by various factors, including the change in earnings as compared to fiscal 2019, a remeasurement of deferred tax assets related to $67.4 million of net operating losses available under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) that were carried back to fiscal years before the U.S.

Tax Cuts and Jobs Act was enacted, which resulted in a benefit of $8.8 million.

These decreases were partially offset by an increase in equity-based compensation resulting from the initial public offering as discussed in Note 13 of the consolidated financial statements, an increase in unrecognized tax benefits as discussed in Note 14 of the consolidated financial statements, limitations of deductibility for certain public company executive compensation in accordance with Section 162(m) of the Internal Revenue Code of 1986 as amended (the “Code”), and changes to state taxes from changes in tax laws, tax rates, and apportionment of income.

Net Loss Attributable to Class A and B-1 Common Stockholders

Net loss attributable to Class A and B-1 common stockholders decreased $69.4 million to $26.5 million for fiscal 2020 compared with a net loss attributable to Class A and B-1 common stockholders of $95.9 million for fiscal 2019.

The improvement period-over-period was primarily driven by higher gross margin of $200.2 million and lower interest expense of $33.9 million, offset by higher SG&A costs of $135.4 million and a lower income tax benefit of $32.3 million.

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 9, “ Senior Notes ,” and Note 8, “ Senior Secured Credit Facilities ,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K) 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 or January 29, 2022.

Loss on Extinguishment and Modification of Debt

In fiscal 2021, the Company recognized $20.8 million of losses on the March 2021 refinancing of the Amended Term Loan Facility and Amended Revolving Credit Facility.

In fiscal 2020, the Company recognized $17.5 million of losses on the partial extinguishment of debt in conjunction with the Company’s initial public offering.

For more information regarding these activities, refer to Note 8 , “ Senior Secured Credit Facilities ,” and Note 9, “ Senior Notes ,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Other Non-Operating Income

Other non-operating income was $34.5 million for fiscal 2021 and related to non-cash gains from the remeasurement of the fair value of our investment in Rover Group, Inc which began after the consummation of its merger with a publicly traded special purpose acquisition company in fiscal 2021.

There was no other non-operating income or loss recognized during fiscal 2020.

For more information regarding this activity, refer to Note 11 , “Fair Value Measurements,” to the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Income Tax Expense (Benefit)

Our effective tax rate was 24.5% for fiscal 2021, resulting in income tax expense of $53.5 million, compared to an effective tax rate of 11.2% and income tax benefit of $3.3 million for fiscal 2020.

The increase in effective tax rate in fiscal 2021 as compared to fiscal 2020 is driven by various factors further discussed in Note 14 of the Consolidated Financial Statements.

These changes include a change in earnings as compared to fiscal 2020, a remeasurement of deferred tax assets in fiscal 2020 related to $67.4 million of net operating losses available under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) that were carried back to fiscal years before the U.S.

Tax Cuts and Jobs Act was enacted, an increase in fiscal 2021 for certain equity-based compensation as discussed in Note 13 of the Consolidated Financial Statements, an increase in fiscal 2020 in unrecognized tax benefits and an increase in certain public company executive compensation subject to Section 162(m) of the Internal Revenue Code of 1986 as amended (the “Code”).

Net Income (Loss) Attributable to Class A and B-1 Common Stockholders

Net income attributable to Class A and B-1 common stockholders was $164.4 million for fiscal 2021 compared with a net loss attributable to Class A and B-1 common stockholders of $26.5 million for fiscal 2020.

The improvement period-over-period was primarily driven by higher gross profit of $319.9 million and lower interest

expense of $ 141.7 million, offset by higher SG&A costs of $ 248.2 million and increased income tax expense of $ 56.8 million.

Prior Year Discussion of Results and Comparisons

For information on fiscal 2018 results and similar comparisons, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our final prospectus filed with the SEC on January 15, 2021 pursuant to Rule 424(b)(4).

For information on fiscal 2019 results and similar comparisons, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our previous Annual Report on Form 10-K filed with the SEC on April 5, 2021.

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 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.

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.

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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.

We define Adjusted EBITDA as net (loss) income attributable to members excluding:

interest expense, net and losses on debt extinguishment;

income tax (benefit) expense;

depreciation, amortization, asset impairments, and write-offs;

(income) loss from equity method investees;

goodwill and indefinite-lived intangible impairment;

equity-based compensation;

pre-opening and closing expenses;

non-cash occupancy-related costs;

severance expenses;

other non-recurring costs.

We believe it is useful to exclude these items that are non-cash or non-routine in nature, as they are not components of our business operations and may not directly correlate to the underlying performance of our business.

In addition, we add back 50% of EBITDA related to our 50% owned veterinary joint venture for years prior to fiscal 2019 (in fiscal 2019, we began consolidating this joint venture in our financial results) and our 50% owned Mexico joint venture for all periods.

We believe it is useful to include our portion of the results of these joint ventures, as it reflects the performance of key components of our business, including veterinary services and international operations, and presents more comparable EBITDA-based financial information rather than (income) loss on a standalone basis.

Our portion of the results of these joint ventures has limitations as an analytical tool, including that amounts shown on the individual line items do not necessarily represent our legal claim to the assets and liabilities, or the revenues and expenses presented.

In addition, other companies may calculate such proportionate results differently, which reduces their comparability.

Further, we define Adjusted EBITDA Margin as Adjusted EBITDA divided by net sales.

Adjusted EBITDA is not a substitute for net (loss) income, 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.

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.

In addition, other companies in our industry may define Adjusted EBITDA differently, limiting its usefulness as a comparative measure.

The table below reflects the calculation of Adjusted EBITDA and Adjusted EBITDA Margin, after taking into account net sales for the periods presented:

The table below reflects the calculation of Adjusted EBITDA and Adjusted EBITDA Margin for the periods presented:

Fiscal years ended

(dollars in thousands)

Reconciliation of Net Loss Attributable to Class A and B-1

Common Stockholders to Adjusted EBITDA

Net loss attributable to Class A and B-1 common stockholders

Net income (loss) attributable to Class A and B-1 common stockholders

Interest expense, net

Income tax benefit

Income tax expense (benefit)

Depreciation and amortization

(Income) loss from equity method investees

Loss on debt extinguishment

Goodwill & indefinite-lived intangible impairment

Income from equity method investees

Loss on extinguishment and modification of debt

Indefinite-lived intangible impairment

Asset impairments and write offs

Equity-based compensation

Veterinary Joint Venture EBITDA (1)

Other non-operating income

Mexico joint venture EBITDA (1)

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Adjusted EBITDA Margin (4)

Veterinary Joint Venture EBITDA represents 50% of the entity’s operating results for years prior to fiscal 2019, when the joint venture was accounted for as an equity method investment.

Beginning in fiscal 2019, this joint venture is now included in our consolidated results with the 50% portion we do not own being adjusted as a noncontrolling interest.

We believe it is useful to include our portion of the results of this joint venture prior to fiscal 2019, as it best reflects the actual performance of our overall business and improves comparability of our financial information.

The Veterinary Joint Venture EBITDA is aligned with the portion of such entity’s net loss that is included in (income) loss from equity method investees in the financial statements because such entity does not have similar items to those excluded in our calculation of Adjusted EBITDA.

Mexico Joint Venture EBITDA represents 50% of the entity’s operating results for all years, as adjusted to reflect the results on a basis comparable to our Adjusted EBITDA.

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.

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Non-cash occupancy-related costs include the difference between cash and straight-line rent for all periods.

Beginning in fiscal 2019, in connection with our adoption of the lease accounting standard, favorable lease rights of $125.2 million and unfavorable lease rights of $30.8 million were reclassified from intangible assets and other long-term liabilities, respectively, to right-of-use lease assets and the related amortization is now included in non-cash occupancy costs.

In addition to the reclassification, the amortization period of these lease right assets has decreased to align with the terms of the underlying right-of-use lease assets, thus resulting in an acceleration of expense compared to prior years.

The overall adoption of the lease accounting standard did not have an impact on our Adjusted EBITDA, as this increase in addback was completely offset in other impacted lines such as lower depreciation and amortization, asset impairments and write-offs, and store closing expenses.

Non-recurring costs include:

unrealized fair market value adjustments on non-operating investments;

class action settlements and related legal fees;

one-time consulting and other costs associated with our strategic transformation initiatives;

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 the initial public offering .

While we have incurred significant costs associated with the COVID-19 pandemic during fiscal 2020 , 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.

We define net margin as net 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.

Adjusted Net Income and Adjusted EPS

Adjusted Net Income and Adjusted EPS are considered non-GAAP financial measures because they exclude certain amounts included in net loss attributable to Class A and B-1 common stockholders and diluted loss per Class A and B-1 common share, the most directly comparable financial measures calculated in accordance with GAAP.

Management believes that Adjusted Net Income and Adjusted EPS are meaningful measures to share with investors because they best allow comparison of the performance with that of the comparable period.

In addition, Adjusted Net Income and Adjusted EPS afford investors a view of what management considers the Company’s earnings performance to be and the ability to make a more informed assessment of such earnings performance with that of the prior year.

The table below reflects the calculation of Adjusted Net Income and Adjusted EPS for the periods presented:

Fiscal years ended

January 30, 2021

February 1, 2020

February 2, 2019

(dollars in thousands, except per share amounts)

Reconciliation of Diluted Loss per Share to

Net loss attributable to Class A and B-1

common stockholders

Income tax benefit

Loss on debt extinguishment

Goodwill & indefinite-lived intangible impairment

Asset impairments and write offs

Equity-based compensation

Store pre-opening expenses

Store closing expenses

Non-cash occupancy-related costs

Non-recurring costs

Adjusted pre-tax income (loss) / adjusted

pre-tax diluted earnings (loss) per share

Income tax expense (benefit) at 26% normalized

Adjusted Net Income (Loss) /

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.

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 operations 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.

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 C ompany’s financial performance.

Although other companies report their free cash flow, numerous methods exist for calculating a company’s free cash flow.

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Senior secured credit facilities, net, including current portion

Senior notes, net

Finance leases, including current portion

cash and cash equivalents

Adjusted EBITDA

Net Debt / Adjusted EBITDA ratio

Liquidity and Capital Resources

Our primary sources of liquidity are funds generated by operating activities and available capacity for borrowings on our revolving credit facility.

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 January 30, 2021 was $499.0 million inclusive of cash and cash equivalents of $111.4 million and $387.6 million of availability on the revolving credit facility.

We believe that our current resources, together with anticipated cash flows from operations and borrowing capacity under the revolving credit facility will be sufficient to finance our operations, meet our current cash requirements, and fund anticipated capital investments for the next 12 months.

Our liquidity as of January 29, 2022 was $649.8 million inclusive of cash and cash equivalents of $211.6 million and $438.2 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.

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Our contractual obligations primarily consist of operating leases and long-term debt and related interest payments.

We do also enter certain short-term lease commitments, letters of credit and purchase obligations in the normal course of business.

For more information regarding our primary obligations, refer to Note 6 and Note 8 to the historical consolidated financial statements included elsewhere in this Annual Report on Form 10-K for amounts outstanding as of January 30, 2021 related to debt and operating leases, respectively.

Also refer to further discussion on our debt refinancing transaction in sources of liquidity below.

We also enter certain short-term lease commitments, letters of credit and purchase obligations in the

normal course of business.

Refer to Note 6 and Note 8 to the historical consolidated financial statements included elsewhere in this Annual Report on Form 10-K for amounts outstanding as of January 29 , 202 2 related t o operating leases and debt , respectively .

Refer also to further discussion on our debt refinancing transaction in “S ources of L iquidity ” below.

Purchase obligations and commitments consist of open purchase orders, non-cancellable commitments for information technology, marketing and other products and services used in the normal course of business as well as our commitment for naming rights to the baseball stadium.

As of January 29, 2022, our purchase obligations and commitments were $507.5 million of which $454.4 million is considered short-term.

The following table summarizes our consolidated cash flows:

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Financing activities

Net (decrease) increase in cash, cash equivalents

Net increase (decrease) in cash, cash equivalents

and restricted cash

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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;

Our primary uses of cash in operating activities include:

purchases of inventory;

freight and warehousing costs;

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and marketing expenses.

Net cash provided by operating activities is impacted by our net loss adjusted for certain non-cash items, including:

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;

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equity-based compensation;

impairments of goodwill and intangible assets;

impairments of intangible assets;

other non-operating income;

and the effect of changes in operating assets and liabilities.

Net cash provided by operating activities was $358.2 million in fiscal 2021 compared with net cash provided by operating activities of $268.6 million in fiscal 2020.

The increase was driven by stronger operating performance period-over-period resulting from our strategic investments, an increase in pet ownership and increased consumer spending in the pet category.

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 and fringe driven by operating performance along with other changes in working capital which is subject to many variables including the timing of cash receipts and payments.

Net cash provided by operating activities was $268.6 million in fiscal 2020 compared with $110.3 million in fiscal 2019.

T he increase was driven by stronger operating performance period-over-period resulting from our strategic investments, an increase in pet ownership and increased consumer spending in the pet category.

In addition, a decrease in cash payments for interest and lower payroll taxes due to the CARES Act contributed to the increase.

This was partially offset by the timing of receipts and payments on inventory, increases in advertising spend and non-recurring expenses related to COVID-19 and the initial public offering.

Net cash provided by operating activities was $110.3 million in fiscal 2019 compared with $203.2 million in fiscal 2018.

This decrease was primarily driven by the timing of cash collections on trade accounts receivable, increases in cash paid for advertising to support initiatives and digital growth, and an increase net cash used in operating activities to expand our vet footprint.

Increases in cash paid for interest and income taxes also contributed to the overall decrease.

Investing Activities

Cash used in investing activities consists primarily of capital expenditures, which in fiscal 2020, fiscal 2019 and fiscal 2018 primarily supported our transformation initiatives.

Net cash used in investing activities was $157.2 million, $139.0 million, and $142.7 million for fiscal 2020, 2019, and 2018 respectively.

Net cash used in investing activities was $237.1 million, $157.2 million, and $139.0 million for fiscal 2021, fiscal 2020, and fiscal 2019, respectively, and consisted primarily of capital expenditures supporting our growth and initiatives.

Offsetting our cash used for capital expenditures in fiscal 2019 was proceeds from the sale-leaseback of our San Antonio corporate support center, for which we received net proceeds of $18.5 million.

The sale-leaseback enabled us to enhance our liquidity and fund investments to support our strategic growth and transformation initiatives.

The majority of our capital expenditures are discretionary in nature and made to expand our business.

The sale-leaseback

enabled us to enhance our liquidity and fund investments to support our strategic growth and transformation initiatives.

The increase in capital expenditures between the periods was primarily due to the build-out of our veterinary hospitals, innovation, capital expenditures for our new distribution center and enhanced supply chain capacity in response to our sales growth.

In fiscal 2022, we expect to spend approximately $275 million to $325 million in capital expenditures.

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Financing Activities

Financing activities in fiscal 2020, 2019 and 2018 primarily consisted of borrowings and paydowns on the revolving credit facility to support the working capital needs of the business.

Principal payments on the Amended Term Loan Facility were $25.3 million per year in fiscal 2019 and 2018.

In fiscal 2020, financing activities included net proceeds from our initial public offering and the subsequent use of proceeds for debt repayments.

In fiscal 2020, the Company paid $745.9 million in principal payments on the Amended Term Loan Facility.

Net cash used in financing activities was $18.8 million for fiscal 2021, compared with $146.6 million used in financing activities in fiscal 2020 and $3.1 million used in financing activities in fiscal 2019.

At the start of the COVID-19 pandemic in March 2020, we took a precautionary draw on the Amended Revolving Credit Facility of $250.0 million.

As operations stabilized and financial results improved, the balance was repaid in full in the second quarter of fiscal 2020 and no amounts were outstanding as of January 30, 2021.

Net cash used in financing activities was fiscal 2020 primarily consisted of repayments of debt in connection with the initial public offering that occurred on January 19, 2021.

Financing cash flows in fiscal 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.

Financing cash flows in fiscal 2020 primarily consisted of repayments of debt in connection with the initial public offering that occurred on January 19, 2021.

Upon the closing of the initial public offering, the Company repaid $727.0 million of the Amended Term Loan Facility, $300.0 million in principal on the Floating Rate Senior Notes and $4.0 million on the 3.00% Senior Notes.

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For more information regarding these activities, refer to Note 8 and Note 9 to the historical consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Net cash used in financing activities in fiscal 2019 primarily consisted of term loan principal payments of $25.3 million and net borrowings on the Amended Revolving Credit Facility of $29.0 million to support the working capital needs of the business.

Additionally, at the start of the COVID-19 pandemic in March 2020, we took a precautionary draw on the Amended Revolving Credit Facility of $250.0 million.

As operations stabilized and financial results improved, the balance was repaid in full in the second quarter of fiscal 2020 and no amounts were outstanding as of January 30, 2021.

Financing cash flows in fiscal 2019 primarily consisted of term loan principal payments of $25.3 million and net borrowings on the Amended Revolving Credit Facility of $29.0 million to support the working capital needs of the business.

The outstanding balance on the Amended Revolving Credit Facility was $29.0 million as of February 1, 2020.

Net cash used in financing activities was $32.1 million in fiscal 2018 and primarily consisted of term loan principal payments of $25.3 million.

No amounts were outstanding on the Amended Revolving Credit Facility as of February 2, 2019.

Sources of Liquidity

Senior Secured Credit Facilities

At 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, providing for senior secured financing of up to $500.0 million expiring on the earlier of 91 days prior to the maturity of the Amended Term Loan Facility (October 27, 2022 or five years from the most recent amendment), subject to a borrowing base.

In connection with the closing of our initial public offering in on January 19, 2021, a $17.5 million loss on extinguishment of debt was recorded in fiscal 2020 related to partial extinguishment of the Amended Term Loan Facility and cancellation of the existing Floating Rate Senior Notes.

For more information regarding this indebtedness, refer to Note 8 to the historical consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

On March 4, 2021, subsequent to fiscal 2020, the Company completed a refinancing transaction and, in combination with the application of the proceeds from the Company’s initial public offering and other recapitalization transactions in connection therewith, reduced total debt by 49 percent over the prior year.

The Company entered into 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.

Net Debt reduction and Adjusted EBITDA improvement as a result of the transaction led to a decrease of 4.2x of the Company Net Debt to Adjusted EBITDA ratio of 3.2x.

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.

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.

T he transaction led to a decrease in Net Debt from $1,548.5 million as of January 30, 2021 to $1,475.6 million as of January 29, 2022.

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 commence on June 30, 2021.

Principal payments are $4.25 million quarterly and commence d on June 30, 2021.

The terms under the ABL Revolving Credit Facility are substantially similar to those of the Amended Revolving Credit Facility .

Derivative Instruments

In March 2016, the Company entered into a series of five interest rate cap agreements with four counterparties totaling $1,950.0 million to limit the maximum interest rate on a portion of the variable-rate debt and limit exposure to interest rate variability when three-month LIBOR exceeds 2.25%.

The interest rate caps are accounted for as cash flow hedges, and changes in the fair value of the interest rate caps are reported as a component of accumulated other comprehensive income.

The interest rate caps were settled in accordance with their contractual terms on January 29, 2021.

For more information regarding derivative instruments, refer to Note 10 to the historical consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

For more information regarding this indebtedness, refer to Note 8, “ Senior Secured Credit Facilities ,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

We operate under one reportable segment and support and serve pets and their parents through our integrated ecosystem of pet care centers, services, and e-commerce.

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Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States, or “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.

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.

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A 10% difference in our actual valuation reserve at January 29, 2022 would have an insignificant effect on pre-tax loss in fiscal 2021.

Additionally, we do not believe there is a reasonable likelihood that there will be a material change in future estimates or assumptions we use to calculate our shrink reserve.

Additionally, we do not believe there is a

reasonable likelihood that there will be a material change in future estimates or assumptions we use to calculate our shrink reserve.

However, if estimates of losses are inaccurate, we may be exposed to losses or gains that could be material.

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We establish a deferral for vendor income that is earned but not yet received and record the deferral as a reduction to merchandise inventory.

The majority of the year-end vendor income deferrals are collected with in the following fiscal quarter, and we do not believe there is reasonable likelihood that the assumptions used in our estimate will change significantly.

The majority of the year-end vendor income deferrals are collected within the following fiscal quarter, and we do not believe there is reasonable likelihood that the assumptions used in our estimate will change significantly.

Historically, adjustments to our vendor income deferral have not been material.

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Recent Accounting Pronouncements

Refer to Note 1 in the historical consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information regarding recently issued accounting pronouncements.

Refer to Note 1, “ Summary of Significant Accounting Policies ,” in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for information regarding recently issued accounting pronouncements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis