Petco Health & Wellness Company, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. PETCO HEALTH AND WELLNESS COMPANY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Audited Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm 61 Consolidated Balance Sheets 64 Consolidated Statements of Operations 65 Consolidated Statements of Comprehensive Income (Loss ) 66 Consolidated Statements of Equity 67 Consolidated Statements of Cash Flows 68 Notes to Consolidated Financial Statements 69 60 PETCO HEALTH AND WELLNESS COMPANY, INC. Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Petco Health and Wellness Company, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Petco Health and Wellness Company, Inc. (the Company) as of January 29, 2022 and January 30, 2021, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended January 29, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 29, 2022 and January 30, 2021, and the results of its operations and its cash flows for each of the three years in the period ended January 29, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated March 24, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 61 Vendor Allowances Description of the Matter As discussed in Note 1 of the consolidated financial statements, the Company receives vendor allowances from certain merchandise vendors through a variety of programs intended to offset the cost of inventory and for promoting and selling merchandise inventory. Purchases-based vendor allowances are recorded as a reduction of merchandise inventory and are recognized as a reduction to cost of sales when the associated inventory is sold. Other promotional allowances that are contractually tied to the sale of inventory are recognized as a reduction to cost of sales at the time of the sale of the specific goods. Funds that are determined to be a reimbursement of specific, incremental, and identifiable costs incurred to sell a vendor’s products are recorded as an offset to the related expense when incurred. Auditing vendor allowances was complex due to the number of individual agreements and the varying terms in the respective agreements. Significant audit effort was required to evaluate the terms of the vendor agreements and the related treatment of the vendor allowances in the consolidated financial statements. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the Company’s vendor allowances process, including management’s assessment of the terms of vendor agreements and related treatment of the vendor allowances. In order to test the recorded amount of vendor allowances, for a sample of vendor contracts, we tested whether the recorded amounts were consistent with the nature of the vendor allowances and evaluated whether the allowances had been earned as of January 29, 2022, were appropriately recorded in the statement of operations and were appropriately classified as a reduction of cost of sales or selling, general and administrative expenses based on the contractual terms. For a sample of vendor arrangements, we confirmed the terms of the agreement directly with the vendor, and for confirmations not received, we performed alternative procedures such as agreeing to underlying contractual arrangements, testing the settlement of the arrangement, and holding discussions with applicable Company buyers to understand the terms of the agreement. We also evaluated and recalculated the amount of deferred vendor allowances recorded as a reduction to merchandise inventory by developing an expectation for the amount based on the historical amounts recorded as a percentage of vendor allowances earned and comparing our expectation to the amount recorded by management. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2020. San Diego, California March 24, 2022 62 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Petco Health and Wellness Company, Inc. Opinion on Internal Control over Financial Reporting We have audited Petco Health and Wellness Company, Inc.’s internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Petco Health and Wellness Company, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of January 29, 2022, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of January 29, 2022 and January 30, 2021, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended January 29, 2022, and the related notes and our report dated March 24, 2022, expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP San Diego, California March 24, 2022 63 PETCO HEALTH AND WELLNESS COMPANY, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) January 29, 2022 January 30, 2021 ASSETS Current assets: Cash and cash equivalents $ 211,602 $ 111,402 Receivables, less allowance for credit losses ($ 931 and $ 3,267 , respectively) 55,618 41,827 Merchandise inventories, net 675,111 538,675 Prepaid expenses 42,355 40,032 Other current assets 86,091 45,613 Total current assets 1,070,777 777,549 Fixed assets, net 726,922 627,547 Operating lease right-of-use assets 1,338,465 1,328,108 Goodwill 2,183,991 2,179,310 Trade name 1,025,000 1,025,000 Other long-term assets 152,786 138,188 Total assets $ 6,497,941 $ 6,075,702 LIABILITIES AND EQUITY Current liabilities: Accounts payable and book overdrafts $ 403,976 $ 339,485 Accrued salaries and employee benefits 150,630 129,484 Accrued expenses and other liabilities 210,872 145,846 Current portion of operating lease liabilities 265,897 258,289 Current portion of long-term debt and other lease liabilities 21,764 2,203 Total current liabilities 1,053,139 875,307 Senior secured credit facilities, net, excluding current portion 1,640,390 1,646,281 Operating lease liabilities, excluding current portion 1,096,133 1,083,575 Deferred taxes, net 318,355 280,920 Other long-term liabilities 134,105 134,354 Total liabilities 4,242,122 4,020,437 Commitments and contingencies (Notes 8, 9 and 16) Stockholders' equity: Class A common stock, $ 0.001 par value: Authorized - 1.0 billion shares; Issued and outstanding - 227.2 million and 226.4 million shares, respectively 227 226 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 - no ne — — Additional paid-in-capital 2,133,821 2,092,110 Retained earnings (accumulated deficit) 142,166 ( 22,251 ) Accumulated other comprehensive loss ( 2,238 ) ( 1,275 ) Total stockholders’ equity 2,274,014 2,068,848 Noncontrolling interest ( 18,195 ) ( 13,583 ) Total equity 2,255,819 2,055,265 Total liabilities and equity $ 6,497,941 $ 6,075,702 See accompanying notes to consolidated financial statements. 64 PETCO HEALTH AND WELLNESS COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Fiscal years ended January 29, 2022 January 30, 2021 February 1, 2020 (52 weeks) (52 weeks) (52 weeks) Net sales $ 5,807,149 $ 4,920,202 $ 4,434,514 Cost of sales 3,380,539 2,813,464 2,527,995 Gross profit 2,426,610 2,106,738 1,906,519 Selling, general and administrative expenses 2,160,539 1,912,314 1,776,919 Indefinite-lived intangible impairment — — 19,000 Operating income 266,071 194,424 110,600 Interest income ( 62 ) ( 653 ) ( 335 ) Interest expense 77,397 219,083 253,018 Loss on extinguishment and modification of debt 20,838 17,549 — Other non-operating income ( 34,497 ) — — Income (loss) before income taxes and income from equity method investees 202,395 ( 41,555 ) ( 142,083 ) Income tax expense (benefit) 53,473 ( 3,337 ) ( 35,658 ) Income from equity method investees ( 10,883 ) ( 6,482 ) ( 2,441 ) Net income (loss) 159,805 ( 31,736 ) ( 103,984 ) Net loss attributable to noncontrolling interest ( 4,612 ) ( 5,253 ) ( 8,111 ) Net income (loss) attributable to Class A and B-1 common stockholders $ 164,417 $ ( 26,483 ) $ ( 95,873 ) Net income (loss) per Class A and B-1 common share (1): Basic $ 0.62 $ ( 0.13 ) $ ( 0.46 ) Diluted $ 0.62 $ ( 0.13 ) $ ( 0.46 ) Weighted average shares used in computing net income (loss) per Class A and B-1 common share (1): Basic 264,261 210,683 208,933 Diluted 265,338 210,683 208,933 (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 13 for further discussion. See accompanying notes to consolidated financial statements. 65 PETCO HEALTH AND WELLNESS COMPANY, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) Fiscal years ended January 29, 2022 January 30, 2021 February 1, 2020 (52 weeks) (52 weeks) (52 weeks) Net income (loss) $ 159,805 $ ( 31,736 ) $ ( 103,984 ) Net loss attributable to noncontrolling interest ( 4,612 ) ( 5,253 ) ( 8,111 ) Net income (loss) attributable to Class A and B-1 common stockholders 164,417 ( 26,483 ) ( 95,873 ) Other comprehensive (loss) income, net of tax: Foreign currency translation adjustment ( 963 ) ( 905 ) 952 Unrealized loss on derivatives — ( 86 ) ( 9,088 ) Losses on derivatives reclassified to income — 7,989 2,058 Total other comprehensive (loss) income, net of tax ( 963 ) 6,998 ( 6,078 ) Comprehensive income (loss) 158,842 ( 24,738 ) ( 110,062 ) Comprehensive loss attributable to noncontrolling interest ( 4,612 ) ( 5,253 ) ( 8,111 ) Comprehensive income (loss) attributable to Class A and B-1 common stockholders $ 163,454 $ ( 19,485 ) $ ( 101,951 ) See accompanying notes to consolidated financial statements. 66 PETCO HEALTH AND WELLNESS COMPANY, INC. CONSOLIDATED STATEMENTS OF EQUITY (In thousands) 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’/ members' equity Noncontrolling interest Total equity Balance at February 2, 2019 $ 1,347,622 — — — $ — $ — $ ( 707,518 ) $ ( 2,195 ) $ 637,909 $ — $ 637,909 Consolidation of joint venture — — — — — — — — — ( 462 ) ( 462 ) Equity-based compensation expense (Note 13) 9,489 — — — — — — — 9,489 — 9,489 Partial settlement of member note 1,019 — — — — — — — 1,019 — 1,019 Net loss — — — — — — ( 95,873 ) — ( 95,873 ) ( 8,111 ) ( 103,984 ) Contributions from noncontrolling interest — — — — — — — — — 243 243 Foreign currency translation adjustment, net of tax of $ 335 — — — — — — — 952 952 — 952 Unrealized loss on derivatives, net of tax of $( 3,184 ) — — — — — — — ( 9,088 ) ( 9,088 ) — ( 9,088 ) Losses on derivatives reclassified to income, net of tax of $ 721 — — — — — — — 2,058 2,058 — 2,058 Cumulative effect adjustments — — — — — — 22,925 — 22,925 — 22,925 Balance at February 1, 2020 $ 1,358,130 — — — $ — $ — $ ( 780,466 ) $ ( 8,273 ) $ 569,391 $ ( 8,330 ) $ 561,061 Equity-based compensation expense (Note 13) 9,757 — — — — 3,158 — — 12,915 — 12,915 Repurchase of equity ( 104 ) — — — — — — — ( 104 ) — ( 104 ) Net loss — — — — — — ( 26,483 ) — ( 26,483 ) ( 5,253 ) ( 31,736 ) Foreign currency translation adjustment, net of tax of $( 318 ) — — — — — — — ( 905 ) ( 905 ) — ( 905 ) Unrealized loss on derivatives, net of tax of $( 30 ) — — — — — — — ( 86 ) ( 86 ) — ( 86 ) Losses on derivatives reclassified to income, net of tax of $ 2,804 — — — — — — — 7,989 7,989 — 7,989 Contributions of Senior Notes (Note 9) — — — — — 573,934 — — 573,934 — 573,934 Conversion to Delaware corporation (Note 1) ( 1,367,783 ) 171,224 37,791 37,791 209 582,876 784,698 — — — — Issuance of common stock in initial public offering, net of offering costs (Note 1) — 55,200 — — 55 932,142 — — 932,197 — 932,197 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 13) — — — — — 45,603 — — 45,603 — 45,603 Net income — — — — — — 164,417 — 164,417 ( 4,612 ) 159,805 Foreign currency translation adjustment, net of tax of $( 337 ) — — — — — — — ( 963 ) ( 963 ) — ( 963 ) Issuance of restricted stock awards — 55 — — — — — — — — — Issuance of common stock, including tax effects — 708 — — 1 ( 3,892 ) — — ( 3,891 ) — ( 3,891 ) Balance at January 29, 2022 $ — 227,187 37,791 37,791 $ 265 $ 2,133,821 $ 142,166 $ ( 2,238 ) $ 2,274,014 $ ( 18,195 ) $ 2,255,819 _______________ (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. 67 PETCO HEALTH AND WELLNESS COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Fiscal years ended January 29, 2022 January 30, 2021 February 1, 2020 (52 weeks) (52 weeks) (52 weeks) Cash flows from operating activities: Net income (loss) $ 159,805 $ ( 31,736 ) $ ( 103,984 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 172,431 174,836 173,544 Amortization of debt discounts and issuance costs 5,796 24,237 23,455 Provision for deferred taxes 37,741 25,548 ( 45,087 ) Equity-based compensation 49,265 12,915 9,489 Impairments, write-offs and losses on sale of fixed and other assets 10,918 15,606 11,871 Loss on extinguishment and modification of debt 20,838 17,549 — Income from equity method investees ( 10,883 ) ( 6,482 ) ( 2,441 ) Amounts reclassified out of accumulated other comprehensive income (Note 10) — 10,793 2,806 Change in contingent consideration obligation — ( 398 ) 883 Indefinite-lived intangible impairment — — 19,000 Non-cash operating lease costs 422,465 430,359 441,981 Other non-operating income ( 34,497 ) — — Changes in assets and liabilities: Receivables ( 13,791 ) ( 10,311 ) ( 3,845 ) Merchandise inventories ( 136,404 ) ( 60,635 ) ( 8,193 ) Prepaid expenses and other assets ( 17,664 ) ( 13,842 ) ( 5,223 ) Accounts payable and book overdrafts 71,775 46,303 15,928 Accrued salaries and employee benefits 10,679 34,295 ( 1,395 ) Accrued expenses and other liabilities 42,899 ( 28,289 ) ( 3,043 ) Operating lease liabilities ( 418,210 ) ( 399,557 ) ( 408,562 ) Other long-term liabilities ( 14,948 ) 27,424 ( 6,847 ) Net cash provided by operating activities 358,215 268,615 110,337 Cash flows from investing activities: Cash paid for fixed assets ( 239,110 ) ( 159,560 ) ( 156,906 ) Cash paid for intangible assets — — ( 450 ) Insurance recoveries — — 489 Cash paid for acquisitions, net of cash acquired (Note 4) ( 4,334 ) — ( 2,813 ) Cash from consolidation of joint venture (Note 1) — — 1,205 Cash paid for investments — ( 1,000 ) ( 585 ) Proceeds from investments 6,135 73 — Proceeds from sale of assets 226 3,302 — Proceeds from sale-leasebacks, net (Note 3) — — 18,549 Proceeds from partial surrender of officers’ life insurance — — 1,470 Net cash used in investing activities ( 237,083 ) ( 157,185 ) ( 139,041 ) Cash flows from financing activities: Borrowings under long-term debt agreements 1,700,000 476,000 1,297,000 Repayments of long-term debt ( 1,690,861 ) ( 1,554,890 ) ( 1,293,250 ) Debt refinancing costs ( 24,665 ) — ( 58 ) Payments for finance lease liabilities ( 3,564 ) ( 3,404 ) ( 3,447 ) Proceeds from employee stock purchase plan 4,185 — — Tax withholdings on stock-based awards ( 33 ) — — Partial settlement of member note — — ( 809 ) Cash received from noncontrolling interest — — 243 Proceeds from initial public offering, net of issuance costs — 936,041 — Repurchase of equity — ( 105 ) — Payment of contingent consideration — ( 250 ) ( 2,750 ) Payment of offering costs ( 3,844 ) — — Net cash used in financing activities ( 18,782 ) ( 146,608 ) ( 3,071 ) Net increase (decrease) in cash, cash equivalents and restricted cash 102,350 ( 35,178 ) ( 31,775 ) Cash, cash equivalents and restricted cash at beginning of year 119,540 154,718 186,493 Cash, cash equivalents and restricted cash at end of year $ 221,890 $ 119,540 $ 154,718 Supplemental cash flow disclosures: Interest paid, net $ 64,545 $ 178,960 $ 217,664 Capitalized interest $ 1,003 $ 499 $ 953 Income taxes paid $ 16,092 $ 2,388 $ 15,036 Supplemental non-cash investing and financing activities disclosures: Accounts payable and accrued expenses for capital expenditures $ 36,935 $ 19,723 $ 21,962 Accrued expenses for offering costs in initial public offering $ — $ 3,844 $ — Accrued tax withholdings on stock-based awards $ 6,552 $ — $ — Contributions of Senior Notes (Note 9) $ — $ 573,934 $ — See accompanying notes to consolidated financial statements. 68 PETCO HEALTH AND WELLNESS COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Description of Business and 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 with 1,433 pet care centers in 50 states, the District of Columbia and Puerto Rico as of January 29, 2022. The Company also offers an expanded range of consumables, supplies and services through its www.petco.com, www.petcoach.co, www.petinsurancequotes.com, and www.pupbox.com websites. The Company was formed as a Delaware limited liability company under the name PET Acquisition LLC on November 19, 2015 as an acquisition entity controlled by Scooby LP, which was indirectly owned by funds affiliated with CVC Capital Partners, Canada Pension Plan Investment Board , a Canadian company (together with CVC Capital Partners, the “Sponsors”), and certain co-investors. On January 26, 2016, the Company completed a merger (the “Acquisition”) whereby Petco Holdings, Inc. converted from a Delaware corporation to a Delaware limited liability company and became a wholly owned subsidiary of the Company. Under this ownership structure, the Company had four classes of membership units: (i) Common Series A Units; (ii) Common Series B Units; (iii) Common Series C Units; and (iv) Voting Common Units. Corporate Conversion and Public Offerings In January 2021, all of the Company’s Common Series A Units, Common Series B Units, and Common Series C Units were contributed from Scooby LP to a newly formed and wholly owned subsidiary, Scooby Aggregator, LP. The Company then converted to a Delaware corporation pursuant to a statutory conversion and changed its name to Petco Health and Wellness Company, Inc. In connection with the conversion and immediately prior to the Company’s initial public offering, all outstanding membership units were converted into 171.2 million shares of newly-issued Class A common stock, 37.8 million shares of newly-issued Class B-1 common stock, and 37.8 million shares of newly-issued Class B-2 common stock. The existing balances of members’ interest and accumulated deficit prior to the conversion were reclassified to additional paid-in capital in the consolidated balance sheets. This reclassification had no effect on the Company’s results of operations. The rights of the holders of Class A common stock and Class B-1 common stock are identical in all respects, except that Class B-1 common stock does not vote on the election or removal of the Company’s directors. The rights of the holders of Class B-2 common stock differ from the rights of the holders of Class A common stock and Class B-1 common stock in that holders of Class B-2 common stock only possess the right to vote on the election or removal of the Company’s directors. 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 price was $ 18.00 per share. The Company received net cash proceeds of approximately $ 936.0 million from the initial public offering after deducting underwriting discounts, commissions, and offering expenses through January 30, 2021, with $ 3.8 million of accrued offering expenses reflected in accrued expenses and other liabilities in the consolidated balance sheets. 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 8 and Note 9 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 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. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Petco Health and Wellness Company, Inc., its wholly owned subsidiaries, and a variable interest entity for which it is the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation. 69 Use of Estimates The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 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. Fiscal Year The Company’s fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks. All references to a fiscal year refer to the fiscal year ending on the Saturday closest to January 31 of the following year. For example, references to fiscal 2021 refer to the fiscal year beginning on January 31, 2021 and ending on January 29, 2022. Fiscal 2021, 2020 and 2019 included 52 weeks. Segment Reporting Operating segments are components of an enterprise about which separate financial information is available and is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The CEO serves as the Company’s CODM. The Company manages its business as one reportable operating segment which is designed to sell pet food, supplies and companion animals, and services to pet parents across pet care center and online channels. Cash and Cash Equivalents Cash equivalents represent all liquid investments with original maturities of three months or less and include money market mutual funds. The Company maintains cash and cash equivalent balances with financial institutions that exceed federally insured limits. The Company has not experienced any losses related to these balances. Included in the Company’s cash and cash equivalents are credit and debit card receivables from banks, which typically settle within five business days, of $ 35.9 million and $ 34.6 million at January 29, 2022 and January 30, 2021, respectively. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the consolidated balance sheets to the total amounts reported in the consolidated statements of cash flows. Restricted cash is held in a trust used for certain employee benefit costs. January 29, 2022 January 30, 2021 Cash and cash equivalents $ 211,602 $ 111,402 Restricted cash included in other current assets 10,288 8,138 Total cash, cash equivalents and restricted cash in the statement of cash flows $ 221,890 $ 119,540 Outstanding checks in excess of funds on deposit (book overdrafts) totaled $ 61.5 million and $ 52.5 million at January 29, 2022 and January 30, 2021, respectively, and are reflected in accounts payable and book overdrafts in the consolidated balance sheets. Vendor Rebates and Allowances Most of the Company’s receivables are due from vendors. Receivables are stated net of an allowance for estimated credit losses, which is determined by continually evaluating individual receivables, the vendor’s financial condition and current and expected economic conditions. The additions and deductions to the allowance for estimated credit losses were not material for all periods presented. The Company receives vendor allowances, primarily in the form of cooperative advertising reimbursements, rebate incentives, prompt purchase discounts, and vendor compliance charges pursuant to agreements with certain vendors. Substantially all vendor allowances are initially deferred as a reduction of the cost of inventory purchased and recorded as a reduction to cost of sales in the consolidated statements of operations as the inventory is sold. Vendor rebates and allowances that are identified as specific, incremental and identifiable costs incurred by the Company in selling the vendors’ products are classified as a reduction of selling, general and administrative expenses in the consolidated statements of operations as the costs are incurred, as the related costs are also classified as selling, general and administrative expenses. 70 Merchandise Inventories Merchandise inventories represent finished goods and are stated at the lower of cost or net realizable value. Cost is determined by the average-cost method and includes inbound freight charges. Physical inventories are performed on a regular basis at pet care center locations and cycle counts are performed for inventory at distribution centers. During the period between counts at pet care center locations, the Company accrues for estimated losses related to inventory shrinkage based on historical inventory shrinkage results and current trends in the business. Inventory shrinkage may occur due to theft, loss, or the deterioration of goods, among other reasons. The Company assesses its inventory for estimated obsolescence or unmarketable inventory and writes down the difference between the cost of inventory and the estimated market value based upon historical mark-downs, supply on-hand and assumptions about future sales. Fixed Assets Fixed assets are stated at cost or fair value as of the date of the Acquisition less accumulated depreciation and amortization. Pet care center facilities and equipment under finance leases are recorded at the present value of lease payments at the inception of the lease. Maintenance and minor repairs are expensed as incurred. Buildings, equipment, furniture and fixtures are depreciated using the straight-line method over the estimated useful life of the asset. Leasehold and building improvements are amortized using the straight-line method over the term of the lease or the estimated useful life of the improvement, whichever is shorter. Land is not depreciated. Amortization of fixed assets financed through finance leases is included in depreciation and amortization expense. The Company’s fixed assets are generally depreciated or amortized using the following estimated useful lives: Buildings 30 years Equipment 3 to 7 years Furniture and fixtures 4 to 7 years Leasehold and building improvements 5 to 10 years Costs incurred to develop internal-use software during the application development stage, which include costs to design the software configuration and interfaces, coding, installation and testing, are capitalized and reported at cost, less accumulated amortization. Costs of significant upgrades and enhancements that result in additional functionality are also capitalized, whereas costs incurred for maintenance and minor upgrades and enhancements are expensed as incurred. Software and capitalized development costs are included in the Company’s equipment fixed asset category and are amortized using the straight-line method over the estimated useful life of the asset. The Company assesses its fixed assets, including internal-use software, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The review of recoverability is based on estimates of the undiscounted future cash flows expected to be generated by an asset (or group of assets) at a pet care center level. If impairment exists due to the inability to recover the asset’s carrying value, impairment losses are measured as the amount by which the asset’s carrying value exceeds its fair value using the income approach and are recorded as a reduction of the related asset and charged to the consolidated statements of operations. Goodwill Goodwill represents the excess of the cost of acquired businesses over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed. Goodwill is not amortized. The Company performs its annual impairment test during the fourth quarter of each fiscal year, or more frequently when warranted by events or changes in circumstances. The Company has the option to first perform a qualitative assessment of its goodwill to determine whether it is necessary to perform a quantitative impairment test. If the Company concludes it is more likely than not that its goodwill is impaired, management evaluates the recoverability of goodwill by comparing the carrying value of the Company’s reporting unit to the fair value. An impairment charge is recorded for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the loss recognized not exceeding the total amount of goodwill allocated to that reporting unit. 71 The Company has one reporting unit. In cases where the quantitative test is performed, the fair value of the Company’s reporting unit is estimated by a third party valuation firm. Fair value estimates used in the quantitative impairment test include calculations using a discounted cash flow analysis and a public company analysis. The discounted cash flow analysis measures the value of an asset by the present value of its future estimated cash flows. The public company analysis analyzes transactional and financial data of publicly traded companies to develop valuation multiples. These multiples are then applied to the Company to develop an indication of fair value. Significant assumptions inherent in the valuation methodologies for goodwill are employed and include, but are not limited to, prospective financial information, growth rates, discount rates and comparable multiples from publicly traded companies in similar industries. Trade Name The Company’s trade name has an indefinite life. The Company performs its annual impairment test during the fourth quarter of each fiscal year, or more frequently when warranted by events or changes in circumstances. The Company also has the option to first perform a qualitative assessment of its trade name to determine whether it is necessary to perform a quantitative impairment test. In cases where the quantitative test is performed, the fair value of the Company’s trade name is estimated by a third party valuation firm using the relief from royalty valuation method. Significant assumptions inherent in the valuation methodologies for the trade name are employed and include, but are not limited to, prospective financial information, royalty rates and discount rates. An impairment charge is recorded for the amount by which the carrying amount of the trade name exceeds its fair value. Joint Ventures, Equity Method Investments, and Variable Interest Entities Investments for which the Company exercises significant influence but does not have control are accounted for under the equity method. Equity method investment activity is primarily related to a 50 % joint venture with Grupo Gigante, S.A.B. de C.V. (the “Mexico joint venture”) to establish Petco locations in Mexico. The Company’s share of the investee’s results is presented as either income or loss from equity method investees in the accompanying consolidated statements of operations. The equity method of accounting is applicable for the Mexico joint venture as the Company does not own more than 50% of voting power, but has significant influence over the operation and financial policies of the investee. The joint venture is not material to the Company’s consolidated financial statements. The Mexico joint venture purchases certain inventory items and pet care center assets from the Company. The Company also receives royalties from the Mexico joint venture for the use of its trademarks. Revenues generated from these transactions were not material in fiscal 2021, 2020, and 2019. The cumulative unrealized foreign currency adjustment on the translation of the Company’s investment in the joint venture and the foreign currency translation impact of the royalty receivable are recorded in accumulated other comprehensive income (“AOCI”), net of tax. The Company consolidates variable interest entities (“VIEs”) where it has been determined that the Company is the primary beneficiary of those entities’ operations. The Company holds a 50 % investment in a joint venture with a domestic partner to build and operate veterinary clinics in Petco locations, which was previously accounted for under the equity method. In March 2019, the Company entered into an amended agreement governing the joint venture’s operations and determined that the Company had the power to direct the activities most important to the VIE. As a result, the joint venture is a VIE for which the Company is now the primary beneficiary. Accordingly, the assets, liabilities, and noncontrolling interest of the VIE, which were not material, were measured at fair value as of the date the Company became the primary beneficiary in accordance with Accounting Standards Codification (“ASC”) 805 – Business Combinations. The results of operations and statements of financial position of the VIE are included in the Company’s consolidated financial statements beginning in March 2019. Under the amended agreement, the domestic partner provides certain management and support services to the joint venture. These services include administrative, financial reporting, compliance, and technology support services in connection with the operation and growth of the joint venture. As compensation for these services, the joint venture pays the domestic partner a quarterly joint venture management fee equal to a portion of clinic revenues, subject to a minimum fixed fee. The Company incurred and recorded $ 2.5 million , $ 2.0 million, and $ 1.4 million of joint venture management fees under this agreement in fiscal 2021, 2020, and 2019, respectively, which are included in selling, general and administrative expenses in the consolidated statements of operations. In March 2022, the 72 Company entered into an agreement to purchase the remaining 50 % of the issued and outstanding membership interests of the joint venture. The transaction is expected to close in the second quarter of fiscal 2022. Fair Value Measurements Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which the Company would conduct a transaction, in addition to the assumptions that market participants would use when pricing the related assets or liabilities, including non-performance risk. A three-level hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 — Unobservable inputs for the asset or liability. The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, trade accounts payable, and accrued expenses and other current liabilities approximate fair value based on the short-term maturities of these instruments. Refer to Notes 8, 9, 10 and 11 for fair value disclosures for the senior secured term credit facilities, senior notes, derivatives, and other types of assets and liabilities measured at fair value, respectively. Self-Insurance Reserves The Company is self-insured for workers’ compensation, general, auto liability and employee-related health care benefits, a portion of which is paid by the Company’s employees. Additionally, the Company has insurance coverage to limit its exposure above a per occurrence retention limit. These insurance policies have stated maximum coverage limits after which the Company bears the risk of loss. The Company determines the related liabilities using a number of factors including historical experience and trends related to claims and payments, information provided by the Company’s insurance brokers and actuaries, an estimate of incurred but not reported claims and industry experience and trends. Estimates of future claim costs for workers’ compensation, general, auto liability and employee-related health care benefits are recorded on an undiscounted basis. All estimates of ultimate loss and loss adjustment expense and resulting reserves are subject to inherent variability caused by the nature of the insurance process. The potentially long period of time between the reporting of an occurrence of an incident and the final resolution of a claim and the possible effects of changes in the legal, social and economic environments contribute to this variability. The Company reports self-insurance liabilities gross of insurance recoveries. As of January 29, 2022, insurance recoveries of $ 5.7 million and $ 15.9 million were recorded in other current assets and other long-term assets, respectively. As of January 30, 2021, insurance recoveries of $ 5.8 million and $ 17.2 million were recorded in other current assets and other long-term assets, respectively. 73 Self-insurance reserves are reflected in the consolidated balance sheets as follows (in thousands): January 29, 2022 January 30, 2021 Current: Workers’ compensation and employee-related health care benefits $ 23,699 $ 21,834 General and auto liability reserves 4,733 4,737 $ 28,432 $ 26,571 Non-current: Workers’ compensation reserve $ 44,706 $ 45,794 General and auto liability reserves 11,780 12,131 $ 56,486 $ 57,925 The current portion and non-current portion of self-insurance reserves for workers’ compensation and employee-related health care benefits are included in accrued salaries and employee benefits and other long-term liabilities, respectively, in the consolidated balance sheets. The current portion and non-current portion of self-insurance reserves for general and auto liability costs are included in accrued expenses and other liabilities and other long-term liabilities, respectively, in the consolidated balance sheets. Revenue Recognition The Company recognizes revenue when control of promised goods or services is transferred to customers, in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services. See Note 2 for further discussion on revenue recognition. Cost of Sales Cost of sales includes the following types of expenses: • Direct costs (net of vendor rebates, allowances and discounts for products sold) including inbound freight charges; • Shipping and handling costs associated with sales to customers; • Freight costs associated with moving merchandise inventories; • Inventory shrinkage costs and write-downs; • Payroll costs of pet groomers, trainers, veterinarians and other direct costs of services; and • Costs associated with operating the Company’s distribution centers including payroll, occupancy costs and depreciation Selling, General and Administrative Expenses Selling, general and administrative expenses include the following types of expenses: • Payroll and benefit costs of pet care center and corporate employees; • Occupancy and operating costs of pet care center and corporate facilities; • Depreciation and amortization related to pet care center and corporate assets; • Credit card fees; • Store pre-opening and remodeling costs; • Advertising costs; and • Other selling and administrative costs 74 Advertising Expenses The Company records advertising expense as incurred and classifies advertising costs within selling, general and administrative expenses in the consolidated statements of operations. The Company’s advertising expenses, net of cooperative advertising reimbursements, were $ 227.9 million, $ 168.4 million, and $ 97.7 million for fiscal 2021, 2020, and 2019, respectively. Vendor cooperative advertising reimbursements reduced total advertising expense by $ 32.5 million, $ 25.7 million, and $ 18.4 million for fiscal 2021, 2020, and 2019, respectively. Leases The majority of the Company’s lease liabilities are real estate operating leases from which pet care center, corporate support, and distribution operations are conducted. The Company also leases equipment, vehicles, and certain pet care center locations under finance leases. Lease terms generally do not include options to terminate the lease and only include options to extend the lease, if it is reasonably certain that the option will be exercised. For any lease with an initial term in excess of 12 months, the related lease assets and liabilities are recognized on the consolidated balance sheet as an operating or finance lease at the commencement of the lease agreement. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. The Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term. Operating lease assets represent the right to use an underlying asset for the lease term, and operating lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are recognized based on the present value of future payments over the lease term at the commencement date. The Company uses a collateralized incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. Operating leases typically require payment of certain non-lease costs, such as real estate taxes, common area maintenance and insurance. These components comprise the majority of the Company’s variable lease costs and are excluded from the present value of lease liabilities unless an event occurs that results in the payments becoming fixed for the remaining term. The remaining lease and non-lease components are accounted for together as a single lease component for all underlying classes of assets. Operating lease assets are adjusted for lease incentives, initial direct costs, impairments, and exit or disposal costs. Operating lease costs are recognized on a straight-line basis from the commencement date to the end of the lease term. Operating lease costs relating to distribution centers are included in cost of sales, and operating lease costs relating to pet care center and corporate support locations are included in selling, general and administrative expenses in the consolidated statements of operations. Amortization on finance lease right-of-use assets relating to distribution centers are included in cost of sales, and amortization on finance lease right-of-use assets relating to pet care center and corporate support locations are included in selling, general and administrative expenses in the consolidated statements of operations. Interest on finance lease right-of-use assets is included in interest expense in the consolidated statements of operations. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company’s sublease portfolio consists mainly of operating leases with a domestic partner to operate dog boarding and daycare facilities, which are not material. The Company records contractual obligations associated with the retirement of long-lived assets at their fair value at the time the obligations are incurred. These obligations arise from certain leases and primarily relate to the cost of removing leasehold improvements and certain fixtures from such lease sites and restoring the sites to their original condition. Upon initial recognition of the liability, that cost is capitalized as part of the related long-lived asset and depreciated on a straight-line basis over the estimated useful life of the asset. Activity related to these obligations in fiscal 2021, 2020, and 2019 was not material. The Company’s asset retirement obligation was $ 6.9 million and $ 5.8 million at January 29, 2022 and January 30, 2021, respectively, and is included in other long-term liabilities in the consolidated balance sheets. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date. Valuation allowances, if any, are recorded against net deferred tax assets when it is considered more likely than not that some portion or all of a deferred tax asset may not be recoverable. Deferred tax assets and liabilities are recorded as either net non-current assets or net non-current liabilities on the consolidated balance sheets. Refer to Note 14 for further disclosures of the Company’s income taxes. 75 Management regularly evaluates the likelihood of recognizing the benefit for income tax positions it has taken in various federal and state filings by considering relevant facts, circumstances and information available. The authoritative guidance clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold for recognizing benefit of a tax position is that such position is more likely than not to be sustained upon examination by the taxing authority, including resolution of any related appeals or litigation processes, and is based on the technical merits of the position. Equity-Based Compensation Equity-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the vesting period of the award, which is also the requisite service period, based upon the corresponding vesting method and probability of vesting (Note 13). The Company recognizes the effect of pre-vesting forfeitures as they occur. Equity Valuation The per unit fair value of equity underlying the partnership unit awards prior to the Company’s initial public offering was determined by the Company’s board of directors based on enterprise valuations performed by management with the assistance of a third-party valuation firm, taking into consideration any recent market transactions involving the Company’s equity. The valuation of the equity of any private company involves various estimates and assumptions that may differ from actual values. In fiscal 2019 and for a portion of fiscal 2020, the Company’s equity value was determined using a combination of two valuation approaches: Income Approach – estimates the fair value based on the present value of the Company’s future estimated cash flows and the residual value of the Company beyond the forecast period. These future cash flows, including the cash flows beyond the forecast period for the residual value, are discounted to their present values using an appropriate discount rate, to reflect the risks inherent in the Company achieving these estimated cash flows. Market Approach (specifically, the guideline public company method) – estimates fair value based upon the observed valuation multiples of comparable public companies, the equity of which is freely-traded by investors in the public securities markets. Beginning in the third quarter of fiscal 2020 and prior to its initial public offering, the Company determined its equity value using the probability weighted expected return method (“PWERM”), or the hybrid method. Under the hybrid method, multiple valuation approaches are used and then combined into a single probability weighted valuation using a PWERM, which considers the probability of an initial public offering scenario. The results of the valuation approaches were weighted based on a variety of factors including: current macroeconomic environment, current industry conditions and length of time since arms-length market transaction events. Additionally, a discount for lack of marketability was applied to account for the lack of access to an active public market. The resulting value was then allocated to outstanding equity using an option-pricing model. Pre-Opening Costs Costs incurred in connection with opening new pet care centers and hospitals are expensed as incurred and are included in selling, general and administrative expenses in the Company’s consolidated statements of operations. Such costs include advertising, payroll, initial supplies and utilities. 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 Company’s variable-rate debt and limit its 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 AOCI. The interest rate caps were settled in accordance with their contractual terms on January 29, 2021 . 76 Refer to Note 10 for further disclosures of the Company’s derivative instruments and hedging activities. Recent Accounting Pronouncements In March 2020, the FASB issued Accounting Standards Update No. 2020-04 – Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions affected by the anticipated transition from LIBOR. As a result of the reference rate reform initiative, certain widely used reference rates such as LIBOR are expected to be discontinued. The guidance is designed to simplify how entities account for contracts, such as receivables, debt, leases, derivative instruments and hedging, that are modified to replace LIBOR or other benchmark interest rates with new rates. The guidance is effective upon issuance and may be applied through December 31, 2022. The Company is currently evaluating the impact of this accounting standard, but does not expect a material impact on the consolidated financial statements and related disclosures. 2. Revenue Recognition The Company generates revenue primarily from the sale of products and services. Revenue is recognized when the control of promised goods or services is transferred to customers, in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services. Control refers to the ability of the customer to direct the use of, and obtain substantially all of, the remaining benefits from the goods or services. Net sales by product type and services were as follows (in thousands): Fiscal years ended January 29, 2022 January 30, 2021 February 1, 2020 (52 weeks) (52 weeks) (52 weeks) Consumables $ 2,533,755 $ 2,123,499 $ 2,054,280 Supplies and companion animals 2,603,104 2,328,663 1,938,904 Services and other 670,290 468,040 441,330 Net sales $ 5,807,149 $ 4,920,202 $ 4,434,514 For all contracts with customers, the Company evaluates whether it is the principal (i.e. to report revenue on a gross basis) or agent (i.e. to report revenue on a net basis). Generally, the Company is the principal in its contracts with customers as it controls the related goods or services before they are transferred to the customer. Revenue from product sales and services is reported net of sales refunds, which includes an estimate of future returns based on historical refund rates, with a corresponding reduction to cost of sales. The Company records a refund liability for sales returns, which is included in accrued expenses and other liabilities, and a corresponding asset for anticipated cost recoveries, which is included in other current assets. There is inherent judgment in estimating future refunds as they are susceptible to factors outside of the Company’s influence. The Company has significant experience in estimating the amount of refunds based primarily on historical data. Revenue is recognized net of applicable sales tax in the consolidated statements of operations. Sales tax liability is included in accrued expenses and other liabilities in the consolidated balance sheets. The Company’s contract liabilities primarily relate to product merchandise not yet delivered to customers, unredeemed gift cards, services not yet completed, and options that provide a material right to customers, such as its customer loyalty program. Substantially all of the Company’s remaining performance obligations have an original expected duration of one year or less. The Company did no t have any material contract assets as of January 29, 2022 and January 30, 2021. 77 Product Revenue Product revenue is recognized when control passes, which generally occurs at a point in time when the customer completes a transaction in a pet care center and receives the merchandise. The Company’s payment terms are typically at the point of sale. For transactions initiated online, customers choose whether to have it delivered to them (using third-party parcel delivery companies) or to collect their merchandise from one of the Company’s pet care centers (“buy online, pick up in store,” or “BOPUS”). For items delivered directly to the customer, control passes and revenue is recognized when delivery has been completed to the customer, as title has passed and possession has transferred to the customer. For BOPUS sales, control passes and revenue is recognized once the customer has taken possession of the merchandise. Any fees charged to customers for delivery (such as shipping and handling) are a component of the transaction price and are recognized when delivery has been completed. The Company uses delivery information to determine when to recognize revenue for products and any related delivery fee revenue. Service Revenue The Company recognizes service revenue from pet grooming, veterinary care, and certain other in-store services once the service is completed, as this is when the customer has the ability to direct the use of and obtain the benefits of the service. Payment terms are typically at the point of sale, but may also occur upon completion of the service. The Company’s service contracts are primarily with retail and veterinary customers. The Company recognizes service revenue from dog training ratably over the life of the contract, as this pattern best depicts when customers use the services provided and, accordingly, when delivery of the performance obligation occurs. Gift Cards The Company sells its own gift cards to customers in its pet care centers, online, and through select third parties. The Company recognizes revenue from gift cards when gift cards are redeemed by the customer. The Company also recognizes revenue for the portion of gift card values that is not expected to be redeemed (“breakage”). Breakage is estimated based upon historical redemption patterns and other factors, such as laws and regulations applicable to each jurisdiction. There is judgment in assessing redemption patterns and the ultimate value of gift cards that is not expected to be redeemed. Sales Incentives and Customer Loyalty Program The Company has a customer loyalty program that allows members to earn points for each qualifying purchase. Points earned enable members to receive a certificate that may be redeemed on future purchases generally within 45 days of the issuance date. The loyalty program points represent customer options that provide a material right and, accordingly, are performance obligations for each applicable contract. The relative standalone selling price of points earned by loyalty program members is deferred and included as part of accrued expenses and other liabilities in the consolidated balance sheets based on the amount of points that are projected to be redeemed, subject to breakage. The Company’s contract liabilities for its customer loyalty program were not material as of January 29, 2022 and January 30, 2021. Revenue is recognized for these performance obligations as actual redemptions occur and the Company updates its estimate of the amount of points that are projected to be redeemed. There is judgment in assessing redemption patterns and the ultimate value of points that is not expected to be redeemed. The Company issues coupons that are not earned in conjunction with a purchase of a product or service, typically as part of targeted marketing activities. Additionally, the Company issues coupons in conjunction with the purchase of products or services. However, these coupons typically do not materially exceed the range of discounts given to similar customers and do not confer a material right. In both of these cases, these are not performance obligations and are instead recognized as a reduction of the transaction price when redeemed by the customer. 3. Sale-Leaseback Transaction In January 2020, the Company sold and leased back its San Antonio, Texas corporate support center for $ 19.0 million with net cash proceeds of $ 18.5 million. The transaction qualified for sale-leaseback accounting, in which the Company recognized the sale, resulting in an initial gain of $ 3.1 million, which is reflected as a reduction 78 of selling, general, and administrative expenses. The lease has been classified as an operating lease and contains a 10 year initial term plus renewal options . 4. Other Acquisitions During fiscal 2021 and 2019, the Company completed acquisitions of small, regional veterinary businesses for total consideration of approximately $ 5.5 million and $ 3.0 million, respectively. Noncash consideration was not material. Net tangible and identifiable intangible assets acquired and liabilities assumed were not material. The acquisitions resulted in the recognition of $ 4.7 million and $ 3.0 million of goodwill, respectively. The tax-deductible portion of goodwill in these acquisitions was $ 2.4 million and $ 3.0 million, respectively. Pro forma results of operations for the acquisitions have not been presented because they are not material to the consolidated results of operations. 5. Composition of Balance Sheet Accounts Fixed Assets, Net Fixed assets, net, consisted of the following (in thousands): January 29, 2022 January 30, 2021 Equipment $ 772,454 $ 648,072 Leasehold improvements 623,201 538,841 Furniture and fixtures 329,823 280,948 Buildings and related improvements 16,959 16,872 Land 3,254 3,254 1,745,691 1,487,987 Less accumulated depreciation ( 1,018,769 ) ( 860,440 ) $ 726,922 $ 627,547 The Company’s depreciation and amortization expense for fixed assets, net was $ 171.1 million, $ 174.0 million, and $ 172.5 million for fiscal 2021, 2020 and 2019, respectively. Accrued Salaries and Employee Benefits Accrued salaries and employee benefits consisted of the following (in thousands): January 29, 2022 January 30, 2021 Accrued compensation and related taxes $ 110,347 $ 83,176 Self-insurance reserves 23,699 21,834 Accrued paid time-off 16,584 24,474 $ 150,630 $ 129,484 79 Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consisted of the following (in thousands): January 29, 2022 January 30, 2021 Accrued capital expenditures $ 36,935 $ 19,723 Accrued real estate taxes 26,662 26,921 Sales taxes payable 19,950 19,449 Deferred revenue 18,003 15,526 Accrued advertising 15,192 13,326 Other accrued expenses and liabilities 94,130 50,901 $ 210,872 $ 145,846 Other Long-Term Liabilities Other long-term liabilities consisted of the following (in thousands): January 29, 2022 January 30, 2021 Self-insurance reserves $ 56,486 $ 57,925 Finance leases 25,052 11,436 Other liabilities 52,567 64,993 $ 134,105 $ 134,354 6. Leases Lease assets and liabilities are reflected in the Company’s consolidated balance sheets as follows (in thousands): Leases Balance sheet location January 29, 2022 January 30, 2021 Assets Operating leases Operating lease right-of-use assets $ 1,338,465 $ 1,328,108 Finance leases Fixed assets, net(1) 24,500 9,350 Total lease assets $ 1,362,965 $ 1,337,458 Liabilities Current Operating leases Current portion of operating lease liabilities $ 265,897 $ 258,289 Finance leases Current portion of long-term debt and other lease liabilities 4,764 2,203 Non-current Operating leases Operating lease liabilities, excluding current portion 1,096,133 1,083,575 Finance leases Other long-term liabilities 25,052 11,436 Total lease liabilities $ 1,391,846 $ 1,355,503 (1) Finance lease right-of-use assets are recorded net of accumulated amortization of $ 19.7 million and $ 17.3 million as of January 29, 2022 and January 30, 2021, respectively. 80 The components of total lease cost are as follows (in thousands): Fiscal years ended January 29, 2022 January 30, 2021 February 1, 2020 Operating lease cost $ 422,465 $ 430,359 $ 441,981 Finance lease cost: Amortization of right-of-use lease assets 3,933 3,292 3,919 Interest on lease liabilities 876 908 973 Variable lease cost 109,723 105,859 112,709 Sublease income ( 5,091 ) ( 5,327 ) ( 5,450 ) Total lease cost $ 531,906 $ 535,091 $ 554,132 Other information for the Company’s leases is as follows (in thousands): Fiscal years ended January 29, 2022 January 30, 2021 February 1, 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 418,210 $ 399,557 $ 408,562 Operating cash flows from finance leases $ 850 $ 941 $ 973 Financing cash flows from finance leases $ 3,564 $ 3,404 $ 3,447 Lease assets obtained in exchange for lease liabilities: Operating leases $ 308,166 $ 132,829 $ 133,219 Finance leases $ 19,841 $ 613 $ 3,695 January 29, 2022 January 30, 2021 Weighted average remaining lease term: Operating leases 6.0 years 5.9 years Finance leases 3.6 years 6.6 years Weighted average discount rate: Operating leases 9.2 % 10.5 % Finance leases 4.6 % 6.2 % At January 29, 2022, the maturities of the Company’s operating and finance lease liabilities were as follows (in thousands): Fiscal years Operating leases Finance leases 2022 $ 377,379 $ 6,006 2023 344,550 17,668 2024 285,637 2,766 2025 225,226 2,422 2026 168,098 1,580 Thereafter 367,791 2,750 Total lease payments $ 1,768,681 $ 33,192 Less imputed interest ( 406,651 ) ( 3,376 ) Present value of lease payments 1,362,030 29,816 Less current portion ( 265,897 ) ( 4,764 ) Lease liabilities, excluding current portion $ 1,096,133 $ 25,052 81 7. Goodwill The changes in the carrying amount of the Company’s goodwill were as follows (in thousands): January 29, 2022 January 30, 2021 Beginning balance: Goodwill $ 2,987,273 $ 2,987,273 Accumulated impairment ( 807,963 ) ( 807,963 ) Goodwill, net $ 2,179,310 $ 2,179,310 Additions from acquisitions $ 4,681 $ — Ending balance: Goodwill $ 2,991,954 $ 2,987,273 Accumulated impairment ( 807,963 ) ( 807,963 ) Goodwill, net $ 2,183,991 $ 2,179,310 Refer to Note 11 for further discussion of the results of impairment testing performed on the Company’s goodwill. 8. 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, 20 21 , 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 Company’s obligations under the First Lien Term Loan and ABL Revolving Credit Facility are secured by substantially all of the personal property assets of the Company with differing priority rights to the various personal property assets ascribed to each facility. The credit facility agreements, while not identical, contain certain affirmative and negative covenants related to indebtedness, liens, fundamental changes in the business, investments, restricted payments and agreements and a fixed charge coverage ratio, among other things. As of January 29, 2022, the Company was in compliance with its covenants on the agreements. The credit agreements governing the First Lien Term Loan and ABL Revolving Credit Facility contain customary default provisions including, among others, the failure to make payments when due, defaults under other material indebtedness, non-compliance with covenants, change of control and bankruptcy, the occurrence of any of which would limit the Company’s ability to draw on the ABL Revolving Credit Facility and could result in the applicable lenders under the First Lien Term Loan and ABL Revolving Credit Facility accelerating the maturity of such indebtedness and foreclosing upon the collateral pledged thereunder. 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 Company accounted for the repayment as a partial extinguishment and recognized a loss on debt extinguishment of $ 12.6 million, which represents a portion of previously unamortized debt discount and debt issuance costs and is included in the accompanying consolidated statement of operations. 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 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 on 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 and interest payments commenced on June 30, 2021 . Principal payments are $ 4.25 million quarterly. 82 In connection with the March 4, 2021 transaction described above, 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 January 29, 2022, the outstanding principal balance of the First Lien Term Loan was $ 1,687.3 million ($ 1,662.1 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 January 29, 2022 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 January 29, 2022, the estimated fair value of the First Lien Term Loan was approximately $ 1,687.3 million, based upon Level 2 fair value hierarchy inputs (Note 1). 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 (Note 1). 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 January 29, 2022, 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 January 29, 2022, $ 438.2 million was available under the ABL Revolving Credit Facility, which is net of $ 61.8 million of outstanding letters of credit issued in the normal course of business and no borrowing base reduction for a shortfall in qualifying assets. Unamortized debt issuance costs of $ 4.7 million 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 January 29, 2022. 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, at the Company’s option, 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. 83 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. 9. Senior Notes Floating Rate Senior Notes On January 26, 2016, the Company issued 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 bear 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. At February 1, 2020, the outstanding principal balance of the Floating Rate Senior Notes was $ 750.0 million and the carrying amount was $ 734.4 million, net of the unamortized debt issuance costs. The weighted average interest rate on the borrowings outstanding was 9.9 % as of February 1, 2020. At February 1, 2020 the estimated fair value of the Floating Rate Senior Notes was approximately $ 701.7 million, based upon Level 2 fair value hierarchy inputs (Note 1) and the expected timing of repayment or settlement as of the reporting date. In January 2021, 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. 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. The Company accounted for the repayment as an extinguishment of debt and recognized a loss on debt extinguishment of $ 4.9 million, which represents a write-off of the remaining unamortized debt issuance costs and is included in the accompanying consolidated statement of operations. 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. At February 1, 2020, the outstanding principal balance of the 3.00% Senior Notes was $ 131.7 million. At February 1, 2020, the estimated fair value of the 3.00% Senior Notes was approximately $ 121.4 million, based upon 84 debt yields and the redemption option, which are considered Level 2 fair value hierarchy inputs (Note 1), and the expected timing of repayment or settlement as of the reporting date. The borrowings were classified as long-term obligations due to the Company’s intent and ability to refinance these obligations on a long-term basis. On January 19, 2021, 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 in connection with its initial public offering. This contribution was recorded as an adjustment to additional paid-in-capital. 10. 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 three-month LIBOR exceeds 2.25 %. The interest rate caps expired and were settled in accordance with their contractual terms on January 29, 2021 . 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. There were no amounts remaining in AOCI relating to the interest rate caps as of January 29, 2022 and January 30, 2021. Approximately $ 10.8 million and $ 2.8 million of pre-tax losses deferred in AOCI were reclassified to interest expense during fiscal 2020 and 2019, respectively. 11. 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): January 29, 2022 Level 1 Level 2 Level 3 Assets (liabilities): Money market mutual funds $ 167,277 $ — $ — Investments of officers' life insurance $ — $ 14,575 $ — Non-qualified deferred compensation plan $ — $ ( 17,453 ) $ — Investment in Rover Group, Inc. $ 32,819 $ — $ — 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 $ 158.0 million and $ 56.0 million as of January 29, 2022 and January 30, 2021, respectively. Also included in the Company’s money market mutual funds balances were $ 9.3 million and $ 7.8 million as of January 29, 2022 and January 30, 2021, respectively, which relate to the Company’s restricted cash, and are included in other current assets in the 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. The Company previously held an equity investment, in the form of multiple series of preferred stock, in A Place for Rover, Inc., an online marketplace for pet care, which was historically accounted for as an equity security 85 without a readily determinable fair value. In July 2021, A Place for Rover, Inc. 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. (“Rover”), and the Company’s equity investment was converted into shares of Rover Class A common stock. In September 2021, the Company received additional shares of Rover Class A common stock in accordance with certain earnout provisions from the July 2021 business combination. The Company now remeasures the fair value of its investment on a quarterly basis, and the resulting gains or losses are included in other non-operating income in the consolidated statements of operations. On November 23, 2021, the Company completed the sale of approximately 11 % of its Rover Class A common stock for net proceeds of $ 6.1 million in cash as part of its participation in an underwritten secondary offering by certain Rover shareholders. 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. In fiscal 2021 and 2020, the Company determined that the fair value of its reporting unit was greater than its carrying amount, and therefore no goodwill impairment charge was recorded (Note 7). In fiscal 2021 and 2020, the Company determined that the fair value of its trade name was greater than its carrying amount, and therefore no tradename impairment charge was recorded . There were no indications of impairment of the Company’s other intangible assets or equity and other investments in fiscal 2021 and 2020. In fiscal 2019, the Company determined that the fair value of its reporting unit was greater than its carrying amount, and therefore no goodwill impairment charge was recorded. In fiscal 2019, the Company determined that the carrying amount of its trade name exceeded its fair value, resulting in a trade name impairment charge of $ 19.0 million. The Company recorded impairment charges of $ 0.7 million on other intangible assets and $ 3.2 million on its other cost method investments in fiscal 2019. The related losses are included in selling, general, and administrative expenses in the accompanying consolidated statements of operations. There were no other indications of impairment of the Company’s other intangible assets or equity and cost method investments in fiscal 2019. The Company recorded fixed asset and right-of-use asset impairment charges of $ 10.4 million, $ 14.5 million $ 13.0 million in fiscal years 2021, 2020, and 2019, respectively. Impairment charges are primarily related to pet care center locations and are recorded in selling, general and administrative expense in the accompanying consolidated statements of operations. 12. Employee Benefit Plans The Company has employee savings plans that permits eligible participants to make contributions by salary reduction pursuant to either section 401(k) of the Internal Revenue Code or under the Company’s non-qualified deferred compensation plan. The Company generally matches 100 % of the first 1 % plus 50 % of the next 5 % of compensation contributed by each participating employee to the 401(k) plan. For eligible participants that hold positions as director and above, the Company matches, at its discretion, 100 % of the first 1 % plus 50 % of the next 2 % of compensation that is contributed by each participating employee to the plan. The Company match is subject to a 3 -year vesting schedule. Employees are required to complete six months of service with the Company to participate in the plan. Under the Company’s non-qualified deferred compensation plan, the Company matches 50 % of the first 6 % of compensation contributed by each participating employee to the plan from the date of eligibility until the point of time that the participating employee is eligible to participate in the Company’s 401(k) plan. Once a participating employee is eligible to participate in the 401(k) plan, the Company match is 50 % of the first 3 % of compensation contributed by the employee to the plan. In connection with the required matches, Company contributions to the plans were $ 9.2 million, $ 6.6 million, and $ 6.9 million for fiscal years 2021, 2020, and 2019, respectively. 86 13. Stockholders’ Equity In connection with its initial public offering, the Company established a new incentive plan (“the 2021 Equity Incentive Plan”) pursuant to which certain employees and non-employee directors of the Company are eligible to receive restricted stock units (“RSUs,” which include performance-based stock units), restricted stock awards (“RSAs”), non-qualified stock options, and other equity compensation awards. The Company has also established an employee stock purchase plan (“ESPP”). The Company issues new shares of Class A common stock upon exercise of stock options and the vesting of restricted stock units. As of January 29, 2022, there were 27.6 million shares of Class A common stock available for issuance pursuant to future equity-based compensation awards under the 2021 Equity Incentive Plan. 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. The following table summarizes the Company’s equity-based compensation expense by award type (in thousands): Fiscal years ended January 29, 2022 January 30, 2021 February 1, 2020 (52 weeks) (52 weeks) (52 weeks) RSUs and RSAs $ 25,459 $ 1,991 $ — Options 8,002 391 — ESPP 1,034 — — Other awards 14,770 10,533 9,489 Total equity-based compensation expense $ 49,265 $ 12,915 $ 9,489 Total related tax benefit $ 5,033 $ 329 $ 178 RSUs and RSAs The Company has both time-vested RSUs and performance-based RSUs. Time-vested RSUs are awarded to eligible employees and non-employee directors and entitle the grantee to receive shares of Class A common stock at the end of a vesting period, subject solely to the individual’s continued employment or service as a director. For the time-vested RSUs, 34 % of the units becomes vested on the anniversary of the grant date, followed by 16.5 % of the units in four equal semi-annual installments thereafter. Performance-based RSUs are awarded to eligible employees and entitle the grantee to receive shares of Class A common stock if the Company achieves specified performance goals during the performance period and the grantee remains employed through the vesting period. RSU activity under the 2021 Equity Incentive Plan was as follows (in thousands, except per share and contractual life amounts): Shares Weighted average grant date fair value per share Weighted average remaining contractual life (years) Aggregate intrinsic value Nonvested, January 30, 2021 3,414 $ 18.00 1.7 $ 88,864 Granted 449 21.81 Vested and delivered ( 926 ) 18.00 Forfeited/expired ( 350 ) 18.21 Nonvested, January 29, 2022 2,587 $ 18.63 1.0 $ 47,342 As of January 29, 2022, unrecognized compensation expense related to unvested RSUs was $ 37.4 million, which is expected to be recognized over a weighted average period of approximately 2.0 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. 87 Options The Company provides stock option grants, which are time-vested, as a form of employee compensation. For each grant, 34 % of the options generally becomes vested on the anniversary of the grant date, followed by 16.5 % of the options in four equal semi-annual installments thereafter. Stock options generally expire 10 years from the grant date. Stock option activity under the 2021 Equity Incentive Plan was as follows (in thousands, except per share and contractual life amounts): Shares subject to options Weighted average exercise price per share Weighted average remaining contractual life (years) Aggregate intrinsic value Outstanding, January 30, 2021 3,482 $ 18.00 10.0 $ 27,962 Granted — Exercised ( 1 ) 18.00 Forfeited/expired ( 154 ) 18.00 Outstanding, January 29, 2022 3,327 $ 18.00 9.0 $ 998 Exercisable, January 29, 2022 1,132 $ 18.00 8.9 $ 340 No stock option awards were granted in fiscal 2021 or fiscal 2019. The fair value of stock option awards granted in fiscal 2020 was estimated at the grant date using the Black-Scholes option pricing model with the following assumptions: Dividend yield 0.0 % Expected volatility (1) 40.4 % Risk-free interest rate (2) 0.7 % Expected term (3) 5.9 years Grant date fair value per share $ 18.00 Estimated fair value per option granted $ 7.00 (1) The expected volatility was estimated based on the historical volatility of a select peer group of similar publicly traded companies for a term consistent with the expected term of the stock options. (2) The risk-free interest rates were based on the U.S. Treasury constant maturity interest rate for a term consistent with the expected term of the stock options. (3) The expected term of the stock options represents the estimated period of time until exercise and was calculated using the simplified method. As of January 29, 2022, unrecognized compensation expense related to unvested options was $ 15.0 million, which is expected to be recognized over a weighted average period of approximately 2.0 years. ESPP The ESPP allows 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. As of January 29, 2022, 7.6 million shares of Class A common stock were available for issuance under the ESPP. Other Awards Other awards primarily consist of partnership unit awards (“Series C Units”) issued by Scooby LP to eligible employees, consultants, and non-employee directors of the Company under the 2016 Incentive Plan, which was established in connection with the Acquisition. Series C Unit awards are restricted profit interests in Scooby LP subject to a distribution threshold and have generally been issued in the form of time-based units that vest in three to five equal annual installments following the grant date. 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 88 sells 90 % of its direct or indirect holdings of the Company’s Class A common stock. No additional Series C Units have been or will be awarded following the Company’s initial public offering . For the Series C Units granted during fiscal 2020 and 2019, the weighted average fair value per unit was estimated to be $ 0.44 and $ 0.25 , respectively. The weighted average fair value per Series C Unit was estimated at the grant date using the Black-Scholes option pricing model with the following assumptions: Fiscal years ended January 30, 2021 February 1, 2020 (52 weeks) (52 weeks) Dividend yield 0.0 % 0.0 % Expected volatility (1) 60.0 - 81.9% 60.0 % Weighted average volatility (1) 81.1 % 60.0 % Risk-free interest rate (2) 0.1% - 1.3% 1.4% - 2.3% Expected term (3) 2.0 to 4.0 years 5.0 years (1) The expected volatility was estimated based on the historical volatility of a select peer group of similar publicly traded companies for a term consistent with the expected term of the Series C Units. (2) The risk-free interest rates were based on the U.S. Treasury constant maturity interest rate for a term consistent with the expected term of the Series C Units. (3) The expected term of the Series C Units was based on estimated liquidity event timing. Series C Unit activity under the 2016 Incentive Plan was as follows (in thousands): Units Outstanding, January 30, 2021 214,006 Granted — Forfeited ( 6,828 ) Outstanding, January 29, 2022 207,178 Vested, January 29, 2022 119,438 Charges with respect to awards issued pursuant to the 2016 Incentive Plan are reflected in the Company’s consolidated financial statements. Compensation expense related to Series C Units is generally not tax deductible. As of January 29, 2022, unrecognized compensation expense related to the unvested portion of Scooby LP’s Series C Units was $ 17.8 million, which is expected to be recognized over a weighted average period of 2.2 years. Earnings (Loss) Per Share Shares of Class A common stock and Class B-1 common stock participate equally in the earnings and losses of the Company and have identical rights in distribution. Basic net income (loss) per Class A and B-1 common share is based on the weighted-average Class A and B-1 common shares outstanding during the relevant period. Diluted net income (loss) per Class A and B-1 common share is based on the weighted-average Class A and B-1 common shares outstanding during the relevant period adjusted for the effect of potentially dilutive securities. Potentially dilutive securities include potential Class A common shares related to outstanding stock options and unvested RSUs, calculated using the treasury stock method. The calculation of diluted shares outstanding excludes options and RSUs where the combination of the exercise price (in the case of options) 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 antidilutive. In fiscal 2021, there were approximately 3.3 million potential shares that were anti-dilutive and excluded from the computation of diluted shares outstanding. In fiscal 2020, all outstanding stock options and unvested RSUs were excluded from the calculation of diluted loss per Class A and B-1 common share, as their effect would be antidilutive in a net loss period. There were no potentially dilutive securities outstanding in fiscal 2019. 89 Shares of Class B-2 common stock are not included in the calculation of net income (loss) per share as they only possess voting rights. Unvested RSUs contain forfeitable rights to dividend equivalent units if dividends are paid to holders of Class A and B-1 common stock. Because the dividend equivalent units are forfeitable, unvested RSUs are not considered participating securities. Unvested RSAs are not considered participating securities for earnings per share purposes, as any related dividends are forfeitable. For periods prior to the Company’s conversion to a Delaware corporation, including fiscal 2020 for which a portion of the period preceded the conversion, 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 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. Prior to the conversion, the Company’s Series C Units met the definition of participating securities, as they would have participated in distributions after certain applicable thresholds had been met. However, such thresholds had not been met in the periods presented, and holders of Series C Units were not contractually obligated to participate in losses of the Company. Accordingly, losses were not allocated to participating securities under the two-class method in these periods. Following the conversion, the Company had no Series C Units outstanding. Scooby LP’s own Series C Units (such as those granted under the 2016 Incentive Plan) do not participate in the earnings and losses of the Company and are therefore not participating securities. 14. Income Taxes Income tax expense (benefit) consisted of the following (in thousands): Fiscal years ended January 29, 2022 January 30, 2021 February 1, 2020 (52 weeks) (52 weeks) (52 weeks) Current: Federal $ 4,550 $ ( 29,869 ) $ 4,273 State 11,182 984 5,156 $ 15,732 $ ( 28,885 ) $ 9,429 Deferred: Federal $ 39,087 $ 19,604 $ ( 34,814 ) State ( 1,346 ) 5,944 ( 10,273 ) $ 37,741 $ 25,548 $ ( 45,087 ) Income tax expense (benefit) $ 53,473 $ ( 3,337 ) $ ( 35,658 ) A reconciliation of income tax expense (benefit) at the federal statutory rate with the provision for income taxes is as follows (in thousands): Fiscal years ended January 29, 2022 January 30, 2021 February 1, 2020 (52 weeks) (52 weeks) (52 weeks) Income tax expense (benefit) at federal statutory rate $ 45,751 21.0 % $ ( 6,251 ) 21.0 % $ ( 27,524 ) 21.0 % Non-deductible expenses 1,425 0.7 986 ( 3.3 ) 363 ( 0.3 ) Equity compensation 5,988 2.7 2,212 ( 7.4 ) 1,623 ( 1.2 ) State taxes, net of federal tax benefit 7,636 3.5 5,473 ( 18.4 ) ( 4,073 ) 3.1 Tax credits ( 2,500 ) ( 1.1 ) ( 1,907 ) 6.4 ( 4,150 ) 3.2 Uncertain tax positions 925 0.4 4,593 ( 15.4 ) 2 — CARES Act – carryback rate differential — — ( 8,752 ) 29.3 — — IPO transaction costs ( 5,201 ) ( 2.4 ) — — — — Other, net ( 551 ) ( 0.3 ) 309 ( 1.0 ) ( 1,899 ) 1.5 $ 53,473 24.5 % $ ( 3,337 ) 11.2 % $ ( 35,658 ) 27.3 % 90 The effective tax rate is based on expected taxable income, statutory tax rates and tax planning opportunities available to the Company. Reserves are established when positions are “more likely than not” to be challenged and not sustained. Reserves are adjusted at each financial statement date to reflect the impact of audit settlements, expiration of statutes of limitation, developments in the tax law and ongoing discussions with the tax authorities. Accrued interest and penalties associated with uncertain tax positions are recognized as part of the income tax provision. On March 27, 2020, in response to the COVID-19 pandemic, the “Coronavirus Aid, Relief and Economic Security Act” (“CARES Act”) was signed into law by the President of the United States. The CARES Act includes, among other things, U.S. corporate income tax provisions related to net operating loss carryback periods, alternative minimum tax credits, modifications to interest deduction limitations and technical corrections on tax depreciation methods for qualified improvement property. The Company re-measured deferred tax assets related to $ 67.4 million net operating losses available under the CARES Act that are expected to be carried back to the fiscal years before the Tax Act was enacted, which resulted in a benefit of $ 8.8 million that increased the effective tax rate in the fiscal year ended January 30, 2021. During the fiscal year ended January 29, 2022, the Company completed its analysis of third party legal, consulting, accounting, and other transaction costs incurred by the Company in connection with its initial public offering on January 13, 2021, which resulted in a benefit of $ 5.2 million that decreased the effective tax rate in the fiscal year ended January 29, 2022. Significant components of the Company’s deferred tax assets and liabilities were as follows (in thousands): January 29, 2022 January 30, 2021 Deferred tax assets: Inventory $ 21,203 $ 20,212 Accrued employee benefits 38,670 44,437 Net operating losses, state tax credit carryforwards 5,856 5,733 Interest expense limitation carry-forward under IRC §163(j) 14,696 22,726 Lease-related items 359,677 355,321 Other 11,646 3,392 Total deferred tax assets 451,748 451,821 Valuation allowance ( 5,863 ) ( 6,149 ) Net deferred tax assets 445,885 445,672 Deferred tax liabilities: Fixed assets ( 115,621 ) ( 91,769 ) Intangible assets ( 267,597 ) ( 264,720 ) Debt restructuring ( 2,248 ) ( 7,493 ) Lease-related items ( 347,501 ) ( 345,123 ) Investments in joint ventures ( 31,273 ) ( 16,830 ) Other — ( 657 ) Total deferred tax liabilities ( 764,240 ) ( 726,592 ) $ ( 318,355 ) $ ( 280,920 ) In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. With the exception to certain state net operating losses discussed below, management believes that it is more likely than not that the Company will realize the benefits of these deductible differences. This is based upon future reversals of existing taxable temporary differences over the periods in which the deferred tax assets are deductible. As of January 29, 2022, the Company has recorded a deferred tax asset of $ 2.5 million reflecting the benefit of $ 48.4 million in state income tax net operating loss carryforwards, which will begin to expire in fiscal 2023. The Company believes that it is more likely than not that the state net operating loss carryforward will not be realized and recorded a valuation allowance of $ 2.5 million on the deferred tax asset related to these state net operating loss carryforwards as of January 29, 2022. The Company recorded a deferred tax asset of $ 3.5 million for certain state 91 tax credits as of January 29, 2022 . The Company believe s it is more likely than not that a portion of these credits will not be realized and has recorded a $ 2.8 million valuation allowance related to these credits. If or when recognized, the tax benefits related to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction of income tax expense. The Company has approximately $ 16.4 million of unrecognized tax benefits as of January 29, 2022, of which $ 4.2 million, if recognized, would impact the effective tax rate and $ 12.2 million would result in an adjustment to the net deferred tax liability. Changes in unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands): January 29, 2022 January 30, 2021 Beginning balance $ 16,421 $ 74 Additions for tax positions taken in prior years — 16,421 Decreases related to lapse of statute limitation — ( 74 ) Ending balance $ 16,421 $ 16,421 The Company has approximately $ 1.7 million accrued for interest and penalties as of January 29, 2022 in the consolidated balance sheets and recorded $ 0.9 million in interest during fiscal 2021 in the consolidated statements of operations. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company does not anticipate that unrecognized tax benefits will significantly increase or decrease over the next 12 months. The Company is no longer subject to examination for U.S. federal income tax for periods prior to fiscal 2018. The Company is no longer subject to examination by state tax authorities for tax periods prior to fiscal 2016. The Company is currently under audit by various state jurisdictions for various years. Though the estimated completion dates of these audits are not known, it is possible that these audits will be completed within the next 12 months. In addition, the Company does not foresee other material changes to the federal or state uncertain tax positions affecting income tax expense within the next 12 months. The Company has no material foreign operations. 15. Accumulated Other Comprehensive Income (Loss) Changes in the balances of each component included in AOCI are presented below (net of tax, in thousands): Derivatives Foreign currency translation adjustment Total Balance at February 2, 2019 $ ( 873 ) $ ( 1,322 ) $ ( 2,195 ) Other comprehensive (loss) income before reclassifications ( 9,088 ) 952 ( 8,136 ) Amounts reclassified from AOCI 2,058 — 2,058 Other comprehensive (loss) income ( 7,030 ) 952 ( 6,078 ) Balance at February 1, 2020 $ ( 7,903 ) $ ( 370 ) $ ( 8,273 ) Other comprehensive loss before reclassifications ( 86 ) ( 905 ) ( 991 ) Amounts reclassified from AOCI 7,989 — 7,989 Other comprehensive income (loss) 7,903 ( 905 ) 6,998 Balance at January 30, 2021 $ — $ ( 1,275 ) $ ( 1,275 ) Other comprehensive loss — ( 963 ) ( 963 ) Balance at January 29, 2022 $ — $ ( 2,238 ) $ ( 2,238 ) 16. Commitments and Contingencies Baseball Stadium Naming Rights Commitment In March 2003, the Company entered into an agreement with San Diego Ballpark Funding LLC and Padres L.P. to name the San Diego Padres’ new stadium Petco Park. The naming rights include signage, advertising and 92 other promotional benefits. Pursuant to the agreement, the Company pays an annual contract fee. Fees for fiscal 202 1 , 20 20 , and 20 19 were $ 4.1 million, $ 4.1 million, and $ 4.0 million, respectively. These fees are included in selling, general and administrative expenses in the consolidated statements of operations, and will be adjusted by the maximum annual change related to the San Diego consumer price index per year through the 2027 Major League Baseball season. 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 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 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 particular litigation is appropriate, the Company may be subject to liability that could have a material adverse effect on its consolidated financial statements. 93 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.