Good morning, and welcome to Petco's Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Kristy Moser, Vice President and Investor Relations Officer. Please go ahead.

Thanks very much, and welcome, everybody, to Petco's Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. In addition to the earnings release, there is a presentation and infographic available for download on our website at ir.petco.com, summarizing our fourth quarter and full year 2021 results. On the call with me today are Mr. Ron Coughlin, Petco's Chairman and Chief Executive Officer; Mr. Brian LaRose, Petco's Chief Financial Officer; Mr. Mike Nuzzo, Petco's Chief Operating Officer and President of Services. In a moment, Ron and Brian will walk you through our recent financial and operating performance from the quarter and the year. Before we begin our remarks, I'd like to remind you that on this call, we will make forward-looking statements in regards to our current plans, beliefs and expectations, which are not guarantees of future performance and are subject to a number of risks and uncertainties and other factors that could cause actual results and events to differ materially from results and events contemplated by such forward-looking statements. These risks and uncertainties include those set forth in our earnings release and our filings with the Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof. And except as required by law, we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise. In addition, today's presentation contains references to non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release and our presentation as well as in our filings with the Securities and Exchange Commission. During the question-and-answer portion of today's call, please limit yourself to one question and one follow-up. With that, let me turn it over to Ron.

Thanks, Kristy. Good morning. We appreciate you joining us today. 2021 was a year of record performance and significant strategic progress for Petco, deepening our competitive moats and evolving into a definitional player in the next phase of retail that we call Retail 3.0, encompassing full leverage of omnichannel advantages, plus robust service offerings, all while having a positive impact. We're continuing to strengthen our one-of-a-kind end-to-end health and wellness ecosystem. Our brick-and-mortar experience gets better and better. Our digital assets are more powerful with sharp competitive advantages. And combined with our hands-on pet services, we can meet all of our customers' needs when, how and where they want. These capabilities combined with our ability to innovate and personalize the pet parent experience, sets Petco apart and is delivering incredible results. Full year 2021 revenue growth was 18%, which translated to 22% growth in adjusted EBITDA, reflecting the strength of our model, continued execution and operating leverage. In the fourth quarter, the Petco team once again executed with the same rigor that drove market share and profitability growth all year. Our differentiated strategy is working. We fundamentally believe that we have the best model in the category. Our team delivered yet another quarter of outperformance with comp growth of 14%, our seventh consecutive quarter of double-digit comp growth, delivering 30% growth on a two-year stack. If you look at the top 50 retailers, there are only three, including Petco, who have delivered seven consecutive quarters of double-digit comp. Let me repeat that. Of the top 50 retailers, there are only three who have delivered seven consecutive quarters of double-digit growth, and one is Petco. Consumer demand outpacing supply remained strong in the quarter. It remained strong in January, where we lapped 20% plus year ago growth, and we're pleased with what we saw in February. And we deliver those results with purpose to make a difference. To Petco, purpose-driven performance is combining stellar business results with tangible improvements in the lives of pets, pet parents and those working at Petco. And once again, we had a tangible impact on those lives that I will share later in the call. We gained share overall, gained share in digital and gained share in brick-and-mortar. Our team is executing, executing in an environment of supply chain tightness, working closer than ever with our supplier partners and nimbly addressing inflationary and labor pressures. Our focus remains on acquiring and delivering for our customers and guiding them to the best available options for their pets, an advantage of our model versus online-only players. On pricing, given our larger percentage of higher-end pet parents, customer demand remained largely inelastic in the quarter, where we realized favorable impacts from the pricing actions we took in both Q3 and Q4. In aggregate, we did not see a decline in product unit volumes for impacted SKUs. Our drive for long-term, above-market growth is powered by continued execution against our strategic growth initiatives. That growth is grounded first in the uniqueness of our ecosystem, offering a distinct competitive advantage that enables us to capture greater share of wallet and build greater loyalty to fuel growth. In brick-and-mortar, our proven step and repeat playbook, consisting of the addition of a veterinary hospital, a ready store-in-store and a JustFoodForDogs pantry, contributes to our confidence that we can drive above-category growth for years to come. Combined with a relentless cost discipline, we're able to drive the operating leverage that is evident in our results and guidance. We've consistently driven about $20 million to $30 million of annual efficiency, enabling us to both reinvest for growth and drop dollars to the bottom line. And as we continue to grow, we expect to drive even greater leverage off of our cost base. Our customer acquisition engine continues to be a competitive advantage across both new and existing pet households. In the fourth quarter, we added nearly 800,000 net new customers, bringing our total active customer count to 24.1 million at the end of 2021. Importantly, we expect these customers to be a source of sustainable growth or, said another way, a furry annuity for years to come. Spend per pet continued its upward march on the back of strengthening humanization trends driven by Gen Zers and millennials, where Petco significantly over-indexes, as well as the impact of our initiatives, like repeat delivery and Vital Care. We continue to drive strong revenue growth across services and vet with a 22% growth rate in the quarter versus a year ago, or 37% growth on a two-year stack, consistent with the trend throughout the year. As you know, we announced last week a transformational transaction to purchase the remaining stake in the Thrive hospital joint venture. This is an exciting, important milestone in our veterinary hospital journey, demonstrating our deep commitment to providing pet parents high-quality, integrated health and wellness services. This joint venture launched us into the full-service hospital business in 2017. And since that time, we built tremendous capabilities within Petco to both build and operate hospitals and recruit the best hospital teams in the industry. With this transaction and subsequent rebranding, our entire hospital network will be Vetco Total Care, one operating playbook, one team, one culture. Brian will elaborate, but this will give us even more opportunity for driving synergies with our pet care centers and optimize our veterinary support costs. Our own Vetco Total Care hospitals continued to deliver incredible results, and we are very excited for this to be our primary expansion focus going forward, as veterinary services continues to be a key element for generating tremendous shareholder value. As of year-end 2021, we reached 197 full-service veterinary hospitals in addition to over 1,000 Vetco mobile clinics, achieving our goal of 72 hospital openings in the year, continuing one of the fastest vet build-out in history, a testament to the team's ability to execute. Our ability to attract and retain talent from vets to groomers has been a key focus and driver of our success. At 5,600, we've never had more boomers. And with the joint venture acquisition, we now have over 1,000 Petco badge veterinary professionals. Make no mistake about it, we are now scale in the veterinary professional market, and vets love working at Petco. Our value proposition continues to resonate with vet with a 94% satisfaction rate, well ahead of industry benchmarks. In fact, we had a 40% increase in recommendations to work at Petco from our vets. Moving to digital, where, once again, we gained share. In Q4, our 2-year digital revenue growth was one of the highest in the industry, delivering an increase of 143%, excluding our sale of Live Aquaria, and it was 25% on a year-over-year basis. We've developed a digital destination for pet parents that really brings to life our 360-degree full health offering, leading to another quarter of share gains as we outpaced the market as well as scaling digital services bookings, which were up over 75% year-over-year. In the last 2 years, we've more than doubled the digital business. This has been driven by, first time, repeat delivery nearly doubled in the last 2 years as we revamped the program to give customers control and as we leverage some of the richest data in the category to drive precision marketing. Second, we're driving higher AOVs, largely due to personalization of our algorithms, driving larger basket sizes and strategic price increases. Third, we extended our flexible fulfillment options. 91% of customers choose either same day or BOPUS when it is available. And we're driving continuous innovation, enhancing the experience and further improving our cost advantage, which we'll share more about on Analyst Day on March 23. Fourth, our app has been downloaded 5.7 million times since launch, with app-generated revenue and active users almost doubling from the fourth quarter last year. Our app customers have become some of the most valuable customers, with spend from app customers being almost double that of non-app users. And finally, our PAW program, an acronym for Petco AdWorks. It's ramping nicely, driving revenue growth and enabling margin expansion for our digital business. Our integrated digital ecosystem is driving engagement, and our most recent cohorts are performing even better than historical levels because we're better serving the needs of pet parents than ever before. Moving now to pharmacy. We're gobbling up share as our business grew 66% year-over-year, with strong growth in both Rx food and prescriptions. We have an absolute right to succeed and see significant upside in this $11 billion category. Within our pet care center merchandise, we drove strong revenue of 10% year-over-year and 20% on a 2-year stack. Within both consumables and supplies, we mix shifted towards own brand, further deepening our competitive moats. We had growth across both consumables and supplies as well as companion animal, while driving margin expansion. Our consumables continued to surge, which is great for the long-term health of the business, as these acquired consumables customers have about a 50% higher LTVs and supplies. And I'm proud of how the team more than offset mix-driven margin pressures. We continue to be strategic about passing through inflation and shifting our mix towards premium, which is up double digits versus last year, both improving margin and expanding our competitive insulation. Promotional activity remained rational, down versus both 2020 and 2019, with the exception of Black Friday and Cyber Monday, where given the differentiation of our portfolio, supply dynamics and low LTV customers, we were selective. And the rapidly expanding frozen fresh category, where we're the #1 pet specialty retailer, we continued our leadership and drove strong double-digit growth year-over-year. A key enabler to these successes is the investments we've made in our PCCs, which have generated significant strategic advantages. In the past 2 years, we've added 1,406 same-day delivery locations, 493 ship-from-store location, 1,427 curbside pickup locations. And as a result, we've added millions of net new customers. And we are just getting started. We're disrupting the market with leading partnerships and innovation that positions us to win for the long term. In addition to the Thrive transaction that I discussed previously, in January, in partnership with Lowe's, we announced a pilot store-in-store program that brings trusted products, services and expertise for both home and pets into one convenient stop at select Lowe's locations. This partnership between 2 industry leaders is designed to elevate our brand, attract new customers and create a more complete total home solution at Lowe's. And our partnership with Rover further expanded our ecosystem with the addition of their boarding and walking services. And they, in turn, will drive Vital Care sign-up for Petco. Last week, we expanded our relationship with JustFoodForDogs, committing to add 300 new pet care center distribution points. We'll codevelop a new human-grade fresh and frozen owned brand product line under WholeHearted, which I'm very excited about, and we'll receive additional marketing support to build awareness. Additionally, Petco receive a warrant for JustFoodForDogs equity, tied to the successful execution of our 2022 plan, with the opportunity to acquire additional equity down the road. Earlier today, we announced the launch of Vital Care 2.0, an enhanced version of the most comprehensive pet wellness program in the category. From the nutrition and supplies pets need every day to the services that keep them at optimal health, Vital Care makes it easier and more affordable for you to care for your pets' whole health, all in one place, better for pets and better for Petco, driving recurring spend, loyalty and customer LTV. Vital Care 2.0 features a rich list of enhancements, including omni-channel redemption, repeat delivery integration and an exciting new affiliate partner program beginning this spring that will launch with several partners who will drive Vital Care sign-up, including Rover.com; Hill's; the San Diego Padres; Central Garden & Pet; Companion Protect; multiple rescues, including the Baltimore Animal Rescue Center, Jacksonville Humane Center and the Friends of Pima Animal Care Center; and more who will be a pipeline for Vital Care. We also expanded the program to cat parents, where the initial reaction has been strong. And while early days, since rolling out the enhanced Vital Care 2.0 program in pet care centers three weeks ago, there has been a tangible increase in sign-ups, with a quarter coming from cat parent. That's good for pets and good for Petco. This builds on the nearly 160,000 subscriptions exiting 2021. These customers have been spending three times more than the average customer. Over 20% of these members are new to food and over 30% are new to services, validating Vital Care's effectiveness in driving share of wallet for Petco. Vital Care is at the center of our go-forward customer value proposition, and today's announcement is very exciting for both pet parents and Petco. Thus far, I have focused on the performance part of purpose-driven performance. Now let me discuss purpose. Make no mistake about it, we get up every single morning committed to improving lives of pets, pet parents and our own partners. We saved over 396,000 pet lives this year and have distributed over 0.5 million free vaccines to under-resourced communities in partnership with Merck as part of our 1 million vaccine commitment. And we reunited another 2,000 pet with their loving parents with Petco Love Lost in Q4 alone, leveraging our database of over 100,000 searchable pets, including nearly 1,900 shelter locations. And we know that our Petco family, including our customers, are all devastated by what we're seeing unfold in the Ukraine. And the love that the Ukrainians have for their pets is seen in photo after photo, whether people leaving the country with pets in tow or lying in a sleeping bag in a subway station serving as a bomb shelter. Together with our nonprofit Petco Love, we're coordinating with international animal welfare partners to support the ongoing needs of pets and pet parents in Ukraine and neighboring countries offering refuge. Our thoughts are with the people and pets of Ukraine and all those impacted by the violence. We also invest to improve the lives of those who work at Petco. The Board and I have committed that as the company does better, our partners will do better. This is why in 2021, the company absorbed all benefits cost increases for employees; and why we conducted over 0.5 million hours of skills and competency training; and why every one of our PCC general managers receive stock at the time of our public offering; and why in Q4, our pet care center staff received yet another well above target bonus on average due to their exceptional execution. And as a result of these and other investments in our people, application hiring in the second half of 2021 was significantly above first half, positioning us well entering into 2022 from a labor standpoint. Our Petco partners did an amazing job serving customers even as we navigated the Omicron spike at the end of the year with a continued focus on health and safety. I'm grateful to each of our team members for how they delivered for pet and the parents that love them this quarter and throughout the past year. And with today being International Women's Day, I want to call out the incredible women across Petco, who are driving our business, leading our teams and supporting customers across the country every single day. It's truly amazing to see our entire team drive tremendous growth, advance our strategy and improve the world around us regardless of the environment. After delivering an outstanding year, our team is now relentlessly executing against our 2022 strategic priorities. The promise of the reengineered Petco that we talked about in the IPO has come to fruition. The company has never been stronger and that's showing up in the momentum we're already seeing in 2022. We participate in a rapidly growing category with scale TAM capture opportunities. We have the industry's only comprehensive health and wellness ecosystem and an advantaged omni-channel offering. We entered the year with more customers than ever who are spending more with us. And our investments in sustainable, predictable growth are working, all powered by the most passionate and best team in our space. With that, let me turn it over to one of our great team members, our CFO, Brian LaRose.

Thanks, Ron, and good morning, everyone. As Ron highlighted, the fourth quarter was yet another quarter of outperformance demonstrating the competitive moats we've built through our differentiated integrated ecosystem of premium products and services. It was a year of record revenue and profitability, and I couldn't be more pleased with how our team has executed. We're leaning into owned hands-on pet services in a way that no one else in the industry is positioned to do with Petco scale. And our decision to purchase the remaining stake in our Thrive joint venture is the latest example of that. As part of the transaction, which is expected to close in May, we will take full ownership and operational control of 98 joint venture hospital locations. Although, our linkages with Thrive were strong, we learned that our own hospitals create a next-level elevated experience, with enhanced synergies driven by our technology, data connections and membership platforms. Also, as we scaled our own model, we increasingly duplicated hospital support overhead with the joint venture that with this acquisition will give us the chance to optimize. So factoring in the expected benefit from enhanced hospital operating synergies and overhead savings and excluding the roughly $15 million of one-time costs associated with the transaction and integration, we expect that this deal will be roughly breakeven to adjusted EBITDA in year one and accretive to adjusted EBITDA in year two and beyond. Importantly, this will serve as the one integrated veterinary platform that we will use to grow our business, enabling us to maximize performance across the entire ecosystem, including our new opening. Momentum across our vet business is progressing nicely, and our value proposition is resonating, and our own vets continued to outperform the model. We opened 72 hospitals in 2021 and on our way to 900. In the early part of this year, our HR and operations teams will be focusing on integrating the 98 joint venture hospitals. With this near-term shift to joint venture integration in late Q1 and early Q2, our new hospital openings are planned to be a more modest 20 to 25 in the first half of the year. And for Q3 on, we plan to return to a quarterly opening run rate consistent with an annualized 70 per year. Diving into results, we delivered yet another quarter of record net revenue at $1.51 billion, up 13% year-over-year with comparable sales of 14% or 30% on a two-year stack with strength in transactions and average basket trends. Momentum in consumables continued, up 29% on a two-year stack and 19% year-over-year. Supplies and companion animal two-year growth was 28%, lapping stimulus-driven elevated prior year comparable. Services and other grew 64% on a two-year basis and 31% year-over-year in the quarter, benefiting from the expansion of our membership and subscription programs. We continue to deliver these results through a dynamic cost and supply environment, during which we have remained steadfast in our inventory management. While the environment is certainly challenging across retail and pet is no exception, our team is executing extremely well, and we continue to leverage our real structural advantages versus our competitors that we discussed last quarter. Inflation contributed to comparable store sales as we continue to be effective in passing through input price increases. Where possible, we've worked with our merchant partners to offset increases through terms and marketing investments. As Ron mentioned, we've taken select product pricing actions to help offset cost input increases. And in the aggregate, we've not seen a material impact on units. Moving down the P&L. Gross profit increased $66 million or 12% to $636 million. Gross margin was 42%, down 59 basis points year-over-year. The year-over-year decline was driven primarily by a mix from strength in consumables, digital and services growth and to a lesser degree, higher supply chain costs. Importantly, these impacts were materially offset by improvement in gross margin across our businesses like in consumables, digital and core services. On a quarter-over-quarter basis, gross margin was up 80 basis points driven by gross margin expansion across most of our business, benefiting from pricing actions taken in late Q3 and Q4 and responsible cost management while delivering for our customers. SG&A as a percent of revenue improved from 37.6% in Q4 2020 to 36.5% in Q4 2021, improving 106 basis points, demonstrating the leverage across our model. On an absolute basis, SG&A expense was $553 million, up $50 million or 10% from prior year, as we supported growth and continue to invest in sustained future growth through marketing our infrastructure and our people. Q4 adjusted EBITDA was $172 million, an increase of 16% from prior year, outpacing revenue growth. Q4 adjusted EPS improved by $0.11 or 65% to $0.28 based on 266 million weighted average fully diluted shares as well as a normalized effective tax rate of 26%. Now turning to the full year. 2021 net revenue grew 18% or $900 million versus last year to $5.8 billion with total comp sales up 19%, with strength across all major parts of our business and positive transactions and basket trends for the year. Gross profit for full year 2021 increased by 15% or $320 million from last year to $2.4 billion. Gross margin in 2021 was 41.8%, down 100 basis points from 2021, driven by the same dynamics that I referenced earlier. SG&A as a percent of revenue improved from 38.9% in 2020 to 37.2% in 2021, improving 166 basis points, demonstrating the leverage across our model. On an absolute basis, SG&A expense was $2.2 billion, up $248 million or 13% from prior year as we supported growth and continued to invest and sustain future growth through marketing our infrastructure and our people. 2021 adjusted EBITDA was $591 million, an increase of 22% from prior year, again, outpacing revenue growth. 2021 adjusted EPS improved by $0.63 or 225% to $0.91 based on 265 million weighted average fully diluted shares as well as a normalized effective tax rate of 26%. Turning to our Pet Care Centers base. We ended 2021 with 1,433 Pet Care Centers in the United States and Puerto Rico, down 21 from the prior year, driven by strategic closures and timing of our footprint optimization. Our Mexico joint venture ended the quarter with 108 Pet Care Centers, up 12 from the prior year. Looking forward in 2022, we expect our footprint to remain roughly flat to where we started in 2021 at approximately 1,450 Pet Care Centers across the US and Puerto Rico with further expansion in Mexico, where we continue to be the market leader. Our Mexico business continues its double-digit trajectory, extending its number one online and offline position and plan to expand into Chile later this year. We continue to have strong liquidity, ending the quarter with $650 million, inclusive of $212 million cash and cash equivalents and $438 million of availability on our revolving credit facility. Looking at cash flow. We generated strong cash from operations of $358 million and had $239 million in capital expenses. In the same period, we generated robust free cash flow of $119 million, up 8% versus prior year, while we increased CapEx by 50% year-over-year as we continue to reinvest in future sustainable growth. Our net leverage ratio reduced by 22% at 2.5x in 2021 year-over-year, with a significant reduction in our debt over the last 14 months. I know many of you are looking for insight into our long-term capital allocation plan, which we will provide at our upcoming Analyst Day. Looking forward, building on our strong performance in 2021 with a track record of execution, we are confident in our ability to drive continued growth and market share gain in 2022. In full year 2022, we expect to deliver net revenue of $6.15 billion to $6.25 billion, or a 6% to 8% increase from 2021; adjusted EBITDA between $630 million and $645 million, or a 7% to 9% increase from 2021; and adjusted EPS between $0.97 and $1 based on $76 million of net interest expense, 267 million shares outstanding and an effective tax rate of 26%. While we don't provide gross margin specific guidance, it's helpful to note that Q1 typically has lower gross margin than Q4 due to seasonality. Additionally, in the first quarter of 2021, gross margin benefited from stimulus driven higher supply sales. Last, we expect capital expenditures at the $275 million to $325 million range, inclusive of incremental investments in digital, the build out of our vet hospitals, innovation and enhanced supply chain capacity in response to sales growth. We will share more on this in two weeks at our 2022 Investor Day. Our guidance reflects our current expectations around inflationary costs, the strength of our unique health and wellness ecosystem that continues to set Petco apart and our confidence in our ability to deliver against our strategic priorities like vet, digital and owned and exclusive brands as well as the significant cost discipline Ron mentioned earlier, as we continue our cost savings programs. And finally, relentless execution against our proven strategy and initial revenue trends in 2022 give us confidence looking to the year ahead. With that, Ron, Mike and I will now take your questions.

Thank you. We will now begin the question-and-answer session. And the first question will be from Steven Zaccone with Citi. Please go ahead.

Great. Good morning everyone. Thanks for taking my question. Nice to see the continuing strength in the business. First question I had was just on pricing expectations within the full year top line guidance. You gave some commentary you've been able to pass on price. But more broadly, I was curious, how do you think about your positioning within the rest of the pet industry, especially if the mass channel maybe gets a little bit more promotional this year?

Thanks, Steve. Appreciate the question. Let me just give a lay of the land, then I'll go into looking forward. One of the great things about pet is it's relatively immune to macroeconomic trends. Premiumization has been a multiyear trend. And even today, we're seeing its continuation in this environment. The best example of that is fresh frozen, where we have a higher ring, higher frequency and where we see outsized growth and by the way, better trip frequency. In the higher end customer where we sit, we see pricing is relatively inelastic. And the other thing we've talked about before is 70% of our product is either owned, exclusive or covered by that. So our exposure to pricing is less than most other businesses. And as Brian said on the call, we haven't seen a decline in unit volumes. That said, if there was more pricing that came, we feel pretty confident that, that could be passed through. But we want to make sure we have offers for all customers. So we have the fresh frozen at the top. We have high-end kibble. We have mid-range kibble. And we also have Vital Care for a comprehensive program that provides value to customers. So we see the market is rational. And given the supply and demand dynamics, we anticipate continuing to be rational, but we're less exposed than probably any other competitor. And the mass channel doesn't really have many of the brands that we really do the majority of our business with.

Great. That's very helpful. And then just a follow-up on the top line. You gave some comments about gross margin cadence as we think through the year. Is there anything to keep in mind as we think about same-store sales or just general revenue growth as we think about the cadence of the year? Thanks very much.

Yes. The one thing I'd say, Steve, is similar to the comments I made on Q4 to Q1 seasonality. Remember that in Q1 last year, we called out a 700 basis point to 800 basis point benefit from stimulus. And we grew 27% last year, which was marked by outsized growth in supplies in companion animal, where we grew 33%. So other than that, I wouldn't call out any quarterly dynamics, but just a reminder about the comments last year on stimulus.

Perfect. Thanks, guys.

Thank you.

The next question will be from Michael Lasser with UBS. Please go ahead.

Good morning. Thanks a lot for taking my question. How much did inflation contribute to the 14% same-store sales increase in 4Q? And given the rise in inputs like grain, how much inflation have you embedded into your 5% to 8% growth outlook for 2022?

Yes. Thanks for the question, Michael. I won't get into specifics on the quarter. What I will tell you is for the year, inflation was about a low single-digit impact to our total comp, which was in line with the cost input increases that we saw. We did see a little bit bigger pickup on that in Q4. But as we mentioned on the call, no elasticity impact, as we mentioned in our Q3 earnings call as well. And then going forward, I would just tell you that we factored in our current expectations of cost input increases and any associated pricing actions.

And Brian, did that take into account the recent move in some of the commodity costs? And how that's going to translate to prices that you're going to see in the coming weeks and months?

Yes, correct. Our current understanding -- look, the market, Michael, remains fluid. We have really good relationships with our vendors. I think our team did a great job of managing through the last year. We continue to remain focused on staying out in front of demand, and our guidance reflects what we expect in terms of cost inputs and pricing.

Okay. And my follow-up question is, it sounds like part of the improvement quarter-to-quarter in the gross margin was driven in part by being more strategic with promotions as well as passing along some of the price increases. So outside of the first quarter, where you're expecting a difficult compare, is there a line of sight to the gross margin stabilizing even with some of the shift to the lower gross margin businesses that still have a better-than-average overall operating margin?

Yes. It's a good question, Michael. I mean, let me start with, as a reminder, we're focused on expanding EBITDA margins. We did it in 2020. We did it in 2021. Our guidance reflects that in 2022. You make a good point in terms of the mix dynamics, but let me ground us in a little bit of fundamentals here. Our services business is firing on all cylinders, and that's really margin P&L geography. More than anything else, it's basically EBITDA neutral. We do have some margin dynamics across digital and brick-and-mortar given channel fulfillment, which we leverage. And then our consumable business has really done better than we expected with share gains at kind of 2x what we saw a year ago. Relative to your point on Q4, the team did a great job managing those impacts with cost management and partnerships with our vendors. But I would tell you, quarter-on-quarter, we saw improvement in our gross margin across all businesses. So consumables was better. Core services was better. Digital was better. And I won't get into any more specific gross margin guidance. But as I mentioned on the call earlier, two dynamics in play, Q4 and Q1, normal seasonality and then the year-over-year stimulus benefit from last year.

Okay. Thank you very much.

Thank you.

The next question will come from Anna Andreeva with Needham. Please go ahead.

Great. Thanks. Good morning, guys and congrats. Really nice result. We had a question on net customer adds, just continue to look really strong for the quarter. Can you share with us how do you think about that number for the year? And any color on where you think these customers are coming from in terms of channels? And maybe any additional channel -- any additional color on performance of the 2020 cohort would be great. And then we had a follow-up.

Yes. Thanks for the question, Anna. We're pleased with the approximately 100,000 new adds in the quarter. In 2021, we had millions of net new adds taking us to 24.1 million as we speak -- or at the end of the quarter, rather. And we've built a strategic capability that, for the last three quarters, had delivered customer adds at a multiple of our key online competitors, and that's something that we're very proud of. They're helping to drive our growth today and continue to do so in the future. I've talked before about this furry annuity concept. And with our more robust analytics capability that we'll talk about at our analyst meetings, we're getting better and better at driving spend per customer. We're getting better and better at driving share of wallet. So we're now compounding this customer add muscle we've built with our ability to drive spend per customer. I would add that it's early days of Q1, but we're pleased with what we're seeing thus far. In terms of your channel question, we're adding customers across both channels. I will tell you that 2021 vis-à-vis 2020; brick-and-mortar was even stronger. So the fear of the people weren't going to return to brick-and-mortar didn't -- it just didn't happen. We saw a return to brick-and-mortar, not only a return of our existing customers, but we picked up a lot of new customers in our brick-and-mortar. We also picked up a lot of new customers. If you want to get a same-day delivery, we're one of the only places where you can get a same-day delivery if you want to get both because you can't get that in our online competitors. So we saw strength across both channels.

Okay. That's great. Really helpful, Ron. I appreciate that. And just as a follow-up on the Lowe's partnership, I know it's still very early days, but could you just give us an update on how the rollout is proceeding? I'm curious how the mix of merchandise will differ compared to a typical pet care center location, whether in terms of owned or third-party brands. And do you see additional opportunities for new partnerships to get that incremental distribution down the road? Thank you so much.

Yeah, great question. It's something we're really excited about. I would first ladder up. Lowe's to me is both an initiative and it's symbolic. We have been, we are, and we're dedicated to being an innovation leader in our space. And Lowe's, to me, is a great example of that. We're looking for partners that give us access to new customers, that have high density of pet parents, who provide supplemental services and partners that are appealing to our higher-end customer base. Lowe's has a fantastic brand, a great experience, a great culture, and they have a lot of DIY focused millennial and Gen Zer customer base who are incremental to ours. One of the other things that I love about this partnership, I grew up at PepsiCo and that's one of the brand building academies. And I have been -- I was amazed when I came in and we only made it more robust, this ability to build brands and this ability to build products. And it is just great to see us letting the kids leave the house in terms of our four walls and going into broader distribution on products like ready products like WholeHearted. And more and more, you'll see us take that brand building capability and take it outside our house for incremental customers and incremental revenue. It's early days on that partnership. But the initial results are promising is all I would say at this stage.

And that’s great. Thank you so much and best of luck.

Thank you.

And the next question is from John Heinbockel with Guggenheim Partners. Please go ahead.

Okay. So Ron, I want to start with Vital Care 2.0. As you think about formulating that and then marketing that, how big do you think Vital Care can be, let's say, in a reasonable period of time, let's say, the next three to five years? And what do you think the monthly fee will shake out as you put additional tiers in above the current $19?

Yeah. I'll probably get punched by IR and my legal team, but we're going to get to one million customers. The question isn't if, it's when. And so that is what we're going to go do. And I see it as the manifestation. Four years ago, we made a big bet. And the big bet was we are going to bet on a comprehensive owned ecosystem. And that owned, by the way, just got a lot stronger with our acquisition of Thrive, which the Thrive -- other half of the JV, which Mike can elaborate upon. But we made that bet. To me, Vital Care is the customer facing manifestation of that bet. It shows up in many, many different ways. But that is the comprehensive manifestation of the bet we made on delivering an ecosystem. And that bet was grounded in the fact that 54% of pet parents want a one-stop shop partner to take care of their pets. And those customers, by the way, are the highest spending and the pet parents that care the most about their pet. So we will get to one million. The question is when, not if. In terms of Vital Care 2.0, we love the additional capabilities. We love the expansion in cat. Actually, we're really pleasantly surprised at what percent of the initial sign-ups are cat. We saw an acceleration immediately once we launched Vital Care 2.0 and our pet care centers. And then I like this affiliate program, too. The more tentacles that are feeding Vital Care sign-ups, the better. And partners like Rover, partners like Colgate-Palmolive, Hill's, multiple shelters, they're going to feed vital care and help us accelerate it. In terms of financial impact, it's baked into our guidance. This is an LTV play for us. This is an LTV play. 20% new to food, 30% new to services, and they're spending three times our average customer. So this is great for our business. We have no plans to move off the $19.99. Our focus is making sure that we're monetizing those customers and providing a great experience.

Yes, Ron, I would just add, too. We hear all the time how important the vet benefit is as part of the Vital Care offering. And so one of the elements of the Thrive transaction, was to unify our programs under Vital Care. So, our Thrive hospital clients will be able to access Vital Care in a more seamless way. And so that's another really exciting part of the transaction.

Great point. Just to build on that, Thrive had a different membership program. This is one of the revenue synergies in this, is bringing that into our Vital Care program.

And then maybe just to follow up on that. The -- when you look at your share of wallet with your best customers, the most attractive demographics, where do you think that sits today? And I imagine Vital Care overlap, right, with that demographic. So Vital Care, this should be a natural wallet share builder, an easy one with those customers?

Vital Care customers are pretty much the highest-value customers in the entire category. So that's why I'm so focused on driving that. They're probably the highest-value customers in the category or one of the highest-value category -- customers in the category. Our share of wallet is absolutely growing. That was the intent of Vital Care. And now at 160,000 at the quarter and well over that at this point, we now know it is a share wallet driver for us. And just a reminder from some of the early documentation we gave in the IPO, and we'll talk about this at the Analyst Day, we have the highest-value customers in the category. So capturing more of their share of wallet, in some ways, is all upside TAM for us. And a way to think about it is it's all upside TAM for us. So that is very much our focus. So it's a great question.

Thank you.

Thank you.

The next question is from Kate McShane from Goldman Sachs. Please go ahead.

Hi. Good morning folks for taking our question. You had mentioned that the elasticity response from some of the price increases we needed to take was neutral. But we were wondering, if you have seen any impact from trading down or just more growth in your own brands and private label as a result?

Hey Kate, thanks for the question. I would answer it in two different parts. First, I've talked about a march towards premiumization that is a multiyear march. We have not seen that abate. So we continue to drive premiumization within our portfolio, whether that takes the form of fresh frozen, whether that takes the form of high-end kibble like ORIJEN and Taste of the Wild. So we are continuing to see that. And on the supply side, driving towards Reddy, the highest-end kind of fashion -- definitional fashion brand in pet supplies. So that continues. Separate from that is the growth of WholeHearted, which is strong. We are driving penetration into WholeHearted. I would not consider WholeHearted a down trade. I would consider WholeHearted active shifting from commodity brands in a similar or lower price into WholeHearted. So we've taken a lot of actions to shift those customers in lower-value commodity brands into WholeHearted as an explicit strategy, and that strategy is working.

That's helpful. Thank you. And then, our second question is on the digital fulfillment. You've had a lot of success with BOPUS and the same-day fulfillment, but I know there's been some limitation with the inventory availability, especially on the same-day fulfillment. So I just wondered how that inventory availability has changed over the year in terms of what you're offering the customer for same day, and what we can expect for 2022.

Yes. So let me start by reiterating the digital growth rate, 143%. It's one of the best in all of retail. 25% was a very good number in the quarter. And if I look at our digital performance versus what I'm seeing from kind of some of the NPD data, it's very, very strong. And I think it speaks to the model. To your digital fulfillment question, over 80% of our digital orders are fulfilled through a pet care center. We talk about that as a competitive advantage versus our online competitors, and it shows up every single day. Here's an amazing factoid for you. 91% of the time, 91% of the time when a customer comes on to our website or app and has the opportunity to do BOPUS or same day, they choose it. And that's something that our online competitor cannot do. In terms of inventory, we've all kind of had challenges in inventory. There is not one of our vendors that plan for 11 million new pets in 2020, elevated in 2021 and elevated today. So they're all kind of stretching out, the bad news. The good news is, they're adding capital and labor situation is getting better. So we see improvements, and our trucks are more and more full going out to the pet care centers. In terms of any gaps, one of the things that we like and we think is an advantage of ours is, if you're coming into one of our pet care centers to get a urinary tract product for your cat and we don't have the exact product that you're used to buying, our pet care center folks are so trusted that they can shift them into another product; where in other channels, you might lose that sale. So it hasn't been perfect, but I would say, if you look at the numbers, 143% growth and 25% growth, we're doing better than the vast majority. And it's getting better.

Yes. I would just add, Kate, that we're going to remain opportunistic in terms of staying out in front of demand, which we do not see abating.

Thank you.

Thank you.

And the next question will come from Oliver Wintermantel with Evercore ISI. Please go ahead.

Yes. Good morning. I had a question -- follow-up question to the Thrive JV integration. I think, Brian, you said it's EBITDA neutral or breakeven in the first year. Would it add to revenues, or is that -- and is that included in the 6% to 8% guidance? And then also, overall, how will that change your trajectory in vet? Is that -- overall, will that accelerate the rollout? Yes. Thanks.

Yes. Let me talk financials, and then I'll turn it over to Mike in terms of strategically. So in terms of revenue, there is no direct revenue benefit in the sense of we already consolidate those results into our financials. So the revenues are already in, and that gets the -- the Thrive share of the JV gets adjusted out through our eliminations and adjusted EBITDA add-backs. So the revenue is actually already in. What you heard Mike touched on earlier was some of the synergies that we expect to get from this transaction in terms of the center store uplift, which we think will be enhanced; the Vital Care expansion, which we think will be enhanced, all that's baked into the 6% to 8%. In terms of the pure vet revenue, that's already in our results. And I'll turn it over to Mike, who can talk more about strategically where it fits.

Yes, Oliver, thanks for the question. I'm excited on a number of fronts about this transaction. I'd first call out that we built a really great business together with the Thrive team. We love working with them, and we've been really happy with the performance of the hospitals and the bond that they've created with our pet care center teams. Talk about scale, and this is where, as you referenced, the potential for acceleration, in the vet business, it's all about your links and your bonds with vets. So we have now 1,300 -- over 1,300 vets we engage with around our mobile vet clinics. We have over 400 owned vet model vet teams. And now we're excited to bring on board 800 best-in-class vet hospital professionals and field staff. They will add significantly to our capabilities, our ability to network in the space, our learnings. They're really going to help us improve our model. And I'm really excited about that. And then, I will not understate the importance of what Ron referenced in the script, this ability for us to go to market as one major branded national player. So he referenced it perfectly, one playbook, one culture, one face to the customer. I think that's going to be really, really important. And then, of course, we referenced the synergies in the script. And we referenced the operational advantages. This whole connection with our ecosystem, I think, is another really strategic part of this transaction. We see it in our owned hospitals today. They are able to reach a higher elevation of customer experience through the links with our operations, our data, our technology, our membership programs. And so we're really excited to bring that benefit to the Thrive hospitals.

Got it. Thanks very much and good luck.

Thank you.

The next question is from Zach Fadem with Wells Fargo. Please go ahead.

Hi. Good morning. Ron, first question on the industry as a whole, as we're dealing with some pretty funky comparisons, I'm curious, if you could talk through your assumptions on broader pet category growth in 2022, both in terms of volume as well as price. And then, when you think about your 6% to 8% growth, what are you attributing to broader category growth versus company-specific drivers and share gains?

Yeah. Thanks for the question, Zach.

Yeah.

Let me be clear, we operate an amazing category. It's large, growing and resilient. If you look at any of the economic downturns, upturns, the category continues to perform. And from a consumer standpoint, there are a lot more pets. People are spending a lot more time with them. And they're spending more time on their pets. And the fact that the majority of the new pets adopted were adopted by millennials and Gen Zers only puts upward pressure on spend per pet, which is good. And we're really well positioned to capitalize on these humanization and premiumization trends that I've talked about. In terms of 2022, we see continued growth. As I said, we see continued spend per customer growth. And we're seeing that show up in our numbers. So we have a lot of faces in the category and our ability to gain share. We got another share report last week. And we gained share. Overall, we gained share. In digital, we gained share and brick-and-mortar. So we have a strong category that we're gaining share in.

Got it. And then for Brian and Mike, can you talk about the drivers of the CapEx up-tick in a little bit more detail? As you mentioned, the store base will remain pretty flat year-over-year. So perhaps you could talk about the number of store remodels or relocations you're planning for 2022. And then, what type of up-tick you're typically seeing from some of your recent remodels over the past year? Thanks.

Yeah. Good question. So, just as you saw in our range today, the midpoint of our CapEx spend is about a $60 million increase year-over-year. I will tell you, Zach, we're going to go into more detail on this at the Analyst Day, but I'll say this. Suffice it to say that, we have no shortage of attractive areas for investment. We touched on them. The vet build-out is one, the remodels, the extension of our fresh and frozen pantries and runs within the stores. We also have investments in innovation, in areas like supply chain, where we're investing in automation and reducing cost per pick. That's an area where you invest to get efficiencies. So if you think about operating leverage going forward, a lot of what we do in terms of our CapEx investments. We have -- we're relentless about our ROI, return on those CapEx investments. And a lot of those areas we invest in, we get efficiencies in the P&L overtime. So, we'll double-click into this more at Analyst Day, so I don't want to steal my own thunder.

Got it. Appreciate the time.

Thank you very much, Zach.

And the next question is from Seth Basham with Wedbush. Please go ahead

Thanks a lot and good morning. I have a follow-up question on the industry outlook. What are you expecting in terms of net new pet adoptions in 2022? And what are you expecting in terms of growth in the discretionary supplies side of the business for 2022?

Yeah. If you look at pets going into homes, we've seen a continued elevated. Actually, one of the things we saw in the second half of 2021 was we saw heightened cat adoptions, which is part of the reason you see us expanding to Vital Care to cat. And actually, we'll talk at our analyst meeting about increasing focus on cat, which is already paying dividends. In terms of supplies, as Brian cited, supplies in Q1 of 2021 were stimulated, if you will, at a heightened level. We see that going back to normalization in terms of overlap dynamics from Q2 on. So supplies will grow in 2021 as a category. And again, we plan on taking share. It's just the Q1 dynamic with that heavy stimulus is an overlap dynamic in Q1 at the category level.

Thank you. And my follow-up is around Vital Care 2.0. Very exciting opportunity and launch here. Just in terms of the LTV of a Vital Care customer, how would you peg it relative to your average customer?

Yes, it's about 3x, Seth. So when we think about the Vital Care customer, as Ron mentioned, this is a share of wallet play. This is a retention play. This is an LTV play. So those customers, we do a lot of analytics around this. So what we've seen from the early adoption in Vital Care 1.0, which is extended into 2.0, is those were already good customers, which then when we get them into Vital Care, they expand. And we look at that LTV as kind of a 3x.

Awesome. Thanks.

Thank you.

And our last question today will come from Peter Benedict with Baird. Please go ahead.

Hi, guys. Thanks for sneaking me in. First question, just kind of dovetailing maybe off that CapEx question, the fresh and frozen push. Can you maybe talk about -- are you guys looking to add more square footage there as you continue to push further into this category? And that's kind of my first question.

Absolutely. If you look at fresh frozen, you and I have had this conversation before. We and I love the fresh frozen category. We're at $1 billion plus as a -- category is a $1 billion plus now. It will get to over $4 billion by 2025. We're the retail leader. And 91% of fresh frozen gets fulfilled through physical retail because of the dynamics of the product. So it is right down the sweet spot for us. We have a wonderful relationship with JFFD that we only strengthened, and we also have Instinct and Freshpet as well. In terms of space, yes, it will expand. It would expand naturally, but it's definitely going to expand now that we agreed with JustFoodForDogs for them to supply a fantastic fresh frozen product under the WholeHearted banner. We're really, really excited by that. It gives our own brand, WholeHearted, another growth vector, and it allows us to kind of have a better and best strategy in fresh frozen that really has us fired up. And then the other part about the JustFoodForDogs agreement is we'll have more marketing in -- against JustFoodForDogs as well. So overall, we plan -- we are leading. We plan on leading fresh frozen.

And I would just tell you, Peter, as it relates to CapEx. These are some of the easier CapEx decisions I have to make. The ROI is really attractive, yes.

The trip frequency is a wonderful for the box actually.

Definitely. Sounds good. And my last question is more over on the services side of things. You guys talked about having unique capabilities for personalization, obviously, bringing the Thrive share of the business in-house. How are you positioned from a system standpoint to kind of optimize the sharing of data, the leveraging of data across your service offerings? And are there any improvements on that front on tap for the year ahead? Thanks.

I'll let Mike take that. We will focus a lot actually at the analyst meeting. You're going to get to meet our Head of Analytics, and how we're moving data around the enterprise, which we firmly believe is a competitive advantage. But I'll let Mike address that.

Yes, Peter. We've actually -- we've come a long way, and there's a lot more opportunity. I think the stat is over 50% of our appointments for services that includes vet, grooming and training are done on our online platforms and primarily on our app, increasingly on our app. So, the digital marriage of our services business, I think, has been one of the big, big game changers for us over the past couple of years. And when you think about it, we talk about this all the time, most of our competition is smaller proprietors who just do not have the marketing or the technology capabilities that we'll bring to bear. And so, that's our starting point. And so now we are building a lot more capacity for integration with Vital Care, additional elements around loyalty involved with our digital platforms. And so, we've got a runway of enhancements and additions on the digital side related to services that I think will just bring more and more value to the customer. And yes, we will talk more about that at our Analyst Day presentation.

The single most important data in a pet ecosystem is the vet data. The fact that we now have that, and we're able to move that data around the organization to the groomer, to the aisle is super, super powerful, and we'll talk about how we're going to do so. But the Thrive acquisition only furthers our ability to do that.

Terrific. Look forward to seeing you guys in couple of weeks. Thanks.

Thank you, Peter.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Ron Coughlin for any closing remarks.

Thank you, operator. I'll just conclude by saying we have a strong growth category. Our competitive moats are deepening, and our world-class team is executing. This is delivering record-breaking performance and share gains in a very dynamic environment. In fact, we've delivered growth in the top end of the retail industry consecutively over the last seven quarters. Make no mistake about it, we've exited the pandemic era a stronger company, better positioned for long-term share and business growth and better positioned to drive enhanced shareholder value. We very much appreciate you spending time with us today and the support that our investors are having us every single day.

That concludes Petco's fourth quarter and fiscal 2021 earnings conference call. Investor Relations will be available after the call, if you have any follow-up questions.

And ladies and gentlemen, this concludes today's conference call. Thank you for all attending today's presentation. You may now disconnect.