Good morning, and welcome to Petco's First Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Cathy Yao, Vice President of Investor Relations. Cathy, you may begin.

Good morning, everyone, and thank you for joining Petco's first quarter 2023 earnings conference call. In addition to the earnings release, there is a presentation and infographic available to download on our website at ir.petco.com, summarizing our first quarter 2023 results. On the call with me today are Ron Coughlin, Petco's Chief Executive Officer; and Brian LaRose, Petco's Chief Financial Officer. Before they begin, I would like to remind you that on this call, we will make certain forward-looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties include those set out in our earnings materials and our SEC filings. In addition, on today's call, we will refer to certain non-GAAP financial measures. Reconciliations of these measures can be found in our earnings release and our presentation as well as in our SEC filings. And finally, during the Q&A portion of today's call, we ask that you please keep to one question and one follow-up. With that, let me turn it over to Ron.

Thank you, Cathy. Good morning, everyone. We appreciate you joining us today. In Q1, Petco delivered its 18th consecutive quarter of comp sales growth, up 5% with revenue growth also up 5%, and we achieved our 12th consecutive quarter of brick-and-mortar growth. These results demonstrate the successful execution of our strategy through the current environment, the ongoing resilience of both the pet category and the secular trends of humanization and premiumization, and Petco's continued delivery of purpose-driven performance. None of this could have been achieved without the hard work of the approximately 29,000 Petco partners across the country who I want to personally thank for their ongoing dedication and commitment to the health and wellness of pets, pet parents, and each other. In the short and medium term, we are laser-focused on executing against our strategic priorities, controlling our controllable, and driving further efficiencies and productivity out of our cost structure. Brian will elaborate on this further. Longer term, we remain confident in the competitive advantages derived from our unique 360-degree care offering delivered through the three core pillars of our business: services, a differentiated and comprehensive merchandise mix, and our omnichannel capabilities, all tied together by our loyalty and membership programs that benefit pets, pet parents and Petco. Focusing on these core pillars. I'll start with services, where revenue was up double digits in the quarter. By evolving and growing our fully integrated services offering with veterinary grooming and training, we continue to further differentiate our business model through hands-on pet care. Our full-service veterinary business continues to scale. And to be clear, there is not another retailer or an online player in our competitive set with a scaled and own veterinary network, and this is a big differentiator for Petco. Between our clinics that provide convenient and affordable preventative care and our expanding number of vet hospitals to provide a full spectrum of diagnosis and treatment, Petco is well positioned as one of the top 10 veterinary providers in the U.S. In Q1, we saw 20% more pets for vet appointments year-over-year, underscoring our momentum and growth trajectory. A key driver of this is our mobile clinics, which provide a powerful growth lever that enables us to bring even more pets into our ecosystem. Averaging over 1,300 clinics a week during Q1, up 22% year-over-year, these fast, affordable, and convenient clinics that operate extended and weekend hours allow us to meet the ongoing demand for veterinary services in an agile way while delivering robust economics. In the short term, our high-performing clinics are well suited in this environment to address the needs of more cost-sensitive pet parents while also providing a pipeline of incredible veterinary talent to our hospitals. In turn, we've created a dynamic working environment for veterinarians within our ecosystem that enhances our attractiveness as a flexible employer of choice in a competitive labor market. Similarly, we continue to be extremely pleased with the progress of our full-service vet hospital business. We added a record 375 veterinarians’ ecosystem in Q1, up 60% year-over-year, and opened 10 new hospitals to reach a total of 257, meaningful progress towards our anticipated 50 to 55 new hospitals this fiscal year. In the medium and long term, maturing vet hospitals will increasingly contribute to top and bottom-line growth while further supporting our firewall economics. In aggregate, our pet care centers with hospitals are seeing a mid-single-digit lift to center store sales after just one year. And as a result, PCCs with hospitals have been growing tangibly faster than those without. Brian will touch more on this later. In short, in addition to providing a world-class veterinary care offering, the operational and financial progress we made in both our clinics and hospitals is securing the runway for long-term profitable growth and strengthening our integrated ecosystem. Grooming also generated record sales in the quarter. We continue to increase capacity and efficiencies in our so on. Demand remained high with our knowledgeable and skilled grooming teams delivering a retentive experience while further driving traffic and center store uplift. Combined, our fully integrated service model continues to position us well in the market, offering consumers flexibility and choice across all wallet sizes. Turning to our second pillar. Our differentiated merchandise continues to provide a competitive edge. Total merchandise sales increased in the quarter on a year-on-year basis, led by double-digit growth in consumables. Importantly, our assortment of health-focused premium brands continues to resonate with pet parents and remains an important driver of demand within our ecosystem. Specifically, in Q1, fresh and frozen delivered both double-digit sales and customer growth year-over-year. Additionally, our exclusive and exciting custom meals offering with Freshpet gives us the opportunity to capture further share of this rapidly scaling market. Similarly, we continue to see momentum with premium brands, including Science Diet, Royal Canin, and ACANA, all up double digits this quarter. At the same time, we're also seeing some value-seeking behaviors in our customer base. For those customers, we saw a demand shift into our own brand offerings such as WholeHearted, providing pet parents with a value-oriented yet health-focused alternative that positions us well competitively. As a result, WholeHearted continued to grow double digits year-over-year. We also enhanced our position in quality, more affordable consumables. Strength in consumables continued to help offset the transitory impact of discretionary purchasing in supplies and companion animals, which remained down in Q1. We're addressing this in two ways: First, we're making sure we meet the needs of more price-sensitive consumers by working with vendors on costing and supplementing our own brand portfolio with high-quality value offerings. Second, we're getting more proactive where we know there is demand. For example, over the last few weeks, while it was extremely warm in the Northwest, we heavily marketed flea and tick. As a result, flea and tick supplies have performed strongly. Turning to the third pillar of our business, our omnichannel model and the structural advantages that it provides. Our digital business delivered double-digit sales growth driven by strength in repeat delivery customers, the continued growth of our rapidly scaling ad network, our digital pharmacy, and dynamic growth in same-day delivery orders, which more than doubled year-over-year, underscoring the significant competitive moat same-day delivery offers relative to our online-only competitors. Our brick-and-mortar pet care centers continue to provide an engaging and helpful in-store experience with our Petco partners guiding pet parents in the aisles while also delivering a structural and competitive micro-distribution advantage for our digital channels. In terms of our people, I am very proud as we experienced stellar Petco partner retention in Q1. In fact, we saw a nearly 800 basis point improvement year-over-year for our full-time partners working in pet care centers, generated through both enhancements to our compensation and benefits and the exciting career opportunities Petco provides for partners working in a passion category like pet. Finally, tying our three growth pillars together is our relentless focus on the customer, with our fully integrated health and wellness ecosystem, providing a unified customer experience. Our customer loyalty programs continue to build momentum with our highest value customers and Q1 marked an over 50% year-over-year increase in recurring customer revenue, building on our milestone of $1 billion reached in 2022. Additionally, in Q1, we delivered year-over-year net pack growth as we bring pet parents deeper into our ecosystem. Our Vital Care membership program continues to provide clear value for customers while also driving loyalty, especially after consolidating all of our loyalty programs under the Vital Care umbrella earlier this year. Our paid Vital Care Premier customers grew over 100,000 in Q1, ending the quarter with over 580,000 customers. Vital Care Premier is now on track to generate over $100 million a year in recurring revenue on an annualized basis. Our end-of-period total active customer count was roughly flat at 25.1 million, driven by some trip consolidation and lapsed discretionary visits. Concurrently, the value of our customer base continues to build via growth in programs such as Vital Care Premiere and repeat delivery, which is showing up in the positive net debt trends we are seeing. Before I close, I want to take a moment to acknowledge how proud I am that the impact Petco continues to have on our communities and Petco partners. This quarter, together with Petco Love, we saved over 100,000 pet lives and delivered over 240,000 free vaccines to underserved communities through the Vaccinated and Loved initiative. And we've now reunited over 20,000 pets to date through Petco Love Lost. We joined the leadership circle of Open to All, reinforcing our ongoing commitment to fostering safe and discrimination-free retail environments for our customers and partners. And in April, we honored our epic achievers, recognizing a select group of high-performing Petco partners for their incredible work over the last year. To conclude, our results underscore the enduring appeal of our unique model and our focus on operational excellence in the current environment. We're incredibly proud of our fully integrated services business, including a veterinary offering as a growth catalyst, our differentiated assortment, and the structural advantages of an omnichannel retailer at scale. Combined, these pillars will enable us to capture continued growth, capitalizing on the secular megatrends of humanization and premiumization in the resilient pet category. Now let me pass it over to Brian.

Thanks, Ron, and good morning, everyone. To build on Ron's remarks, I also want to extend my thanks to our Petco partners and their continued dedication to delivering the very best for pets and pet parents. This mindset, combined with the team's focus on execution and agility in this environment, demonstrates the benefits of the competitive advantages we've been building over the last few years and reinforces the foundation we've laid to drive long-term profitable growth. Looking at the quarter, net revenue was $1.56 billion, an increase of 5% year-over-year. Comparable sales driven by sustained strength in average basket trends grew 5% year-over-year and 10% on a two-year stack. Total Services grew double digits, driven by the strength in vet and grooming under the leadership of our exceptional services team. I also want to spend some time expanding on Ron's comments on our vet hospitals. At our Investor Day last year, we set out the projected unit economics of our veterinary business with hospitals ramping up from being margin dilutive in the first year to breakeven in year two and accelerating to margin accretive by year five. When thinking about this trajectory, it's helpful to dissect our existing hospitals into two primary distinct cohorts. Hospitals that were originally operated as part of our joint venture with Thrive and our own hospitals that we've opened. The oldest of our own hospitals is now reaching three years. Since inception in aggregate, those hospitals have outperformed both our model and the earlier cohorts of the Thrive hospitals, which are now roughly in their fifth year. Both cohorts provide a compounded tailwind to medium- and long-term profitable growth. And on Thrive, we've seen continued positive trajectory post-integration. Additionally, as Ron mentioned, our pet care centers with hospitals in aggregate continue to see a mid-single-digit lift in center store sales after just one year relative to those without. Tied together as the weighted average life of our cohorts continues to mature, the outcome has been incrementally positive. Turning to merchandise. Consumables were up 11% in the quarter year-over-year. Strength in consumables was partially offset by the ongoing impact of discretionary purchasing in supplies and companion animals, which were down 8% in Q1. Our digital business showed strength with double-digit sales growth in the quarter. Moving down the P&L. Gross profit was down 50 basis points in the first quarter at $604.5 million. Q1 gross margin of 38.9% was down 230 basis points year-over-year. The decline was driven primarily by the mix impact of consumable strength and ongoing supplies and companion animal softness. Our team continues to drive efficiencies by focusing on strategic cost initiatives. I'm pleased to report that in Q1, SG&A as a percentage of revenue improved from 37.8% to 37.1% year-over-year, down 70 basis points demonstrating our cost discipline and a balanced approach to managing the short term while making strategic long-term investments such as raising our entry wage to $15 or above, which, as Ron mentioned, has paid dividends through employee retention. Q1 adjusted EBITDA was $111 million, down 6.9% from prior year with an adjusted EBITDA margin rate of 7.1%, down 90 basis points year-over-year. Q1 adjusted EPS was $0.06, a decrease of $0.08 from the prior year, driven primarily by a $0.05 year-over-year increase in interest expense. based on $266 million weighted average fully diluted shares and a normalized effective tax rate of 26%. Turning to our balance sheet. Our liquidity position remains strong. We ended the quarter with $593 million, inclusive of $149 million in cash and cash equivalents and $444 million of availability on our revolving credit facility. Our strong liquidity enabled us to pay down $35 million of principal on our debt in Q1 and an additional $25 million last week. In total, we have paid down $60 million toward our target debt paydown of $100 million for the year. Turning to guidance. We continue to see uncertainty in the discretionary environment and anticipate the macro environment to remain fluid. As such, we remain focused on executing on the factors within our control in the business. With that in mind, we are reaffirming our guidance for the full year and continue to expect revenue of $6.150 billion to $6.275 billion, adjusted EBITDA of $520 million to $540 million, interest expense of $145 million to $155 million; adjusted EPS of $0.40 to $0.48 and $225 million to $250 million of capital expenditures. We also continue to expect to add 50 to 55 owned vet hospitals in 2023 and 10 to 15 rural locations, both of which are reflected in our guidance. Although we typically don't provide quarterly or intra-quarterly commentary and we don't want to establish a precedent, in light of the unique environment, we do want to provide some more detail. Like other retail sector peers, we saw a more cautious consumer beginning in the second half of the first quarter, resulting from banking uncertainty and lower tax refunds, which continues to weigh on discretionary. While our top-line growth continues into May, our reaffirmation of guidance is reflective of our desire to remain prudent in this environment. As such, we expect Q2 EBITDA to be flat to slightly up relative to Q1 EBITDA and continue to anticipate EBITDA to be flat to up in the second half on a year-over-year basis given the year-over-year dynamics of supplies and companion animals. I also want to spend a moment discussing how we're driving additional savings in this environment. We continue to proactively manage costs, including examining real estate needs, optimizing overhead, and extracting additional efficiencies out of marketing spend. We remain hyper-focused on execution while investing in long-term growth drivers to enhance profitability and create additional shareholder value, including, importantly, supporting our vet hospitals and expanding our digital competitive advantages. Similarly, our continued execution toward working capital optimization provides us confidence to support our balance sheet. We remain confident in our ability to continue to improve free cash flow, not just this year but longer term and to do so without significantly sacrificing strategic investments. To conclude, we remain focused on navigating the short-term through strong execution in this environment while ensuring we are well positioned in the long term to deliver profitable growth in a resilient category through our unique and differentiated business model. Thank you for your time. And with that, we'd be happy to take your questions.

[Operator Instructions]. And our first question comes from Oliver Wintermantel from Evercore ISI. Please go ahead.

Thanks, good morning guys. Just regarding your -- the commentary on 2Q, Brian, can you clarify that EBITDA number? Is that a year-over-year number that you quoted or was that versus Q1?

Versus Q1, Oli. So, let me take a couple of things on Q2. So, we said in the call that we continue to grow into May. That said, as you heard me comment on the call, like other retail sector peers, we saw some combination of the banking headlines impacting consumer sentiment in the back half of the quarter, and that continue to weigh on discretionary. But the comment on EBITDA specifically is we would expect Q2 EBITDA to be flat to slightly up relative to Q1 reported EBITDA.

Got it. Thank you. And then maybe a quick follow-up. Just when you look at the mix of your business, obviously, since pre-pandemic, the growth in consumables made that mix a lot higher versus the supply business. If you look for the rest of the year and that maybe you can tie that into your commentary about the EBITDA number as well. How do you see that playing out? Is there -- do you still think the consumable business has remained strong for the rest of the year and supplies weaker, which then might have a bigger impact on your gross profit margin. So maybe you can tie that into your commentary about EBITDA. What are the drivers of that? Thank you.

Yes. Good question, Oliv. So, let me start with consumables where you want consumables was up double digit in the first quarter, but total services. So, we've continued to see strength in services. Our grooming business remains really strong. Our vet business model is continuing to scale. Our own hospitals are actually tracking above the model that we laid out, and we talked about kind of that dual cohort tailwind on the call. If you think about the discretionary categories, if you were to just take our volume, our dollar basis reported number in Q1, and drag that out towards the balance of the year, the comp improves just by nature of the lapping dynamic in the second half of last year. And hopefully, that's a little bit helpful in terms of how to think about the different business segments.

Our next question comes from Peter Benedict from Baird. Please go ahead.

Thanks. two questions I guess we'll just get them in the gate. First on just the trend in consumables. You talked about some more value-seeking behavior. Can you maybe expand upon that -- talk about the availability of those value products and just where you're seeing that? Is that in dry? Is that happening in fresh and frozen? Just some more color there. And then secondly, just curious on the promotional tone in your business, particularly around the supplies area. What are you seeing there? Are you taking prices down as you're working on costs with your vendors? Thank you.

Thanks, Peter. First, on food, we continue to see a bifurcation, pets a little different than many other categories. You have a host of customers for whom doing the absolute best thing for their pet is non-negotiable. So, what we're seeing is strong double-digit growth in fresh and frozen, strong double-digit growth in super premium Kibble like ORIJEN or Taste of the Wild, and our Science Diet products. So, we continue to see strong growth there. And in actuality, we continue to revenue mix shift towards those higher-priced products, which is a positive for us, and that's a category of truth as well. That's a decade-long trend. In this current environment, there is a subsegment of customers that are looking for more value. And the first beneficiary of that is WholeHearted. WholeHearted is a premium quality product for a mid-price range. So, we're seeing double-digit growth on a WholeHearted, which is obviously good for us in terms of stickiness. On the lower end, there are some customers that are looking for value. We've supplemented our line in the short term with a product called Diamond, which is a high-quality product. And we'll continue to look to supplement that part of our portfolio. But to make no mistake about it, we're not doing low-quality products. We're not doing products that don't have any margin associated with it. That's the food side of the house. On the supply side of the house, we are working with vendors. That's a more disaggregated vendor base. We are working with vendors on the cost side of the house. We are similarly supplementing our line with more value offerings there. In terms of the promotional environment, promotional environment, Q4 to Q1 sequentially was pretty flat. So, we're not seeing significant increase in promotional activity at this point.

Thank you.

Thanks, Peter.

The next question comes from Steven Forbes from Guggenheim Securities. Please go ahead.

Good morning, Ron and Brian. I wanted to start maybe with recurring revenue trends, 50% growth, impressive rate again in the first quarter. Curious about what the percentage of total sales is of recurring revenue. How do you think about this channel evolving over 2023 given your commentary around the macro? And then as we look out to 2024 and beyond, what are some of the core initiatives that you want to highlight that can really drive this penetration higher as we think about your potential of the business?

Thanks for the question, Steve. Actually, if you go back to maybe our first earnings call, we talked about our desire to build more recurring revenue into our model. At that point, our recurring revenue as a percent of total was pretty small. In Q4, we announced that it had reached over $1 billion, which is a pretty big milestone. Obviously, with the growth number that we put up in Q1, that penetration furthered, and I'll let you do that math. Key drivers of that are repeat delivery, which we're very excited about, and we have a very competitive offer and our customer sat on that is very high. And particularly since we have some products that are exclusive to us and fresh, frozen, particularly, we're able to be very competitive there. The second piece is Vital Care Premier and our sign-up rate only increased in Q1 versus Q4, which we're really excited about. Consumers see the value in it. They save over $200 on average a month. And for us, we're picking up more share of wallet. So over 30% of our Vital Care Premier customers weren't getting food with us and even more weren't having services with it. So, it's a share of wallet play for us. It is very, very strategic for us. As I said, we talked about it a couple of years ago as an aspiration. Now we're delivering on it. And we are very focused on continuing to drive more recurring revenue out of our model. And if you think about the interconnectedness of our model, as we bundle more initiatives like insurance into it, it only gets more powerful. And I think that would only accelerate our recurring revenue as a percent of our mix.

And then just a quick follow-up, Brian, maybe for you. The second quarter commentary. Can you help us better understand the mix implications, right, of what you're trying to express here because it looks like compares on supplies and companion animals’ sort of ease in the second quarter? But do you still expect a negative sort of mix impact on gross margin? Or just any contextualization on the margin outlook for the -- second quarter gross margin outlook?

Yes. I think let me start with we would expect services to continue to remain strong, consumables to continue to remain strong into the second quarter. As I mentioned on the call, overall, we've continued to grow in May. We reiterated the guide for the full year, Steve. And if you go back to the commentary on the call about the intra-quarter dynamics of Q1, we did see in the back half of Q1 some softening in the environment, and therefore, we wanted to be prudent about how we talked about Q2 and reaffirm for the balance of the year.

I would just remind everyone on what we've talked about in the past on services. So as services continue to grow, it's relatively neutral on the EBITDA line, but there is P&L geography because the labor is in cost of sales.

Our next question comes from Kate McShane from Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for taking my questions. I wondered if you could help us think through traffic versus ticket in the quarter, but then also how you're thinking of that breakdown for the rest of the year?

Good question. Kate, how are you? Honestly, we don't think of ourselves as traditional retailer given the fully integrated model that we have, featuring services, digital and omni. That said, I would tell you that our basket remains healthy, and we're pleased with what we see.

I would just build on that. From a traffic standpoint, we're seeing positive trends on the veterinary business, which is bucking industry trends, where we saw 20% more pets this quarter. We're also seeing positive traffic on the grooming side. So those are important areas where we want to be driving traffic and then help the total box, merge there's some trip consolidation.

And our second question is just around vet. It sounds like you're seeing some encouraging signs there with the owned vet. And just I wondered if you could maybe double-click, I can go into that a little bit more in terms of just what progress you're seeing now that, that is fully owned by Petco, what things are looking like competitively, and just how you're doing with regards to the hiring of vets?

I'll start, and maybe Brian and I will tag team. Thanks for the question, Kate. So first, we've had a lot of conversations about hiring. And we've never hired so many vets as we did this past quarter or brought them into our ecosystem in the case of the clinics. And I'll start on the clinics. This is a maybe underappreciated asset. I will tell you that our vet clinic business is very, very strong. It's the right offer at the right time. It's growing rapidly. We have over 1,300 clinics a week and that is a high appeal, but also it is a feeder system, minor leagues, if you will, for our bringing our vets into our hospital. And nobody else has that feeder system, which gives us an absolute advantage. So that's number one. We executed -- we opened 10 new hospitals in the quarter. We're on track for 50 to 55. Our recruiting engine is strong. Our value proposition is working. And we're bringing in some really interesting diagnostic capabilities as well, and that's helping attract that in terms of other elements of the model, I'll let Brian elaborate.

Yes. I would say from a margin dollar perspective, when you think about the model, in total, vets are accretive. From a rate standpoint, at maturities, certainly, they're projected to be. And as I said on the call and as you mentioned, Kate, on aggregate, we are ahead of our model on our owned vet cohorts. Over the last three years, just a reminder, we've added 176 of our 257 hospitals in the last three years. So, a lot of our hospitals are younger than three years. The good news with that is it gives us a lot of runways ahead of us that will allow us to take advantage of the maturity curve of vets and that accretion. And as Ron mentioned, our vet clinic business is such a strong business, and that's helped us contribute to a 20% year-over-year increase in vet visits. And so overall, we feel really good about our vet position.

Our next question comes from Seth Basham from Wedbush Securities. Please go ahead.

Thanks a lot, and good morning. It's great to see continued sign-ups for the Vital Care Premier program. I just had a question in terms of the revenue per customer there. Doing the math, it seems that you're getting about $170 per customer annualized. At your Analyst Day last year, I think you indicated you implied $400 spend per member goal. Can you please tell me if that's accurate and what the delta is there?

Yes. So, let me kind of walk you through it, Seth. So, $20 a month is what they pay in a subscription fee. So, if you run that out over the balance of the year, you're talking $240. -- The $400 that we quoted is an enterprise value. So, if you think about on an annualized basis, what we're getting from those customers, the subscription is just one part of it. The additional trips and the fact that it's a 3.5x LTV for those customers compared to an average customer of Vital Care. That gives us a greater share of wallet. It gives us greater on-ramp to the overall ecosystem.

So, for example, free rate being a Vital Care customer, maybe they weren't doing services with us. Maybe they were a service customer not getting food with us and we're seeing significant incidences of that, which is driving the share of wallet number that Brian cited.

Very good. And as my follow-up, just thinking about the margin dilution associated with new Vital Care customers. Has that been significant? And how do you expect that to trend going forward?

Yes. When we think about Vital Care, we do look at it as an LTV and share of wallet play, Seth. So, from an enterprise margin dollar standpoint, it is very accretive. From a rate standpoint, there's some impact. But when you're talking about 580 Vital Care Premier members on a base of 25 million customers, it's not significant.

Our next question comes from Anna Andreeva from Needham & Company. Please go ahead.

Good morning, thanks so much guys. two quick ones from us. I wanted to follow up on the active customer count flat. I think it's the first time you're not seeing growth in net adds. Could you provide color on that? What are you seeing with churn? And how should we think about net customer growth as we go through '23? And then secondly, great to hear that owned hospitals are tracking ahead of the model. Brian, could you provide just more color on that? Is that on sales or profitability or all of the above? And any notable difference to call out across the portfolio?

Hi, Anna. thanks for the question. While our customers were flat sequentially due to trip consolidation and lapse in supplies visits, we are seeing strength in Nest Pac [ph]. And that's really due to the strength of our loyalty programs and driving more share of wallet, which we talked about a little while ago. And some great examples, 31% of Vital Care Premier customers are new to consumables, 36 new to services. So, it's driving that share of wallet that I talked about earlier, and again, 3.5 times more than average customers. So, we're making a lot of progress on Nest Pac in an environment where you're seeing some lapsed visits due to the discretionary environment. From an ad standpoint, we have significant levers on our desk. One is marketing and you'll see an exciting new campaign coming out shortly there. Our service model. If you look at our vet customers, 20% of those customers are new to Petco. You look at our rural -- actually, our rural stores have already added 35,000. You see we're early days there. So, we have levers on our desk to drive net customer adds. But in the meantime, we're going to continue driving Nest Pac and the value from our customer base.

Yes. And then on the vet question on -- I would just say a couple of things. You asked about whether that's revenue or profit. If you think about the maturity of a vet business, it's all about scale and utilization. So just by nature, if we're ahead of model, it's going to be both top line and bottom line. You asked about the difference in sort of cohorts. The only thing I would call out is the difference between owned and the ones that we originally opened under the Thrive joint venture. Those were tracking behind the model; the own hospitals were tracking ahead of model. Part of the reason we made that acquisition of the additional 50% last year is because we felt like we can improve the performance of the hospitals and get a greater enterprise return for Petco. And if you go back to once we fully integrated those Thrive hospitals, the performance of those hospitals under the Vetco brand have improved.

Our next question comes from Zach Fadem from Wells Fargo. Please go ahead.

Hi, good morning. Do you think the 7.6% decline in supplies and companion animals, is a fair reflection of the supply’s category as a whole? Or have you seen some share shift to mass? and then as you think about the components within the category, any callouts of segments doing well versus particularly challenged? And how should we think about deferral versus just a divot for these categories when the macro recovers?

Thanks for the question, Zach. So, let me split it into first from a companion animal standpoint that's not really a mass dynamic. So, the category -- that's really a category dynamic. In terms of supplies, could there be super low-end products that are going through mass or some of the online kind of more discounted channels. Sure. We're focused on higher value profit pools rather than just share for share's sake, and we think we're holding our own against those segments. And I think evidence of that is our Ready brand where we're growing nearly double digits on our Ready brand. So again, we're focused on higher value. We're focused on where there is a profit pool. So, might there be some things underneath where there's a profit pool? Sure, but that's not where we're focused. But that said, we believe there is profit to be had on some of the value segments. And as I said, we're both supplementing our line as well as working with those vendors to reduce cost so that we could be more competitive on some of those products.

Okay. Great. And then on your services business, still growing nicely. Could you talk about the contribution across grooming, Vetco, and vet hospitals? And as you look at 2023 and into '24, can you help us think through the evolution of sales and EBITDA growth contribution from these businesses?

Yes. I probably won't get as specific as you want, Zach. But let me walk through it. By nature, total vet is going to have a higher growth rate than the other subcomponents of services, just given the fact that we're adding hospitals every year, right? So, if you look at overall revenue growth that's going to be growing faster. Vetco, we don't disclose that overall growth number, but we continue to scale that business at very high utilization. It's been a great business for us. If we think about the overall sort of growth rate going forward, you'd expect those dynamics to continue to play out as long as we keep adding vets.

Our next question comes from Steven Zaccone from Citi. Please go ahead.

Hi, good morning, guys. Thank you, very much for taking my question. I wanted to ask on the cadence of the year. At this point last year, we were talking about the fact that sequentially in the second quarter, you typically see revenue increase, whereas this year, it looks like it's going to be down sequentially just based on your commentary about May. So, could you just help us talk about the balance of the year, how should we think about that second quarter? And then Brian, as you think about the puts and takes on the top line to get you maybe the high end versus the low end, what are the big factors in the second half of the year?

Yes. Thanks for the question, Steve. Let me first start with we continue to grow. We made the comment on the call that in May, we've continued to see growth, and we would expect that to continue. The comments on Q2 are more to do with what I mentioned on the call about the back half of Q1. So, we did see a shift in the back half of the first quarter. And to the extent that continues into Q2, I think it's best for us to remain prudent at this time. The biggest dynamic in terms of half one to half two is the discretionary category. But make no mistake, if you think about what we're banking on for the second half, there's not a bank on an enormous recovery, but rather if you again take the dollar value of what we reported in discretionary in Q1 and you drag that out Q2 to Q3 to Q4, the comp in that category will improve just by nature of the lapping dynamics.

Okay. Fair enough. We haven't heard about the farm and pet supply this quarter. How is that progressing overall? And then just remind us how many of those stores will you have by year-end. Thank you.

Thanks, Steve. The rural pet care centers are doing very well. We're really encouraged. They are performing above our expectations. And this is important because of the $7 billion opportunity for us and $7 billion and growing. We closed the quarter with eight rural PCCs. We opened three in Q1 making meaningful progress towards our 10% to 15%, which we said we would open this year. I mentioned this earlier, but I have to admit it's surprised even me, 35,000 new customers to Petco from this initiative already, which is really, really exciting. This -- after earnings last quarter, I stopped in Glasgow, KY on my way back. And while I saw a great dog and cat products in supplies, I even got my chocolate lab, Yogi, a new Carhartt harness while I was there. But I was really excited to see the bovine, the equine, we even had some horses in the front parking lot as if it was stage. So, this is a great extension of our PCCs and great extension of our merchandise as well. We're bringing some of those products on in terms of our online product assortment. So very exciting thus far ahead of our model.

Our next question comes from Greg Sommer from Gordon Haskett. Please go ahead.

Hi, thanks for taking my question. I just wanted to dig into the comment about the second half of the quarter being a little more cautious from the consumer. And I was just curious if that was more so traffic being a little softer across the business? Or if that was just more consumer behavior, either from like a category standpoint or customers looking for more value?

Yes. It was more a consumer behavior standpoint. Greg, if you think about what happened in the overall environment from the banking headlines to perhaps to a lesser degree, lighter tax refunds, it's not dissimilar to what you've heard from other retail sector peers. So, I'm more talking about consumer sentiment.

Okay. I just had a quick follow-up as well on pricing. So, before you guys said that you believe the most majority of the pricing had already come through, although there could be pockets. Just curious if that's still a kind of anticipation for the remainder of the year.

Yes. So first, the pricing that we took is sticky, which is good news. And second, the majority of pricing has come through in terms of the vendors that we engage with, the scale vendors. We know that to be a truism. And as I said, on the supply side of the house, where it's a more disaggregated vendor base, there's probably more deflationary opportunities than inflationary opportunities.

Our next question comes from Michael Lasser from UBS. Please go ahead.

Good morning. Thanks so, ask for taking my question. You indicated that the bulk of the comp was driven by growth in average transaction size, so how does that break down between like-for-like inflation and more items in the basket due to trip consolidation. And if the majority of it was inflation, how is that going to impact the flow of the comp over the next few quarters as you start to lap some of the price increases that you took last year? thank you, very much. I have one follow-up after that.

Yes. Let me start with consumables, Michael. We grew in units. So, when you think about consumables growth, it wasn't all driven by pricing equation, we grew in units. You have to also subsegment our growth into the different components. Services was really, really strong. Grooming business, the vet business continued to grow, and that includes our Vetco clinic. So, you've got growth in services, growth in consumables, unit growth in consumables and we've talked about discretionary.

Okay. And my follow-up question is, you've made the case in the past that typically when you enter these periods of softness in the supply’s category the last five or six quarters. Is it still your expectation that, that's the case, especially as you laid out the math that simply by getting to easier comparisons in the back half of the year that the growth rate should start to stabilize? And is this the new norm where the penetration of supplies is structurally lower and given the margin dynamics associated with that? How do you look at your long-term profitability profile in light of what could be a lower business that's more profitable?

Thanks for the question. For -- let me establish a couple of facts. First of all, if you look at on a three-year basis, our supplies business is up double digits. If you look at many categories, that's not the case. They're now turning red versus three years ago. Our supplies business is up on a three-year basis, double digits. The second thing is we don't see a fundamental shift in mix on a long-term basis and neither do the experts and projectors that we see. You have two dynamics that are bleeding into the dynamics today. The first, you have a life stage of pet dynamic and the second is you have a macroeconomic dynamic. The life stage of pet, and we talked about this a couple of years ago is heavy on supplies in the initial couple of years and then flew out there. There we go. There's a good example.

He's Excited about your answer, Ron. He's excited.

I was looking for a model for my answer there, and I got one. And then more food year two, year three, and then it stabilizes and take my dog yogi. We bought lots of supplies, crates, and things like that and now he's already up to 50 pounds and he's eating more food every single day. So that is one dynamic that has impacted things right now. And the second dynamic is the current economic environment, which historically has impacted discretionary and then it rolls off, and I'll come to the five to six quarters. So, from a long-term structural standpoint, we don't see a major shift in the relative size of the categories. We do see a shift within our portfolio because of the nature of the rapid build-out of our services. And again, services has a P&L geography dynamic but services will be more and more of our mix as we go forward. As to the five-quarter to six-quarter element, if you look at November, December, and compare that to January, and February, we were exactly on that trajectory. Historically, when the category has gone through recessions, first, the category has grown about five points to six points, which lines up. Consumables hangs right in there, and then there's a temporary hit to supplies. And it tends to start it's come back five to six quarters out. We saw that in January, and February, the trends in January, and February were a nice improvement versus November and December, and it was following historical patterns. And then we had the combination of the banking and some of the other dynamics with tax refunds, et cetera, and that abated a bit. We're confident in the mid to long term that normalizes. But again, the short-term macro environment had a moderating influence on that. Actually, the last thing I would say on that is we're not passengers on the bus. We're taking actions across advertising and across assortment across promotional activity to make sure we're driving. Those programs as well as our in-store and online activities to drive supply sales, and we have a lot of confidence in our ability to shape our own destiny.

And our next question comes from Simeon Gutman from Morgan Stanley. Please go ahead.

Hi, good morning, Ron and Brian, my first question, has two parts. They're not really related. The first is on the consumer and what you're seeing. It seems like the consumer has been trending a little worse and we get the comments towards the end of your quarter. Has that stabilized? Or we're still trending and we haven't felt the bottom? And then the second part of this question is you mentioned the majority of the gross margin was mix. Can you either quantify or what the other factors was anything in terms of price and promotion and the [ph] GM weakness?

Thanks, Simeon. Let me go back to where I started on -- the category dynamic is a bifurcation. Actually, they break into three pieces. Services continues to be robust, which is super strategic for us. We're putting a lot of capital into the vet hospitals. We're bucking industry trends. Services continues to be robust regardless of the macro environment. Now on merchandise, we're seeing a bifurcation. We continue to see strong sales on our premium products. That's a timeless trend, and that continues during this time period. In terms of the value-seeking, I already talked about that. I would say that the trend that we saw at the back half of Q1 has continued into Q2. We're launching initiatives and the marketing campaign I talked about -- and that's what we're seeing as of right now, which is why we were prudent in our guidance.

Yes. And Simeon, when we talk about the majority impact of the impact being affected by mix and gross margin, what we're really talking about there is that mix dynamic between discretionary and consumables. The only other thing I would call out and remind you of is the mix impact by business, primarily services. Anytime services is strong, and we are very happy when it is. There is a margin rate impact that, quite honestly, is okay for us because if you look at EBITDA dollars, EBITDA dollars, and EBITDA rate in the services business are very, very attractive. So, service is growing strong, it is good news for the business.

Okay. My second question is on the shape of the year. It felt like your initial guidance for the full year on EBITDA felt like there was some conservatism in it. I don't know how the first half is playing out versus expectations. I get the sense maybe it's coming in a little bit lighter given some of the dynamics you mentioned. We are lapping these items that you mentioned in the second half, but it also feels like maybe the second half has gotten a little bit steeper. Is that fair? Or we're just taking some of that conservatism from the model that you had in the first place?

No, I don't think that's fair, Simeon, to be honest. I think if you look at what happened in Q1, I think Q1 was ahead of our expectations. The commentary on Q2, I think, is the prudent commentary to make at this time given what we saw in the back half of Q1. So, we reaffirmed our guide for the year given the normal puts and takes. We just guided 60 days ago. We think it's the right call to reaffirm at this point in time. But I don't think I would say Q1 performed worse, it performed better.

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. To close today's call, I want to reinforce the Petco operates in a highly resilient category with an ecosystem that is both unique and delivers on pet parents' desire for an integrated health and wellness partner. In this environment, we're focused on progressing our key long-term growth strategies like vet, and controlling our controllables. Of course, none of this would happen without our incredible Petco partners to whom I'm grateful for providing us with an incredible, competitive advantage every single day. Thank you for your time.

That concludes our first quarter 2023 earnings conference call. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.