Yahoo Finance Presents: Petco CEO Ron Coughlin

Yahoo Finance Editor-at-Large Brian Sozzi sits down at the Nasdaq with Petco CEO Ron Coughlin to break down the company's quarterly growth, inflation, and the massive rise in pet ownership during the COVID-19 pandemic.

Video Transcript


BRIAN SOZZI: Ron, good to see you. Thanks for joining us.

RON COUGHLIN: Great to see you.

BRIAN SOZZI: It feels as though we've-- well, this is the first time we've actually met in person. Let's just get that out of the way We've been living in the metaverse, so to speak, doing all these interviews.

RON COUGHLIN: You exist.

BRIAN SOZZI: I think I exist. I'm not sure. But look, we've talked to you throughout the pandemic. And we've seen these negative market reactions to your earnings. Well, we didn't get that to this report. What do you think the market is just focusing in on here?

RON COUGHLIN: Well, you look at seven consecutive quarters of double digit growth. We are one of only 3 retailers out of the top 50 that have done that. And we've had margin expansion along the way. So when you put up terrific numbers, you add 800,000 new customers, the market's going to respond.

BRIAN SOZZI: I don't get it, Ron. Seven quarters of double digit same store sales. That is unheard of in retailer. And you are very much a retailer. I know you've focused on health and wellness. But still, is there something that Wall Street doesn't understand about your company?

RON COUGHLIN: Yeah. We just need to continue to execute. And that's what we're doing. The seven quarters. We're adding customers. And one of the things we talk a lot about is retail 3.0. It's really the next generation of retail. And we think we're a leader in that. If you take our unique ecosystem, our omnichannel capabilities, 80% of our digital orders get fulfilled through our pet care centers. And you add that with our service offerings. And we just announced a big vet acquisition that we believe is going to be transformational, where we took our JV veterinary hospitals, and now they're going to be part of Petco, with 800 new veterinarian professionals coming into the Petco family. We're only poised for more growth.

BRIAN SOZZI: How do you explain double digit same store sales? Is it the pet adoption boom? Is that still playing out?

RON COUGHLIN: We're gaining share. So, yes, we play in a great category. But we continue to gain share. And we're going and capturing new TAM. So whether addressable markets, whether you look at the vet market that's a $30 billion market, whether you look at the Rx market that's $11 billion market. We said when we went IPO that we were just getting started. Now we're growing rapidly. Over 60% growth in the Rx market as an example. So we have great category. We're gaining share in our existing categories. But we're tapping into new addressable market.

BRIAN SOZZI: What data can you share? I imagine you collect a lot on your consumer. How many dogs do they own? How many cats do they own? What's the state of their pet household?

RON COUGHLIN: Yeah. So there was the huge pet boom in 2020 with 11 million new pets. It stayed elevated in '21 and into '22. You are seeing more multi-pet households, which is great for our business.

BRIAN SOZZI: I still don't have a pet.

RON COUGHLIN: We can help you with that. We can help you with that through the Petco Love Foundation. But at the end of the day, there are more pets. People are spending more time with them. And they're spending more on them. And that's not going to change.

BRIAN SOZZI: What are they investing in? What are some of the top things they're buying for their pets right now?

RON COUGHLIN: Yeah. I heard the conversation you had with Julie earlier.

BRIAN SOZZI: Her dog is Sparky. Have to give Sparky a shout out.

RON COUGHLIN: Sparky. And I'm with Julie. And I see it in our numbers. If you look over the last decade, there's a trend towards premiumization. And even as the economy starts to wobble, that premiumization trend is not changing. And it's best manifested by two things that I'd say. One is fresh frozen, which is the highest ring, highest frequency in our store.

BRIAN SOZZI: That's fresh frozen--

RON COUGHLIN: Fresh frozen food. And that's growing rapidly. It's supposed to go from a billion dollars today to $4 billion in the next three or four years. And then our Reddy high-end supplies brand, if the millennial's wearing a puffer vest, guess what. So is-- what was the name?


RON COUGHLIN: Sparky could wear a puffer vest. I encourage you to go down to Soho and check in.

BRIAN SOZZI: That's the world we're living in now. We're both wearing puffer vests.

RON COUGHLIN: That's exactly right. On Price Street there, we have a [? Reddy ?] store in store right across the street-- a Reddy store right across the street from Louis Vuitton for fashionable pet parents.

BRIAN SOZZI: Very interesting. Look, supply chains continue to be tough throughout the retail sector. Are you able to get the products you need in this environment?

RON COUGHLIN: Yeah. So our team has done a fantastic . Job but there is not one vendor that said, I think there's going to be 11 million new pets in '20 and heightened thereafter. So they are playing catch up. But look at our numbers. We put up 18% growth for the year, 14% for the quarter. So in a tight market, we are executing. And we're winning, in our view. We continue to gain share.

But it is tight. One of the things that is really helpful here, though, is if you go into one of our pet care centers and you ask for, say, a urinary tract cat food, and it's not available, our folks can help you get another product. In other channels, that sale is lost. So we're able to retain a lot of those sales where products aren't available that may be competitors can't.

BRIAN SOZZI: Where are the biggest shortages? I heard last-- maybe this is about six months ago-- wet food.

RON COUGHLIN: Wet cans is where the highest is. But that's the bad news. The good news is actually our trucks are going out more and more full. So our replenishment to our pet care centers is much better week on week.

BRIAN SOZZI: 1,500-plus stores. How many will you open this year?

RON COUGHLIN: What we said is we're going to be relatively flat for the year. And we'll also do a lot of relocations to even better zones. And then one of the things we haven't talked about and I don't think I've ever talked to you about is our Mexico business where we'll open double digit stores. We're number one online, number one offline with our joint venture in Mexico.

BRIAN SOZZI: Why Mexico?

RON COUGHLIN: And that's a great bussiness for us. Mexico-- well, first of all, proximity. But second, we've developed a partnership with a phenomenal company called Grupo Gigante. And they are a joint venture. They basically take everything that we produce in the United States and take the same product line and retail approach and bring it to Mexico, and then they execute phenomenally well. And our business has been a double digit rocket ship. We have over 100 locations today. And it's probably an underappreciated part of our story.

BRIAN SOZZI: I'm going to put you on the spot here. Inflation. There's inflation in food. The stuff is everywhere. Now, if Julie is to go out there and buy some dog food for Sparky, I mean, how much more would that cost her right now?

RON COUGHLIN: Yeah. So we have the highest in pet parents in the category. And so demand has been relatively inelastic. Where we've gotten pricing we've been able to pass that pricing through. That said, we make sure we have offers for every type of wallet. So whether it is the fresh frozen, whether it's high-end kibble or mid-range kibble, like our product WholeHearted, we make sure we have products available for all price points.

That said, we also have Vital Care. We launched a new Vital Care-- a enhanced Vital Care this morning. And it makes sure that for $19.99 a month you can tap into your checkups, your grooming, discounts on food, discounts on supplies. And customers can save between $200 or $300 a year. So we're trying to balance it. And we're trying to cushion it for customers.

BRIAN SOZZI: Have you started to see consumer start to trade down? I get photos daily recently of gas prices over $5 a gallon. Are you seeing folks maybe perhaps not buy that premium wet food and just go out there and buy regular kibble?

RON COUGHLIN: Yeah. The answer is no. So we're continuing to see the shift towards premium. Those who do, we're making sure we have offers. But we're not seeing. We continue to mix shift into premium. And then we continue to mix shift from the low end into our WholeHearted mid-range products. So we're not seeing that dynamic. But again, we're trying to make sure we have offers for all customers.

BRIAN SOZZI: There's a lot coming at leaders of companies right now. Are you concerned about a recession?

RON COUGHLIN: I'm no economist. It's my job to be prepared if there is a recession. We start from the history. And the history is that the pet industry has been one of the most resilient of any industry.

BRIAN SOZZI: You have to feed Sparky.

RON COUGHLIN: You have to speed Sparky. Julie was right. If you go back to the Great Recession, there was almost no impact to the pet industry. People really don't change their practices in the industry. That said, it's our job to make sure that we have offers for customers in a recessionary environment. That's why things like Vital Care can help. We have mega bags and other solutions for them. But the pet industry has been relatively resilient to any macros.

BRIAN SOZZI: Lastly, this is my first time meeting you in person. We've talked to you since day one of the IPO. How did you go from being at HP, a computer company, to now leading a pet company?

RON COUGHLIN: Yeah. I blame Yummy. Yummy is my 13-year-old yellow lab. And he's the love of my family's life. And the ability to be in this category was really, really something I was attracted to. But the second thing is I like going and doing things that are hard.

And back three or four years ago, Petco needed a turnaround. And we re-engineered basically every inch of the company, but on the foundation of phenomenal people. And we had phenomenal people. And we just needed to hone our strategy and our execution. That's what we've done. And so we have these great people. And they're executing against our strategy. And that's when you show up with seven quarters of double digit growth. But the second piece that-- or the last piece that I would cite is our mission.

Our mission is about improving the lives of pets, pet parents, and the people who work at Petco. And that motivates me every single day. And it motivates all the 25,000 people every single day. And it's not every day that you get to save 400,000 pet lives like we did last year. It's not every day that you get to give out 500,000 free vaccines to people who can't afford vaccines for their pets. So we get to execute like one of the best companies in the world. And we get to have impact that probably outpaces most companies in the world. And that's unique.

BRIAN SOZZI: Oh, good to finally meet you in person. And, of course, good luck on the next couple of quarters. We'll talk to you soon.

RON COUGHLIN: Great. Nice to see you.

BRIAN SOZZI: Thanks for joining us. Appreciate it.

RON COUGHLIN: Thank you.