Inflation: ‘Pet parents don’t cut back’ on staples, Petco CEO says

Petco CEO Ron Coughlin joins Yahoo Finance Live to discuss company earnings, consumer trends, inflation, and the outlook for growth in the pet industry.

Video Transcript

JULIE HYMAN: Petco reported its 14th consecutive growth quarter, topped estimates in its latest earnings report. We've been watching a lot of various retailers, of course, and they have had a lot of varying results, haven't they? Let's bring in the CEO of Petco, Ron Coughlin, right now to talk about the quarter.

And we just saw, actually, your shares turn lower because I don't know what-- I don't even know how to explain what's going on in this environment, Ron. But as we've been watching the retailers, we've really been zeroing in on inventory build year over year because it seems a lot of the retailers sort of were caught off guard and have been struggling with that. That didn't seem to be so much the case with you guys. Talk me through what you're seeing inventory-wise.

RON COUGHLIN: Yeah, well, first, we've had such strong demand that that's helped make sure that we don't have the inventory issue that others have had. If you look at our inventory from a unit basis, it matches our sales almost exactly. We don't have that situation of having excess inventory on hand because of delays in Asia. So our inventory on hand pretty much matches up with the demand that we see coming, so we don't have that issue.

JULIE HYMAN: What are you seeing, if anything, in terms of changing customer behavior?

RON COUGHLIN: Yeah, so if I look at our business, I would stratified into three pieces. The majority of our business are staples. Just like you don't cut back on milk or eggs, pet parents don't cut back on their food for their pets. And in fact, what we're seeing is upgrading of foods, continued premiumization towards the most premium kibbles, towards fresh frozen foods. So our portfolio continues to premiumize even in this inflationary environment, and that's true for our brand Reddy, which is basically only fashion supplies brand in the industry. So we're seeing that.

Underneath that are services, and I would call them near staples. So if you look at grooming, if you look at veterinary services, that business grew double digit as well. So that's something that really doesn't get cut back on, and that's strength. And then you have supplies, things like tennis balls, collars, leads, and that's where the discretionary spend has some impact. But as I said, the majority of our portfolio are more staple-like. And throughout kind of past economic issues or economic shocks, the pet industry has continued to perform well and has been relatively resilient.

- Yeah, now that I think about it, I guess I never had, tennis balls are discretionary. I want to move-- I'm fascinated to get your take-- not your take, what you're actually doing with ad spending because we got some news out of Snap this morning. They guided lower, and they're an ad company. I'm just wondering, are you spending the same amount of ads? Are you pulling back a little bit? Are you worried about what the Fed is doing here?

RON COUGHLIN: Yeah, we have phenomenal return on our advertising spend, and our cost of acquisition actually went down, unlike online-only players. So we like the return we're getting on our marketing. Our marketing for the quarter is actually up because we get great return. And that's why our customer ads were at $400,000 for the quarter on top of elevated levels in 2020, 2021. So we're continuing to drive our marketing spend through this environment because we have a great story to tell.

JULIE HYMAN: And as part of that, Ron, talk to me about what we're seeing in terms of new pet owners versus you taking market share. It sounds like from what you're saying with the marketing spend that you're taking market share perhaps from competitors. What about the sort of new pet adoption trends that saw that boom during the pandemic? What does that looking like right now?

RON COUGHLIN: Yeah, there was this theory that there was going to be this pull forward of pet ownership. That's not what happened. You saw heightened pets in 2020, 11 million new pets, heightened pets in 2021. And now Euromonitor just called 2022 pet growth at 2%, which is above historic rates of 1%. At the same time, people are spending more. We now know that the majority of those new pets were adopted by Gen Z or as Millennials. And they spend more on their pets. They humanize their pets even more. So we have number of pets growing and spend per pet growing, and that's why the pet category has been a great defensive growth category in these types of times.

JULIE HYMAN: Ron, I would be remiss if I didn't ask you about the stock performance because what you're describing is a pretty robust picture. The numbers looked relatively robust, and yet the stock is not, right? We have seen a pretty dramatic pullback of about 40% or so over the last year. We've seen a rerating really broadly in the market here. Are you guys a victim of that? I mean, what do you see in terms of catalysts to help turn that around?

RON COUGHLIN: Yeah, you know, first, we're focused on executing. We have a no-excuses mentality. We've executed since we became a public company. We've beaten our guidance every quarter. So we continue to execute first and foremost.

I abide by the Oracle of Omaha's sentiment that eventually the market will realize intrinsic value, and we're providing intrinsic value. Overall, retail has been hit in recent months, but we're outperforming the S&P retail index. But we'll continue to drive execution. We didn't change our guidance like many did, and we think the pet category has very different dynamics than the rest of the retail landscape. And as I said, we continue to see premiumization when others are talking about down trading. And we're not seeing that down trading. So we think we have a great story. We think we're a great defensive growth story. And the market eventually always realizes value.

- Well, that's right. I always appreciate a Warren Buffett reference. So we have to leave it there. Always appreciate you stopping by and fascinated by those insights. Glad that you're executing well. Petco CEO, Ron Coughlin, thanks.