Petco Health and Wellness Company (WOOF) Q4 2021 Earnings Call Transcript

Petco Health and Wellness Company (WOOF -6.02%)
Q4 2021 Earnings Call
Mar 08, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Petcos' fourth quarter and fiscal year 2021 earnings conference call. All participants will be in a listen only mode. [Operator instructions] 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.

Kristy Moser -- Vice President and Investor Relations Officer

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, an infographic available for download on our website at ir.petco.com, summarizing our fourth quarter and full-year 2021 result. 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 in 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 most directly comparable GAAP financial measures are included in our earnings release in 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.

Ron Coughlin -- Chairman and Chief Executive Officer

Thanks, Christy. Good morning, we appreciate you joining us today. 2021 was a year of record performance and significant strategic progress for Petco. Deepening our competitive moat 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 are having a positive impact.

We're continuing to strengthen on our one of a kind and in health and wellness ecosystem, a 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 remains strong in the quarter.

It remains strong in January, where we lap 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, and I will share later in the call.

We gained share overall, gain share in digital, and gain 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 pet, an advantage of our model versus online-only players. On pricing, given our larger percentage of higher-end pet parents, customer [inaudible] remained largely inelastic in the quarter, when we realized variable impacts in 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. Our growth is grounded first in the uniqueness of our ecosystem, offering a distinct competitive advantage that enables us to capture a greater share of wallet and build greater loyalty of field 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 adjust food for dogs pantry contributes to our confidence that we can drive above category growth for years to come.

Combined with 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 to $30 million 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. A 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 a 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 Z's and millennials, where Petco significantly over indexes, as well as the impact of our initiative, 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 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've built tremendous capabilities within Pecto, 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 vectored total care when operating playbook one team, one culture. Brian will elaborate, this will give us even more opportunity for driving synergies with our pet care centers, and optimize our veterinary support costs. Our own Petco total care hospitals continue 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 Petco mobile clinics, achieving our goal of 72 hospital openings in the year, continuing one of the fastest that 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, and 5,600 we've never had more groomers, and with the joint venture acquisition, we now have over 1,000 Petco badged veterinary professionals. Make no mistake about it, we are now scaling the veterinary professional market, and vets love working at Petco. Our value proposition continues to resonate with that 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 gain share. In Q4, a two-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 a 360 degree or health offering.

Leading to another quarter of share gains as we outpace the market, as well as scaling digital services bookings, which were up over 75% year over year. In the last two years, we've more than doubled the digital business. This has been driven by first-time repeat delivery nearly double in the last two years, as 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 ALDs', largely due to personalization of our algorithms, driving larger basket sizes, and strategic price increases.

Third, we extend our flexible fulfillment options. 91% of customers choose either same day [inaudible] when it is available, and we're driving continuous innovation, enhancing the experience, and further improving our cost advantage, which will share more about an analyst day on March 23rd. 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 Ad Works, it's ramping nicely, driving revenue growth and enabling margin expansion for our digital business. [inaudible] ecosystem is driving engagement, and our most recent cohorts are performing even better than historical levels because we're better serving in the age of pet parents than ever before. Moving now to pharmacy, we're gobbling up shares, 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 10% year over year and 20% on a two-year stack. Within both consumables and supplies, we mix shifted toward 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 LTV than 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 toward premium, which is up double-digits versus last year growth, both improving margin and expanding our competitive inflation. Promotional activity remained rational down versus both 2020 and 2019, with the exception of Black Friday and Cyber Monday, were given the differentiation of our portfolio, dynamics, and low LTV customers, we were selective. In the rapidly expanding frozen fresh category, where we're the number one pet specialty retailer, it 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 two years, we've added 14,006 same-day delivery locations 493 shipped from store location, 14,527 curbside pick-up 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 Moz, we announced a pilot store and 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 two 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.

Well, co-developed the new human-grade fresh and frozen own-brand product line under wholehearted, which I'm very excited about, and will receive additional marketing support to build awareness. Additionally, Petco received 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 nutritional 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 pet go. Driving recurring spend, loyalty, and customer LTV. Vital Care 2.0 features a rich list of enhancements, including omnichannel redemption, repeat delivery integration, and an exciting new affiliate partner program beginning this spring. There were launch with several partners will drive vital care signup, including [inaudible].com, the San Diego Padres, Central Garden and 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. 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 entering 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, and driving share 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 pet care. That's for a focus 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 the lives of pets, pet parents, and our own partners. We saved over 396,000 pet lives this year and have distributed over half million free vaccine under-resourced communities in partnership with Merck as part of our one million vaccine commitment. I mean, reunited another 2,000 pet with their loving parent who Petco love lost in Q4 alone, leveraging our database of over 100,000 searchable pets, including nearly 1900 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 Ukrainians have their pets is seen in photo after photo. Whether are 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 recording 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.

Why we conducted over a half million hours of skills, and competence training, and why every one of our PCC general managers receives stock [inaudible], 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 continued focus on health and safety. I'm grateful to each of our team members for how they delivered for pets 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 omnichannel offering. We enter the year with more customers than ever who are spending more with us, in 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.

Brian LaRose -- Senior Vice President, Finance

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 the year of record revenue and profitability, and I couldn't be more pleased with how our team is executed.

We're leaning into own 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 benefits 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 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 price.

Momentum and 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 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 continued 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 invest. 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 unit.

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 consumer, both 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 service.

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. As C&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 continued 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 baskets 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.

As C&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 continue to invest in sustained 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. In 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 center 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 2021 at approximately 1450 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 a 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% to 2.5 x in 2021 year over year. With a significant reduction in our debt over the last 14 month, I know many of you were 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 to $6.25 billion, or a 6% to 8% increase from 2021.

Adjusted EBITDA between $630 and $645 million, or a 7% to 9% increase in 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 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 on inflationary costs, the strength of our unique health and wellness ecosystem that continues to step Petco apart, and our confidence in our ability to deliver against our strategic priorities like that digital, and own 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.

Questions & Answers:

Operator

Thank you. We will now begin the question and answer session. [Operator instruction] At this time, we will pause momentarily to assemble our roster. And the first question will be from Steven Zaccone with Citi.

Please go ahead.

Steven Zaccone

Great, good morning, everyone. Thanks for taking my question. Nice to see that 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'd be 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 bit more promotional this year?

Brian LaRose -- Senior Vice President, Finance

Thanks, Steve. Appreciate the question. Let me just give a little, and then I'll go into looking forward. One of the great things about Petco is it's relatively immune to macroeconomic trends.

Premiumization has been a multi-year 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 reading, higher frequency, and where we see outsized growth and by the way, better track frequency. In the higher-end customer where we said 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 map.

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 cable, we have midrange cable, and we also have vital care for a comprehensive program that provides value to customers. So we see the market as rational, and given the supply demand dynamics, we anticipate continuing to be rational, but we're less exposed and 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.

Steven Zaccone

Great, that's very helpful. 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.

Brian LaRose -- Senior Vice President, Finance

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 of 700 to 800 basis point benefit from stimulus, and we grew 27% last year, which was marked by outside growth by a 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.

Steven Zaccone

Perfect. Thanks, guys. 

Brian LaRose -- Senior Vice President, Finance

Thank you.

Operator

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

Michael Lasser -- UBS -- Analyst

Good morning. Thank you for taking my question. How much do inflation contribute to the 14% sales increase in 4Q, and given the rise in imports like [inaudible]? How much inflation have you embedded into your 5% to 8% growth outlook for 2022?

Brian LaRose -- Senior Vice President, Finance

Yeah, thanks for the question, Michael. I won't get into specifics on a 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 pick up on that in Q4, but as we mentioned on the call, with 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 associated pricing actions. 

Michael Lasser -- UBS -- Analyst

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

Brian LaRose -- Senior Vice President, Finance

Yeah, correct. Our current understanding, and look, the market, Michael remains fluid. We have really good relationships with our partners. I think our team did a great job at 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 price.

Michael Lasser -- UBS -- Analyst

OK. 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. Outside of the first quarter, were you expecting a different compare? Is there a line of sight to the gross margin stabilizing? Even with some of the shift to a lower gross margin business, is it still have a better than average overall operating margin?

Brian LaRose -- Senior Vice President, Finance

Yeah, it's a good question, Michael. I mean, let me start with as a reminder. We're focused on expanding income 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 even a 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 are 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 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 it. So consumables was better served, 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 to Q1 normal seasonality and the year over year stimulus benefit from last year.

Michael Lasser -- UBS -- Analyst

OK. Thank you very much. 

Brian LaRose -- Senior Vice President, Finance

Thank you. 

Operator

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

Anna Andreeva -- Needham and Company -- Analyst

Great. Thanks. Good morning, guys, and congrats. Really nice results.

We had a question on net customer ads, I 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 channel? and maybe any additional channel of any additional color on the performance of the 2020 cohort would be great, and then we had a follow-up.

Brian LaRose -- Senior Vice President, Finance

Yeah, thanks for the question, Anna. We're pleased with the approximately 8000,00 new ads in the quarter. In 21, we had millions of net new ads taking us to 24.1 as we speak or at the end of the quarter rather. And we built a strategic capability for last three quarters and delivered customer ads at a multiple of our key online competitor, and that's something that we're very proud of.

They're helping to drive our growth today and to do so in the future. I've talked before about this free annuity concept, and with our more robust analytics capability that we'll talk about, and 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 21 vis-a-vis 20 brick and mortar was even stronger. So the fear that people can return to brick and mortar, 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 pop as you can't get that our online competitors. So we saw our strength across both channels.

Anna Andreeva -- Needham and Company -- Analyst

OK. That's great. [Inaudible] 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? Curious how the mix of merchandise will differ compared to a typical pet care center location, whether firms have 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.

Brian LaRose -- Senior Vice President, Finance

Yeah, great question and 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. And we're looking for partners that give us access to new customers, and have high density of tech parents who provide supplemental services, and partners that are appealing to our higher-end customer base. Always has fantastic brand, a great experience, a great culture, and they have a lot of DIY-focused millennials and Gen Z, your customer base are incremental to ours. One of the other things that I love about this partnership, I grew up at PepsiCo, and kind of 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 kind of 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 and 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 I would say at this stage.

Anna Andreeva -- Needham and Company -- Analyst

That's great, thank you so much, and best of luck.

Operator

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

John Heinbockel -- Guggenheim Securities -- Analyst

So, Ron, I want to start some Vital Care 2.0. As you think about formulating that, and 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 3 to 5 years. And what do you think the monthly fee will shake out as you put additional tiers in above the current 19 bucks?

Ron Coughlin -- Chairman and Chief Executive Officer

Yeah, I'll probably get punched by IR and my legal team, but we're going to get to a 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. Nearly 4 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 thrive other half of the GMV, which make an elaborate upon.

But we made that bet. To me, vital care is the customer-facing manifestation of that, that 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 good care of their pets.

And those customers, by the way, are the highest spending on this and the pet parents who care the most about their pet. So we will get to a million. The question is when not if. In terms of Vital Care 2.0, we love the additional capabilities.

We love the expansion of Cat. Actually, we're really pleasantly surprised at what percent of the initial signups are cat. We saw an acceleration immediately once we last launched Vital Care 2.0 and our pet care centers. And then I like this for your program to, you know, the more tentacles that are feeding vital care signups, the better.

And partners like rover partners, like Colgate-Palmolive Hills, and multiple shelters, they're going to feed vital care and help us accelerated. In terms of financial impact is baked into our guidance, this is an LTV play for us. This is an LTV play. 20% due to food, 30% due 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 1999. Our focus is making sure that we're monetizing those customers and providing a great experience.

Mike Nuzzo -- Chief Operating Officer and Chief Financial Officer

Yeah, 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 Our Thrive Hospital clients will be able to access vital care in a more seamless way. And so that's that's another really exciting part of the transaction.

Ron Coughlin -- Chairman and Chief Executive Officer

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.

John Heinbockel -- Guggenheim Securities -- Analyst

And then maybe just to follow-up on that. When you look at your share of wallet with your best customers, you know the most attractive demographics. Where do you think that fits today? And I imagine vital care overlaps right with that demographic. So vital care, which would be a natural wallet share builder, an easy one with those customers.

Ron Coughlin -- Chairman and Chief Executive Officer

[Inaudible] Customers are pretty much the highest valued customers the entire time. So that's why I'm so focused on driving that they're probably the highest value customers in the category, one of the highest value category customers in the category. Our share of wallet is absolutely growing. That is was the intent of vital care.

And now at 160 and a 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 to 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 [inaudible] in some ways is our upside TAM for us in a way to think about it as it's all upside TAM for us.

So that is very much our focus. So it's a great question. 

John Heinbockel -- Guggenheim Securities -- Analyst

Thank you.

Ron Coughlin -- Chairman and Chief Executive Officer

Thank you.

Operator

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

Kate McShane -- Goldman Sachs -- Analyst

Hi, good morning, thanks for taking our questions. You had mentioned that the elasticity response from some of the price increases you needed to take was neutral, but we were wondering if you had seen any impact from trading down or just more growth in your own brand of private label as a result.

Ron Coughlin -- Chairman and Chief Executive Officer

Hey, Kate, thanks for the question. I would answer it in two different parts. First, I talk about the march toward premiumization, that is a multiyear march, we have not seen that a bit, so we continue to drive premiumization within our portfolio, whether that takes the form of fresh frozen, whether that takes the form of hand kimbo like origin and taste of the wild, so we are continuing to see that. And on the supply side, driving toward ready the highest, and kind of fashion definition or 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, and I would not consider wholehearted a down trade, I would consider wholehearted active shifting from commodity brands in a similar lower price into wholehearted. So we've taken a lot of actions to shift those customers in lower value commodity brands into whole hearted as an explicit strategy, and that strategy is working.

Kate McShane -- Goldman Sachs -- Analyst

That's helpful, thank you. And then our second question is on the digital fulfillment. You've had a lot of success with focus 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.

Ron Coughlin -- Chairman and Chief Executive Officer

Yeah, so let me start by the digital reader. In 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 you 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 our picture 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 when a customer comes on to our website or app and has the opportunity to do business same day they choose it, and that's something that our online competitor cannot connect to. 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 20, elevated in 21, and elevated today. So they're all kind of stretching out, that's the bad news. The good news is they're adding capital and labor situations getting better. So we see improvements in our trucks are more and more for 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 than that, the vast majority, and it's getting better. 

Brian LaRose -- Senior Vice President, Finance

Yeah. And I would just add to that we're going to remain opportunistic in terms of staying out in front of demand, which we did last year.

Kate McShane -- Goldman Sachs -- Analyst

Thank you. 

Operator

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

Oliver Wintermantel -- Evercore ISI -- Analyst

Yeah. Good morning. I had a question, follow-up question to the five Chevy integration. I think, Brian, you said it's epitaph neutral or break even in the first year.

Would it add 2 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? Yeah, thanks.

Brian LaRose -- Senior Vice President, Finance

Yeah. 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 already in, and I guess the thrive share of the JV gets adjusted out through our eliminations and adjusted even to add-backs.

So the revenue was actually already in. What you heard Mike touched on earlier with 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 quite care expansion, which we think will be enhanced. All that's baked into the 6% to8% in terms of the pure vet revenue that's already in our results. And I'll turn it over to Mike to talk more about strategically worth it.

Mike Nuzzo -- Chief Operating Officer and Chief Financial Officer

Yeah, 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 whereas you referenced the potential for acceleration, in the vet business, it's all about your links and your bonds with that. So we have now over 13,500 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 onboard 800 best in class that 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 you referenced it perfectly.

One playbook, one culture, one speaks to the customer. I think that's going to be really, really important. And then, of course, we reference the synergies in the script, and we reference 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.

Oliver Wintermantel -- Evercore ISI -- Analyst

Got it. Thanks very much, and good luck.

Ron Coughlin -- Chairman and Chief Executive Officer

Thank you.

Operator

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

Zach Fadem -- Wells Fargo Securities -- Analyst

Hi, good morning. Ron, first question on the industry as a whole as we're dealing with some pretty funky comparisons, and I'm curious if you could talk through your assumptions on broader at category growth in 22. 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?

Ron Coughlin -- Chairman and Chief Executive Officer

Yeah, thanks for the question, Zach. Let me be clear, we operate in 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 spending per pet, which is good. And we're really well-positioned to capitalize on these humanization and criminalization trends that I've talked about.

In terms of 22, 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 faith in the category and our ability to gain share. We've got another share report last last week and we gain share.

Overall, we gained share in digital, we gained share in brick and mortar. So we have a strong category that we're gaining share in.

Zach Fadem -- Wells Fargo Securities -- Analyst

Got it, and then for Brian and Mike. Did you talk about the driver of the capex uptick 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 22. And then what type of [inaudible] you're typically seeing from some of your recent remodels over the past year. Thanks.

Brian LaRose -- Senior Vice President, Finance

Yeah. Good question, so as you saw in our range today, the midpoint of our capex spend is on a $60 million increase year over year. I will tell you that 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.

You touched on them, that buildout is one the remodels, the extension of our fresh frozen entries 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 got efficiencies in how over time, so we'll double click into this more an analyst case on to steal my own thunder.

Zach Fadem -- Wells Fargo Securities -- Analyst

Got it! Appreciate the time.

Brian LaRose -- Senior Vice President, Finance

Thank you very much, Zach.

Operator

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

Seth Basham -- Wedbush Securities -- Analyst

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 or supplies side of the business for 2022?

Ron Coughlin -- Chairman and Chief Executive Officer

Yeah, if you look at pets coming into homes, we've seen a continued elevated, actually, one of the things we saw in the second half of 21 was we saw heightened cat adoptions, which is part of the reason you see us expanding to mind to care to cat. And actually, we'll talk at our analyst meeting about increasing focus on cats, which is already paying dividends. In terms of supplies, as Brian cited a supplies in Q1 of 21, we're 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 21 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, the category, though.

Seth Basham -- Wedbush Securities -- Analyst

Thank you. My follow-up is around vital care 2.0, a 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?

Ron Coughlin -- Chairman and Chief Executive Officer

Yeah, it's about 3x. So when we think about vital care customer, as Brian mentioned, this is a share of wallet play, this is a retention play. this is going to LTV. So those customers, we do a lot of analytics around that.

So what we've seen from the early adoption and Vital Care 1.0, which extends 2.0, is those were already good customers, which then when we get around to final care at the expense and we look at that LTV as kind of a 3X.

Seth Basham -- Wedbush Securities -- Analyst

Awesome. Thanks.

Operator

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

Peter Benedict -- Robert W. Baird and Company -- Analyst

Oh hey, 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 you guys looking to add more square footage there as you continue to push further into this into this category? And that's kind of my first question.

Ron Coughlin -- Chairman and Chief Executive Officer

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 a billion plus as a cat in the categories of billion plus. Now it'll get to over $4 billion by 2025. We're the retail leader in 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 JFFT that we've only strengthened. And we also have instinct and fresh pet 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 JustForFoodForDogs 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 and other growth vector, and it allows us to kind of have a better and best strategy fresh frozen that really has us fired up. And then the other part about JustForFoodForDogs agreement is we'll have more marketing in against JustForFoodForDogs as well. So overall, we plan, we are leading, we plan on leading fresh frozen.

Brian LaRose -- Senior Vice President, Finance

And I would just tell you, Peter, as it relates to the capex, these are some of the easier capex decisions I have ever made, [inaudible]

Peter Benedict -- Robert W. Baird and Company -- Analyst

Definitely sounds good. 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 position from a system standpoint to kind of optimize the sharing of data, leveraging of data across your service offerings? And are there any improvements on that front on tap for the year ahead? Thanks.

Ron Coughlin -- Chairman and Chief Executive Officer

Well, that Mike may take that. We will focus a lot actually on 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 let me address that.

Mike Nuzzo -- Chief Operating Officer and Chief Financial Officer

Yeah, 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 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 will bring to bear. And so that's that's our 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 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 Petco 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 drive acquisition only furthers our party to do that.

Peter Benedict -- Robert W. Baird and Company -- Analyst

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

Ron Coughlin -- Chairman and Chief Executive Officer

Thank you, Peter.

Operator

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.

Ron Coughlin -- Chairman and Chief Executive Officer

Thank you, operator. I'll just conclude by saying we have a strong growth category, our competitive modes are deepening, and are 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 in 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 have in us every single day.

Kristy Moser -- Vice President and Investor Relations Officer

That concludes Packer's fourth quarter and fiscal 2021 earnings conference call. Investor relations will be available after the call if you have any follow-up question.

Operator

[Operator signoff]

Duration: 69 minutes

Call participants:

Kristy Moser -- Vice President and Investor Relations Officer

Ron Coughlin -- Chairman and Chief Executive Officer

Brian LaRose -- Senior Vice President, Finance

Steven Zaccone

Michael Lasser -- UBS -- Analyst

Anna Andreeva -- Needham and Company -- Analyst

John Heinbockel -- Guggenheim Securities -- Analyst

Mike Nuzzo -- Chief Operating Officer and Chief Financial Officer

Kate McShane -- Goldman Sachs -- Analyst

Oliver Wintermantel -- Evercore ISI -- Analyst

Zach Fadem -- Wells Fargo Securities -- Analyst

Seth Basham -- Wedbush Securities -- Analyst

Peter Benedict -- Robert W. Baird and Company -- Analyst

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