Good day ladies and gentlemen. Welcome to Petco's Fourth Quarter Fiscal 2020 Earnings Conference Call. After today's presentation there'll be a question-and-answer session and further instructions will be given at that time. Please also note today's event is being recorded. I would now like to turn the conference over to Kristy Moser, Vice President and Investor Relations Officer. Kristy you may begin.

Thanks very much and welcome everybody to Petco's fourth quarter fiscal 2020 earnings conference call. We are webcasting live over the internet. To access the call on the internet, please log on to Petco's website at petco.com and follow the links from there.

Thanks, Kristy and good morning, everyone. Let me begin by saying that we couldn't have been more pleased to be speaking with you for the first time since our IPO January. We've been looking forward to sharing progress against our strategic priorities, and how that translated to strong fourth quarter and full year results. We exited 2020 with momentum, delivering fourth quarter revenue growth of 16% above our expectations, a 17% comparable store sales or comp sales, 90% plus digital growth, almost a million new customers into the franchise and 13% adjusted EBITDA growth. This contributed to an impressive 2020 performance overall, where we saw a full year revenue growth of 11% translate into 14% growth in adjusted EBITDA. And while the COVID environment has definitely provided a strong industry tailwind, looking forward, the millions of incremental new pets-oriented homes in the past 12 months, generated a predictable head spend annuity for years to come.

Thanks, Ron. Good morning, everyone. Building on the strong business momentum that Ron discussed, I am pleased to share with you how this momentum is translating into strong financial and operational results. I'll start with the fiscal year 2020. Full year 2020 revenue grew 11% from 2019 to $4.9 billion, with total comp sales of 11% consisting of digital up over 100%, services and vet up modestly despite COVID headwinds, and brick and mortar merchandise up mid-single digits, reflecting robust trends discussed previously. Both transactions and average basket trends were strongly positive for the year. As Ron mentioned, our digital business continues to benefit from repeat delivery, which by the end of the year represented almost 45% of total digital revenue. And from local Pet Care Center base fulfillment, including buy online and pickup in store, curbside, shipped from store and same day delivery, which collectively represented approximately 80% of fulfilled digital orders. Owned brands delivered a team's growth rate for the year. Our services and vet businesses continue to benefit from momentum in grooming, as well as the scaling of vet hospitals. In spite of a challenging environment from COVID restrictions, in 2020 as we added 44 new full-service vet hospitals within Pet Care Centers, ending the year with 125 hospitals. From a performance standpoint, our hospitals are expected to reach full revenue and EBITDA maturity at five years after launch. Notably, our hospitals completing their third year of operations are ahead of model generating over $1 million in revenue, and over $200,000 in four wall EBITDA in year three, while our 2019 and 2020 cohorts are scaling meaningfully faster than model as we gain more vet service share within our target markets. In addition to these impressive hospital trends, the rest of store lift from our Pet Care…

Thanks, Mike. My closing point is the same one that I made on our IPO roadshow and asked how to think about Petco. Beyond being a mission based strong growth company with terrific management team, yes, I encourage you to think about us as a high performing retail company. We're also a digital omnichannel innovator as e-commerce business doubled in the last year. At the same time, we're a veterinary care and services provider as that footprint increased by over 50% in the last year. We are confident that the continued execution of our strategy will drive momentum across our business as reflected in our 2021 guidance, and will enable us to continue to create long-term value for shareholders. On behalf of our more than 26,000 passionate partners, I could not be more proud of our incredible performance in 2020 and we are just getting started. The #Petcostrong is something that organically became a rallying cry this year. And I see us becoming Petco stronger every single day. We're excited about the future and appreciate you being a part of our journey. With that, Mike and I will now take your questions.

Thank you. We will now begin the question-and-answer session. Today's first question comes from Kate McShane with Goldman Sachs. Please go ahead.

Hi, good morning, thanks for taking my question. My question centered around gross margins, it was nice to see that you were able to offset some of the pressure from the mix piece, which I know includes digital and services. So, I wondered if you could maybe talk through that a little bit more, how much that mix impact did have on gross margins in Q4 and how should we think about the gross margins in the context of the guide for 2021?

Thanks, Kate, appreciate it. Let me be clear, our FY'20 and fourth quarter gross margins were in line with our expectations. We will continue to drive gross margin rate improvement in each area of our business, as well as drive into high profit areas like own brands that offset that mix shift to digital. So, from a longer-term standpoint, any gross margin rate erosion is going to be modest and moderating over time. I'll let Mike double click into that.

Yeah, thanks, Ron. Thanks for the question, Kate. Yeah, I would start by emphasizing that our gross margin rate for 2020 would have exceeded 2019's gross margin rate, excluding the COVID related impacts as we mentioned in our prepared remarks. In Q4, the major impact was the lapping of an actuarial true up from 2019. And we also had COVID related impacts. Channel mix was modest, but what we are seeing is gross margin rate improvement in major areas of our business. And the other really positive thing is that we are seeing substantial opportunity for continued rate improvement. We've talked about the delivery optimization that we're doing in e-commerce, the productivity enhancement in services with the scaling of best and the increased productivity around our grooming business, for example, own brands is a huge help to our gross margin rate. So, we don't guide to gross margin rate, it's embedded within our guidance. We feel very good about our ability to manage this aspect of our business.

Thank you.

Thanks, Kate.

And our next question today comes from Steven Zaccone with Citigroup. Please go ahead.

Great, thanks. Good morning and congrats on the nice start to being a public company. Ron, when you look back on 2020, how much of the strength in the business was driven by the pandemic lifting demand versus the general transformation in the business that was already underway?

Hey, Steve, and thanks for the well wishes for quarter, number one. So, if you break it down, in many ways, we were just perfectly positioned for COVID. The transformation that we engineered. We were already accelerating coming into COVID, so we were growing 6%, coming into COVID with plans to accelerate from there. As COVID change behaviors, we turn - we'd be in the process of turning our Pet Care Centers into micro distribution centers already. So, we immediately tripled the amount of ship from store locations, we launched curbside and then later launched same day delivery. All of these positioned us very well to capture the COVID opportunity. Now, I know there's lots of conversations about, stay at home beneficiaries versus companies that are going to surge with reopening, I would tell you that we're a bit of a unicorn between the two. Yeah, we got a benefit from COVID, but that benefit brought with it 3 million incremental new pets in 2020. And we see elevated pet adoptions and we see waiting lines with breeders and we see our live animal sales at an elevated level in the first half of 2021. So that provides an annuity. If you look at a home gym, you're only going to do that once every five or 10 years. But once you have that new furry friend in your house they're going to be fed, they're going to be groomed, they're going to need to be vaccinated. So that provides an annuity that gives us a bridge from the COVID beneficiary to the reopening beneficiary. So, we bridge into both. We also had parts of our business that were hampered in COVID that are going to have positive lap dynamics and grooming and training to be perfect example, out of abundance of caution, we stopped group training, we reduced our throughput and footfall in our grooming salons. And those went negative for the first two quarters or after the COVID. We got back to growth and we got back to double-digit growth in Q4. But those are going to have a positive overlap dynamic as we head into the second half. And then when you look at total spend per pet, it is for the last seven or eight year has been up 4% as humanization and premiumization increases. So, we see that continuing into the second half. So, we're both a COVID beneficiary, but we're also a reopening beneficiary. And all the work we did in the leading up to COVID positioned us perfectly. Thanks for the question, Steve.

Yeah, yeah, that's great. Thank you for the detail. Just a quick follow-up question on the e-com business. So, you have very strong growth this year, but there's still a pretty sizable sales volume gap versus the industry's largest e-com pure play. What do you view as your key competitive advantages online to narrow that gap over time? And thanks very much.

Yeah. So, let me start by saying we've doubled our e-comm business in 2020. So obviously, we're very happy with that. We've steadily gained share from a digital standpoint. So, we're happy about that. We already depict our e-commerce businesses into three buckets. We historically prior to those three buckets had been overly promotionally oriented. We had an antiquated infrastructure, and a promotion orientation. So, phase 1 was getting the basics right, during the fundamentals. We rebuilt the IT infrastructure underneath our digital business. And within 18 months, we launched repeat delivery, we launched our app, we launched buy online, pick up in store, et cetera. So, we redid our IT infrastructure. Then we close gaps in areas like SKUs versus competition. We close gaps in areas like pricing where we wanted to. We were the slowest site in the industry. Now we're either the fastest or as fast as anybody else. So, we got our fundamentals right. And guess what happened when we did that, our conversion grew by double digits. And then stage 3, which is the really exciting stage is where we generate competitive advantage. And that really became clear to us in COVID. As we launched focus, as we expanded or curbside, as we expanded our ship from stores, but really, really when we launched same day delivery. Same day delivery is now 30% of our orders and the way to think about all of those offers is we get to the customer faster. So, you have higher customer satisfaction at lower cost than pure online players, who are shipping from DCs. And the best example of this is a big bag of dog food. So, a big bag of dog food from a DC, 40 pound bag is going to get a UPS or FedEx charge based upon the weight going across zones to that customer. Instead, the big bag of dog food gets picked from one of our Pet Care Centers, formerly known as stores. Goes in the back of a door dash trunk, which costs us the same as if it was a tennis ball and gets to that customer the same day again, lower cost. So, we believe, we have structural advantages that will allow us at minimum to play our game, and to continue to gain share. But we think its competitive advantages versus the online players that the dedicated player would have very difficult time competing against.

Thanks very much.

Thank you.

And our next question today comes from Michael Lasser with UBS. Please go ahead. Mr. Lasser, this is the operator. Your line muted, perhaps.

It was. I'm sorry. Good morning. Thanks a lot for taking my question. Two quick questions. First, if you look back at 2020, how was the overall promotional environment? And how did that contribute to your gross margin dynamics, especially in the fourth quarter? And second, what is your expectation for the contribution from inflation in 2021, is in light of the sharp rises in commodity input costs for pet food? Thank you very much.

Yes. So, I'll front this and then Mike will tell this one. Thanks for the question. The good news is the promotional activity was severely backed off in 2020, which allowed us to do some of the margin offsets. Digital is a great example, we expanded margins within our digital business. So, promotional activity has been down, we don't see that more promotional pressure as we navigate into 2021. The other thing I would say is over half of our merchandise portfolio isn't sold at other places. So, we have less promotional pressure than just about all of our competitors, because we have much stronger mix in own brands, and much stronger mix in exclusive. So, we don't have that same promotional or commoditized pressure on our business. Where we really see pricing and promotions going, is on the back of the analytics build out that we did last year. We've spent time building a data infrastructure, we brought in analytics experts. We created a cross enterprise analytics group with some phenomenal analytics talent from outside. And now we're getting hyper targeted at the individual customer level, on what motivates them. And one of the examples right now is customers that we think would be prone to buy online pick up in store. In that instance, they're doing the shipping for us. So, we'll promote them into buy online pick up in store, we see them turning into almost repeat delivery customers. So, the long-term value of that customer is high. So, we promote them into buy online pick up in store, and then we increase our long-term value, and obviously exponentially expand our margin as just one example. But I let Mike expand.

We've been migrating away from a heavily promotional environment in 2019 and 2020. So, I can't say that we were meaningfully less promotional in 2020 related to 2019. I believe, as Ron was saying that, we don't really feel like we would have to be more promotional in 2021 for the very reasons that Ron was talking about. As far as input costs, we have not seen a broad-based substantial increase in input related costs. Historically, Michael, this has been a business where if there have been increases in input costs, they've been able to be incorporated into the pricing structure for us. But as of right now, we feel pretty good about how we're positioned from a pricing standpoint, how we're positioned from a manufacturing input pricing structure.

Awesome. Thank you so much. And good luck.

Thank you.

Our next question today comes from Seth Sigman with Credit Suisse. Please go ahead.

Hey, everybody, thanks for taking the question. And congrats on all the progress. So, you're exiting 2020 with significantly more customers than you started? And I'm just wondering, can you discuss the repeat behavior a little bit more, how have you been able to retain these customers to-date? And I guess just given the recurring nature of your business, presumably that would support some higher level of baseline growth into '21? I'm just curious, how do you think about that? How does that factor into your outlook? Thank you.

Yeah, thanks. That's a great question. So yes, we captured nearly a million customers in Q3. We captured nearly a million customers in Q4 and the Q3 number was competitive with our biggest online competitor, who has been historically good at that. So, we felt really good about those two numbers. So, then the question becomes what you just said, which is, what do we do with these customers. We have been actively shifting more of our customer base and more of our revenue base into recurring revenue customers, which makes it much more predictable and quite frankly, much less promotional. So, whether it is repeat delivery, whether it is PupBox, which is our monthly box for new puppies, which is an on ramp to our business, whether it's our insurance offer, whether it is our membership vital care offer, we are shifting mix to recurring revenue and recurring revenue had a significant impact on our comp both in Q3 and in Q4. Specific to repeat delivery, what we see is, we see higher satisfaction scores from our repeat delivery, we see significant growth in our repeat delivery. Concurrent with that, though, one of the interesting things that's happening is we have a lot of customers that behave as if they are recurring revenue. These are programs like spa club, and board those customers that come every two three weeks and pick up the same product. So more and more of our revenue is becoming recurring type revenue either explicitly or implicitly. The other thing I would say is that our LTVs are going up and our retention is going up on our customer base. The customers that we acquired during the COVID years were higher retention and more profitable customers than prior years. So, we feel really good about these million customers pick up in Q3 and Q4 and what we're doing with them.

Okay, that's great. Very helpful. If I could just follow up on the guidance. So, you're guiding sales towards the high end of the long-term algorithm that you've talked about. I guess you're guiding to EBITA growth slightly above that. And I realize the long-term outlook doesn't really embed a lot of EBITDA margin expansion given some of the puts and takes you've talked about. But is there anything specifically that holds back the margin expansion in FY'21, maybe an assumption for continued COVID costs or anything else that you would flag?

Seth, I wouldn't call it anything in particular, I would emphasize, and we feel really good about the fact that in 2020, even with COVID expenses, we expanded our EBITDA margin by 20 basis points. So, our guidance would imply a continued growth in the EBITDA margin. And as we have shown in the past, our ability to manage our cost structure, our ability to do that while smartly investing in the business, I think gives us a lot of confidence that we can continue to expand EBITDA margins into 2021.

Thanks very much.

Thanks, Seth.

Our next question today comes from Liz Suzuki with Bank of America. Please go ahead.

Thank you. Are you seeing any meaningful changes in markets that are reopening, particularly on the services side? And do you also expect online penetration to come down as markets reopen? Or have consumers become so accustomed to buying online that that acceleration in the online shift is now more likely to be permanent?

I'll do the second part of that, and then I'll pass it over to Mike just to the services reopening. We definitely have a change of behavior, particularly in older consumers we're seeing, all of a sudden, they are comfortable buying, purchasing online and their digital savviness has gone up, forced by the stay-at-home orders. At the same time, increasingly, we're not thinking about our customers is either or, 39% of customers, according to our studies are omni channel customers. And those are our sweet spot. Right. They want to do some activities online, but they also want to come into the Pet Care Centers to get groomed, to get trained, to get advice from our amazing Pet Care Center partners. So, we see more and more omni channel behavior. And actually, I'll give you two dynamics. First is, as our digital business has surged 100% in 2020, it is driving Pet Care Center traffic and growth, number one. The second thing I will tell you is we really dialed up as we over delivered through the second half of 2020. We dialed up our performance marketing to aggressively acquire customers on the digital side of our house. What we found, as we dialed up our marketing on the targeted against the digital side of our business, our traffic and basket grew in our Pet Care Centers. So, this is really one end-to-end ecosystem, omni channel ecosystem that is quite powerful. And we believe it's unique because we're the only one that, as part of that, owns our own vet network. And I'll pass it on to Mike to elaborate on services.

Yes, Liz. I would say, and I'm really proud about this. Our services business, our rebound has been broad based. So, it hasn't been market specific. It's been significant, so, much quicker than I think we may have even anticipated. And I think one of the big drivers is what Ron was talking about. This link with digital and services has become very, very powerful for us. So, we talk about the 25% of appointments that are now booked online for grooming. The Spa Club program is all outpaced, the rollout of online training, which we did in literally three weeks within COVID that we're now servicing Ron's mom's pet. That coupled with Vetco, our mobile vaccinations, where we pivoted to an online scheduling system. All of these digital linkages have helped to accelerate the business, have it rebound faster, and have given us a lot of momentum as we get into the first part of the year. And just I'm really, really excited about it.

The last thing I'd say, Liz, on that is, our traffic and basket are up in our Pet Care Center, so we didn't have this massive shift to digital and our Pet Care Centers aren't growing, our Pet Care Centers are growing, traffic is up and basket are up in our Pet Care Centers. And that continues to this day.

Perfect, thank you.

Thank you.

And our next question today comes from John Heinbockel with Guggenheim Partners. Please go ahead.

Hey, guys, maybe you talk to what you think your current share is with the most lucrative customer segments that you have? And where do you think that might be able to go to? And then how many - where did you finish the year with multi-channel customers? How many did you add in the fourth quarter?

Yeah. So, from a share standpoint, we're gaining share everywhere where we're focused. So super premium food, including fresh food, training, grooming, veterinary, digital, we're gaining share everywhere where we're focused. Now talking about the customer, we have the highest value customers or we're over indexing the highest value customers in the category, really the health focused pet parents and the quality seekers. And the majority of our portfolio, our customer base is in this highest customer segment. And they spend over 40%, more than your average pet parent. So, we enjoy that customers, we bring in new customers, they gravitate towards that higher end, spend and quality seeking. And part of it is because we have this unique end-to-end ecosystem. If you go talk to customers, 50% of customers say they want a one stop shop partner for the care of their pet. We are the only ones who have that. Nobody else has from own vets to training to grooming to the highest nutrition foods to supplies, our leading pet specialty competitor spam out their vet as you know. So, we're the only ones who have that. So, we feel really good about our over indexing and our acquisition of the highest value customers in the pet space. In terms of multi-channel, we have steadily increased our multi-channel growth. So, when we first started the conversations, I think in testing the water, we were single-digit growth. We went up to double-digit growth at the beginning of the roadshow. And then in Q4, we're in the 20s in terms of multi-channel growth. And now importantly, multi-channel customers spend between two and three times more than our single channel customers. So, they spend more as we drive them into more channels like a food only customer into adding grooming, a food and grooming customer into vet, they spend more, so it's great for our business. The headroom story of this is we only have 3.5 million customers that are multi-channel out of our 20 million plus customers. So, we have a lot of headroom in that.

Thank you.

And our next question comes from Peter Benedict with Baird. Please go ahead.

Hi, guys. Good morning. I guess the two questions first, just, can you maybe expand on your earlier comments around the fresh food category? Maybe give us a sense for what the size is today? I think you said it was going to quadruple. We're just trying to understand, frame those numbers. And how are you positioning Petco and take advantage of that and thinking about the opportunity for just food for dogs? That's my first question.

Yeah. So, pet is a phenomenal category for syndicated data. The data that we see from industry experts says that the pet category is roughly about - I'm sorry, the fresh category is roughly about $650 million today, going up to $2 billion by 2024. It is a major focus of ours, we feel like, we have the best offering with just food for dogs. And we will be doubling our footprint of just food for dogs in 2021. We plan on being a market maker in this space. It's the highest ring in our Pet Care Centers or on our digital sales from a food standpoint. The second thing that it does for us is it has twice the trip frequency and all the associated add on baskets that happen with that trip frequency. So, we are big fans of fresh from a doing the right thing for pets. And we're big fans of fresh in terms of what it does for our business.

Okay, that's great. Thanks for that, Ron. And then we get a lot of questions about Petco's ability to source qualified vets. So just can you maybe update us on how your recruiting packages is kind of resonating in the marketplace? And they've got aggressive goals here in terms of adding. But just kind of any update on your success and how you go to market and attracting vets for your hospitals?

Hey Peter, good morning. I'm really close to this. So, I can tell you. I'm really excited about our progress on vet. The fact that we opened 44 hospitals during the COVID year, and we have built this recruiting engine, that doesn't just happen. We've made a substantial amount of progress. I would tell you that our time to fill is better than the market. Our retention is much better than the market. And I really think it's because we've invested in field support, and recruiting talent and compensation and benefits and really tried to shape a very positive vet culture that emphasizes autonomy. And Petco's mission is a huge help as well. In addition, as you know, we have the mobile vaccination clinic business, which gives us access to over 2099 vets. And it becomes a great sourcing engine for the full-time vets that we can bring into our ecosystem of hospitals. So, I can tell you, I'm on the phone with vets, so I'm usually the closer in the recruiting process. And what I'm hearing more and more from them is that with this great combination of a bigger company with resources and support combined with a culture that feels like a really great family business. So, we're seeing a lot of good progress. And as we said, 70 next year, or this year in 2021 and we're on a really good runway of growth.

That's great. Thanks for that. I guess if I can sneak just one more in here. I know it's still early here. But the vital care effort initiative, just can you talk about the enrollment trends there, what you're seeing and how you expect that to maybe scale as you go forward? Thanks.

Yeah. I am so excited about Vital Care. So, we launched it in October. And we now have over 50,000 members in Vital Care. And what's beautiful about Vital Care is that we are increasing share of wallet. So, if you look at what's happening now, roughly 19% of our Vital Care customers are new to food. And 30% plus are new to services. So, we're getting share of wallet, which was the intent. From a strategic standpoint, really, what it does is it brings our whole unique ecosystem to life for customers. So, you get the checkout, you get the vaccination, you get grooming, you get discounts on food. So, it's really powerful for us, it's growing. You will see us continue to evolve the offer as we learn in the market. And you'll see us continue to dial up the marketing and the customer acquisition. So, we're very much getting started. But it is a key future pillar of our business.

Okay, thanks so much, guys. Good luck.

Thank you.

Thanks, Peter.

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

Hey, good morning. Can we talk about the performance of your vet hospitals? You mentioned nearly all cohorts are ahead of your model. And I'm curious if you could talk a little more about the contribution to traffic and comps? And then as you think about the annual step up from 40 to 45 vet hospitals to 70 plus, how should we think about the gradual comp and EBITDA lift in 2021? And how that builds in 2022 and beyond?

Exactly, great question. Yeah, I would say that the health of the overall vet business is really strong. And as you indicated, we provided some information on some of our older cohorts, and some of our newer cohorts. But I could say each cohort is showing a beat model on both revenue and EBITDA. And we're seeing some acceleration in Q1 which is fantastic. What is driving that is our customer counts are up, the number of surgeries done at hospitals is ramping nicely. These are two really big contributors to the maturity of the vet hospital. As far as the contribution to the comp, as we have talked about where we put our vet hospitals, where we do the transformation of our Pet Care Centers, we're seeing a lift and we've consistently seen a list of mid-single digits in those Pet Care Centers. So, the combination of the vet business scaling, we talked about that in the context of the overall services business contributing on our long-term algorithm, a couple of points of comp. And then you add to that the incremental benefit from the transformation of the Pet Care Center, that includes the addition of the vet hospital adding some additional comp points within the overall ecosystem of the business. So, it becomes a very powerful engine for contributing to the overall growth of the company.

Thanks, Mike. That's helpful. And you talked a couple times about the impact of COVID related bonuses and expenses on the P&L this year. Curious if you could break out the impact for us in 2020 in terms of basis points? And as you think about the 2021 model, can you talk us through which costs are recurring and what won't recur and any other offsets on the operating expense line?

Yeah, good question. For 2020, our total COVID expenses were around $45 million and about three quarters of that would be in SG&A and about a quarter of it would be in our gross margin. For Q4, I think it was around $8 million. So obviously a big impact to us on the financials that we absorbed and still grew EBITDA, which is really good. As far as 2021, I can tell you that the increased sanitation and PTO, we've incorporated these in just running the business. And so, we feel really good about those expenses embedded within our cost structure. We also have planned compensation investments that match up with our field bonuses that we gave during the year in 2020. So, we feel like we're largely covered from a cost structure standpoint. You can't predict COVID, it's been relatively unpredictable. But as far as what we know, we feel like we're really good from an overall cost structure standpoint and what we've given you in the guidance related to that.

Got it. Really appreciate the color. Thanks for the time.

Thanks Zach.

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

Thanks a lot, and good morning. My first question is around your customer base. If you could give us the year-end customer accounts, that would be helpful. And related to that, what are you seeing in terms of the spend per customer on average? How has that trended through the year 2020 on a quarterly basis?

Yes, we're really pleased with what we're seeing from a customer dynamics standpoint. As I said, we picked up nearly a million customers in Q3, nearly a million customers in Q4, and we're acquiring customers as we speak in Q1, our momentum is continuing. So, we feel really good about our ability to acquire customers. Our customer acquisition cost is either the lowest or one of the lowest in the industry, whether that be in digital or we have great customer acquisition leverage in areas like that, that a mom-and-pop operator just can't compete with. So, we have turned into a customer acquisition machine and we have a virtuous cycle. As we invest, we acquire new customers that's driving our topline dropping and we're able to invest back to acquire more. Concurrent with that our LTVs continue to build; our retention rates continue to build. And as I said earlier, the customers that we bring in and the customers that we over index with are the highest value customers in the category with over 40% higher spend than our average pet customer. So, we feel really good about where we are from a customer standpoint, both in acquisition as well as the monetization. And I should say our customer satisfaction is up in every part of our business.

Got it, thank you. And then secondly, as a follow up, just thinking about your commentary around promoting into both this 25% off orders over $50, you're essentially giving away any fulfilment cost advantage you have or is the online peers? And that's depressing your gross margin versus in store sales, of course. How loyal are these customers? Do they stick at the promotion period? When?

Good question Seth. This is what I was talking about earlier in terms of getting smarter from analytics standpoint. So, first of all, we're not doing kind of mass everybody promotions. So, we're targeting those promotions of the customers that we think that makes financial sense for us, number one. Number two, I'm 54 years old, soon to be 55 years old. And one of the things that our digital leader had to teach me and get me up to speed is to change my mindset from profit today to an LTV orientation. And so, when we shift these customers into a more profitable way of buying from us, the LTV is higher. So yeah, we will short term do some trade off on that promotion, but long term that is LTV good for our business. And that's a sophistication that we're bringing to our business that we didn't use to have. We suggest you across the board discounts to incent purchases. Now we're driving people into the offers that have higher margin and have higher LTV. And that's the precision that we're bringing to our business.

Thank you. And our final question today comes from Oliver Wintermantel with Evercore ISI.

Yeah, thank you. And congratulations on a successful IPO. It's good to have you guys back as a public company. I have two quick questions. One is traffic versus ticket if you could maybe comment on that, how that trended in the fourth quarter, but then also in 2020 as a whole? And then the second question is about labor costs, average hourly wages are going up. So, we just wanted to see how you guys model that going forward and what kind of a headwind that would be for you guys? Thank you.

Yeah. So, I will take the second part of that. And then I'll let Mike elaborate on that as well in terms of labor costs, and then as well as the average ticket. But average ticket, everything is going in the right direction. As I said traffic and basket are going in the right direction. But I'll let Mike elaborate. One of our commitments to the partners of Petco, which is if the company does better, you will do better. We take it very, very seriously. That's a kind of different flavor in 2020, as we had partners that were looking out for pets and pet parents in the middle of a pandemic and putting themselves at risk. So, two things happened during this COVID year. The first thing is, we wanted to make sure that they were compensated for being in a challenging environment. And we did five COVID appreciation bonuses and I put that up against anybody, any retailer or anybody else who had employees on the front lines, in terms of taking care of our people, and that served them well and helped our bond. The second thing that happened though, is we had a terrific year as evidenced by these results. And so, we increased wages as we went through the year to compensate them because we don't only think it's a short-term lift to our business, we fundamentally believe that there is a long-term lift to our business based upon having 3 million, 4 million, 5 million incremental new pets added into our mix. It provides an annuity for our business. So as Mike said, we had EBITDA leverage in our P&L. So, we had cost leverage in our P&L as we were able to offset that. But I'll let Mike expand.

Yeah, I would just say that the comp growth that we saw in Q2, Q3, and Q4 was very slowly driven by growth in average ticket and growth in transactions. So, we've seen both of those key stats grow well, and contribute to the overall comp of the business. And we're seeing the traffic, especially around our services business, as that has rebounded, that has obviously helped drive total traffic growth to the total enterprise. But on both stats, we've seen really strong performance.

On both sides of our business, digital and Pet Care Centers.

And then from labor cost standpoint in terms of within the P&L?

Yeah. As I think I mentioned, we built within our budgets, and what's reflected in our guidance is continued investment in our labor model.

Thanks a lot guys and good luck.

This concludes the question-and-answer session. I'd like to turn it back over to Kristy Moser for final remarks.

Thank you, Rocco. That concludes Petco's fourth quarter 2020 earnings conference call. Investor Relations will be available after the call if you have any follow up questions. Thank you.

Thank you very much.

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