Good morning, and welcome to Petco's Third Quarter Fiscal 2021 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Kristy Moser, Vice President of Investor Relations. Please go ahead.

Thank you very much, and welcome, everybody, to Petco's third quarter 2021 fiscal earnings conference call. In addition to the earnings release, there is a presentation and infographic available for download on our website at ir.petco.com summarizing our third quarter 2021 results. On the call today are Mr. Ron Coughlin, Petco's Chairman and Chief Executive Officer; and Mr. Brian LaRose, Petco's Chief Financial Officer. In a moment, Ron and Brian will walk us through Petco's recent financial and operating performance for the quarter. Before we begin our remarks, I would 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 our 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. 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 to the most directly comparable GAAP financial measures are included in the earnings release and our presentation, as well as with 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.

Thanks, Kristy. Good morning. We appreciate you joining us today. Petco delivered record third quarter results with our sixth consecutive quarter of double-digit comp growth, generating 32% comp growth on a two-year stack with strong profit flow-through. We continue to execute on our differentiated strategy with robust performance across all areas of our business. Growth in adjusted EBITDA of 17% outpaced our 15% year-over-year revenue growth, reflecting the strength of our model and operating leverage. I am so proud of our team's performance navigating these unprecedented supply chain, inflationary pressures that are impacting every industry. Our focus remains on acquiring delivering for our customers in an environment where demand is outpacing supply, with millions of new pets and greater spend per pet. I know from my nearly 30-year experience as a vendor to retailers that in times like these the strong and growing, gets stronger. Correspondingly, we are pleased with our supply relative to the industry, particularly in consumables, enabling a more than doubling of our rate of share gain. Additionally, because most of our holiday stock is owned brands, we are well positioned, having over 95% of that stock already in stores and DCs. This is on the heels of a 24% increase in Halloween merchandise sales compared to last year. On inflation, like the broader marketplace, we have seen some price increases on vendor supplied product that we have been able to pass through. The high-end of the pet category where we focus is highly inelastic. And in aggregate, we haven't seen an impact on unit volumes. In a tight labor market, the companies with a compelling employee value proposition and strength of mission will do better in a competition for labor. If you love pets, and want to work for a company that cares about you, Petco…

Thanks, Ron, and good morning, everyone. As Ron highlighted, the third quarter demonstrated the strength and resilience of our business and terrific execution against our strategy, one that is truly differentiated in the market. I'm pleased to share with you how this execution is manifesting into strong financial and operational results. Q3 was yet another quarter of record net revenue of $1.44 billion, up 15% year-over-year, with comparable sales of 15% or 32% on a 2-year stack, reflecting the strategic competitive advantages and traction on our transformation that Ron outlined. On both a 1 and 2-year basis, transactions and average basket trends were strongly positive for the quarter. In regards to inflation, we have taken select pricing actions to offset cost input increases. Our pricing strategy has been executed methodically. And in aggregate, we've not seen an impact on units. We have an inelastic category and flexibility to adjust our pricing as dynamics in the market unfold. Momentum in consumables has been increasing, up 27% on a 2-year stack and 21% year-over-year. In Supplies and Companion Animal, 2-year growth was 34%, lapping heavy prior year comparables nicely at 6%. Services and Other grew 48% on a 2-year basis and 28% year-over-year in the third 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 and cost-mitigation efforts. While the environment is certainly challenging across retail, and pet is no exception, our team is executing extremely well, and we have advantages versus our competitive set. With our owned and exclusive brands representing roughly half of our assortment, we naturally receive priority status on those products. We exited products with artificial ingredients and have shifted towards healthier, more narrowly distributed…

We will now begin the question-and-answer session. . Our first question today comes from Oliver Wintermantel with Evercore ISI.

My question was regarding traffic versus ticket in the quarter. If you could maybe break out what inflation was and how ticket and traffic were trending in the quarter? And what do you expect that to be in the fourth quarter? Is it more traffic or ticket driven?

Yes. Thanks, Oliver, it's Brian. First of all, let me say that transactions and average basket trends were both strongly up versus a year ago. Transactions are up. We're benefiting from larger baskets. And we also are benefiting from our partnership with our payment platform, Klarna, which went live earlier this week, and we continue to look for opportunities to expand our basket size. Relative to inflation, I'd tell you that we took pricing actions during the quarter, and we haven't seen any aggregate impact on volume, and we'll continue to look at vet pricing going forward.

Yes. Right. This is Ron. I would just add on that the traffic and basket increases were present in both our PCCs as well as digital.

Got it. And then just a clarification. The gross margin that you said is the same as the third Q. Is that the rate or the decline in basis points year-over-year?

Yes, Oliver, that's rate. And what I would tell you is we're in a unique time. And the consumer wants to spend more, and we're focused on driving gross margin dollars. But as you asked and as we said on the call, Q4, we expect to be in line with Q3. And that said, we're pulling every lever to drive margin as much as we can without sacrificing the customer experience.

Our next question comes from Steven Zaccone with Citi.

I wanted to follow up on the gross margin a little bit. So given the dynamic for a continued decline here in 4Q, can you maybe just talk a bit about how much of this you view as transitory in nature with the consumables mix and the supply gain pressure? And then I'm curious to get a sense of what are the defense factors here, right, that could help you on gross margin rate? And there, you're taking pricing up right. You should be seeing a benefit towards own brands. So how do we think about some of the defense factors you have to protect rate, especially as we get into next year?

Thanks for the question, Steve. So let me take the first part of it in terms of breaking down the gross margins. But I'll start by just reminding from the release, our EBITDA rate increased by 20 basis points, our gross margin dollars by $53 million. I'll second what Brian said. We are in a unique, unique time. The consumer wants to spend more money. So we are very focused on gross margin dollars, though we are actively pulling levers on gross margin rate. 3 components to the gross margin impact year-over-year, the #1 driver is consumable mix. So our business did far better than we expected. And our rate of share gain was twice what we saw a year ago. So this is very good for our business. Consumables are sticky. Consumable LTV is roughly 20% better than is our supplies LTV. So we get a better LTV off this customer. So it's strategically a good thing for us. Does it provide margin pressure here and now? Yes. But again, from an LTV standpoint, it's a good thing. Beyond that, there's a mix element. Brian talked on the call about services component, which is really P&L geography as we mix shift into services. The COGS are in cost of sales, but the EBITDA is basically neutral to total enterprise. And finally, there's the supply chain piece that every retailer is seeing.

Yes. And I think on some of the levers, Steve, you hit on a couple of them, but I'll just go a little bit further. So expanding premium and own-brand mix, enhancing our services pricing, realizing the economics of our vet investments, where our bed hospitals are getting more mature. They're starting to see the front funnel of our new hospitals that are coming online, driving higher AOV through targeted customer engagement and PTCs and digital and continuing to optimize our digital fulfillment channels towards the lower cost fulfillment options. I would tell you, Steve, that a lot of this is already showing up. If you look at rates in sort of some of the subcategories, gross margin rate for services was up year-over-year. Digital rate was up year-over-year. Consumables rate was up year-over-year. So within that mix dynamic, we are driving rate increases across the categories.

Okay. It's very helpful. Then maybe a higher-level question, Ron. Just thinking about the brand's progress. I guess you've been at the company now for over 3 years. Company's public. How do you feel about the consumer's perception of Petco? Like what's really working when you talk to customers? Where is there more opportunity for improvement as you go forward?

I'd say it's a story of we've come so far, but we have so much headroom ahead. If you look at -- it was October 2018, we made the decision to get rid of artificial ingredients. And that was water moment for us because it really started repositioning the company into a health and wellness company. And that positioning of a health and wellness company has served us well. Whether it has helped our consumable business go into the higher-end businesses like super premium kibble or fresh or whether getting rid of shock color has helped us go upstream on training to positive training or clearly giving us credibility in the vet space now get to 173 vets and for consumers to feel like they can come to a Petco for debt services, all the way up to surgeries, so that repositioning of the company has been successful. The brand is successful. And then underneath that, we've actually really gotten our marketing muscle. And so the campaign that we launched in January of last year really -- or January this year really brought that brand promise to life. And when we couple it with our performance marketing, you've seen the results. I mean let's -- right, there are questions of whether we could lap in the second half. And we didn't just lap, we lapped with strength. And that's both because of our offering, because of our marketing, but fundamental to all of it is the brand strength.

Our next question comes from Michael Lasser with UBS.

Ron, given the point you made in your script about the step down that typically happens in the second year of ownership of a pet and all the strengths and adoptions that have occurred last year, one would have expected that to be a drag on the industry this year, yet industry has been really strong. Why do you think that is? And is this just delaying an inevitable step down next year?

Yes. So let me be 100% clear, and this is a conversation we had a lot in the IPO process. There is no step down between year 1, year 2, year 3, year 4, all the way out. The only time you get a change in annual spend per pet is in -- towards end of life, where the Rx and prescription bounces up. But year 1 to year 2, in terms of total dollars, is equivalent. The dynamic that we're talking about is in year 1, you have a higher of supplies because you're getting crates, you're getting beds, you're getting all the supplies, leashes, collars. Year 2, I don't know about your pet, but my Yellow Lab, Yumi, probably added 50 pounds between year 1 and year 2, and he was eating a lot more food. So year 2, you see the consumables pick up versus the supplies. So if you look at the business progression, 2020 was a hyper growth year for new pets, hyper growth year for supplies. 2021, we're getting into hyper growth on consumables. In both of those dynamics, we're gaining share against those segments. But in the here and now, it does create a bit of margin rate pressure because of that crossover. On top of that, our rate of share gain on consumables doubled, which is great for our business, but the optics create the conversation.

Yes. And Mike, the last thing I would add on that is we've talked about the market expecting to grow at a 7% CAGR over the next 5 years. And our portfolio is not a direct overlay with that market. We're over-indexed to parts of the market that are growing at a multiple of that services in digital, which will grow at a multiple of 7, and that's 2 areas where we are over-indexed. And as part of that is our vet build-out as well. If you look at our vet build-out, we've talked about hospitals, that in this year with 1 closing right after, the year puts it at 173. And the last thing I would add, to Ron's point, is although the dynamics of the mix of supplies and consumable shifts year 1, year 2, we are seeing continual increases in spend per pet year-on-year.

Driven by millennials and Gen Z-ers adopting the majority of the new pets. Thanks for the question.

Understood. Including a quick follow-up, if we assume that some of the drags in the gross margin persist in the next year, maybe the balance between consumables, and supplies is a little bit more normal, but supply chain costs, the mix of services probably persist, do you have the ability to manage SG&A and have it lever like it's been over the last few quarters to offset that, in light of the very tight labor market and wage inflation probably persisting well into next year?

Yes, I can take that one, Michael. So first of all, I'd say we've continued to manage our costs aggressively. If you look at what happened this quarter, SG&A improved by almost 3 points while we continue to invest in the business. So we continue to lean into areas like marketing, where we like the ROI. And we'll continue to drive operating leverage through growth initiatives and SG&A cost-out opportunities. We have formal programs designed to reduce OpEx and SG&A and to give us greater leverage. And there's also components of our cost structure that are fixed, such as our operating leases. We have close to 1,500 PCCs. And we know those associated expenses, so there's natural leverage with volume. On your first point on consumables versus supplies, while consumables, we expect to remain strong, we do expect those growth rates to start to come closer together as we get past Q4.

Our next question comes from John Heinbockel with Guggenheim Partners.

So Ron, let me start with, when you think about Vital Care and its growth rate going forward, how do you think it will track the vet rollout to a certain degree? And how can you accelerate that outside of the vet rollout? I don't know if there's something you can do with Vetco or with partnerships. And then just remind us the -- I know it's early, but the Vital Care customer in terms of their lifetime value and their spend relative to a non-Vital Care customer?

Yes. Thanks for the question, John. So Vital Care, we're happy with the growth. We're ahead of our expectations. We have long-term plans for Vital Care to be scale and to have a tangible impact on our business. These customers are spending 3x our average customer. But underneath that are some fantastic ad design dynamics. So for example, Vital Care customers -- 19% of Vital Care customers are new to food with us. Over 30% of Vital Care customers are new to grooming with us, so -- or services with us. So it is doing the share of wallet job that we wanted to. I mean in terms of the linkage on how we drive Vital Care, I will tell you, this is in every pocket of Petco thing. So the Pet Care Center, I think I've been in probably 25 since our last quarterly call. And our Pet Care Center folks are as fired up about Vital Care as our vet folks are. And actually, I'll tell you who the most fired up in are, are our groomers, because people go in. They trust the groomers, and you get grooming discounts because of Vital Care. So it is across the organization thing for us. And you will see Vital Care accelerate as we go forward from here.

Okay. And then maybe a quick second. In terms of the supply business, right, I think about Reddy. Obviously, the first Reddy shop is pretty impressive. Where do you think -- how do you think about driving supplies in Reddy? Can you do it more through more of those locations? Is that going to drive some engagement online? How do you kind of -- is there a way to easily use Reddy to accelerate the supplies business from where it is now?

Yes. So we're very focused on Reddy and tight supplies end-to-end. We like the owned brand part of it, and we like the profitability of it. You do have a year 1 to year 2 dynamic going on right now. We love Reddy, which is why we invested in that flagship store. Consider it a flagship store, consider it advertising, which, by the way, if anyone is looking for great Christmas presents for -- or Hanukkah presents for the holidays, we encourage you to go down and pick something up for the New York crew on the call. But we are launching -- or we have launched store in stores for Reddy. So you take a normal store, and we do the build out. We also add a Reddy store in store in the ones that we've done over the last year, and we're seeing a significant lift. We will continue to drive Reddy as high end, but we're also taking up our entire supplies line, whether that's the everyday supplies. I talked about holiday as a supply -- sorry, Halloween as a supply. Our holiday stuff looks great. And then in 2000 -- actually going on in Q4 and then into 2022, you will also see us relaunch our Pet OTC. I believe there is no reason why industry can't have a vibrant OTC, similar to what you would see at a CBS. And you will see us go after that opportunity in a more significant way at the end of this year and into 2022.

Next question comes from Zach Fadem with Wells Fargo.

Ron, when you look at your vet and prescription opportunity, could you talk about how much of the industry scripts or vaccinations today are filled by the vet channel or OTC channels? And how you differentiate versus them? And then for vet care as a whole, could you talk about to what extent that tight labor market impacts the vet rollout?

Yes, I'll start, and then Brian can add in anything that I leave out. So let's focus first on the Rx part of it, because it is one of the significant pieces of headroom in our business, $11 billion market. And if we look at the progression, last quarter, we talked about the shift over to Vetsource. We saw our momentum build, and then -- that's Q2. In Q3 now, what we saw was the business really started to take off, 50% growth and 100% growth on our Rx food business, which every time we put in a vet, we can sell in the Pet Care Centers as well as obviously, what we're doing from a digital standpoint. And our script business has gotten better week over week ever since we did the Vetsource. So that was a winning move. And so we're going after that $11 billion. You think about it, in 173 hospitals, in 1,100 Vetco clinics, we now have vets writing scripts that get fulfilled either in the Pet Care Center or in the -- in our digital assets. So we're able to drive that across the ecosystem with an ecosystem effect that other people that don't have live vets may not have on our ability to hire bets. As we said on the call, our time to fill is below industry averages. And our value proposition is really working. If you look at what we do, we offer flexible working hours, working days. And if you know what's happening in that business and the profile, that is valuable to them. We offer the ability to practice autonomous medicine. That Is very valuable, and the roll-ups aren't doing that. We offer stock, which most companies -- vet hiring companies do not offer. So we have very attractive components to our value proposition, which is why our time to fill is better than industry averages. The other thing that we haven't talked too much about is our Vetco clinics. We have 1,100 Vetco clinics. We tap into 1,500 vets, who sign up for shifts on our Vetco clinics. Those vets, number one, are a feeder system for future hospital as maybe their life circumstances change. But importantly, those vets can do filling shifts for us. I don't think anybody else in the industry has that capability. So we're doing well on our pure vet hospital recruiting, but we have this cadre of vets that sign up for our clinics that can do fill-in shifts. And that's what enables us to drive the growth that we're doing in terms of number of vets. That said, it is a tight market, but I like how we're executing in a tight market, and I like our value proposition.

Got it. That's helpful. And for Brian, when I look at your profit flow-through, it's been relatively consistent this year at a low double-digit incremental EBITDA margin. But I'm curious, to what extent is this being constrained today by the external environment inflation, perhaps some of your growth initiatives? And as I think about long term, what are the opportunities to improve flow through? Or is this low double-digit level the right way to think about the business?

Well, thanks for the question, Zach. I'm not going to get into specific guidance, but what I will read forth some of the points that you made, we've been consistent over '21 -- 2021, where we've pulled levers and we've driven adjusted EBITDA margin expansion in each quarter while investing in future growth. So I wouldn't use the word constrained as you did. I'd rather say we are balanced in our execution against expanding adjusted EBITDA. If you look at our guidance, our adjusted EBITDA for full year is growing faster than revenue, while continuing to invest back into the business. We continue to highlight areas like marketing and advertising. We look at the ROI on those investments from a customer acquisition and LTV standpoint. And as long as we like the ROI, we'll continue to lean into those investments while also expanding to that.

Our next question comes from Chris Bottiglieri with BNP Paribas Exane.

So Ron, you hit on the pet adoption in the prepared comments. Can you just elaborate more there, what you're seeing? It's kind of hard for us to track that data. It's probably tough for you, too, if you have the adoption shelters, you have kind of like your CRM and data analytics. So hoping you can maybe give us a sense for like the cadence of pet ownership over the last several quarters and how that's comparing to like pre-COVID trends?

Yes. So thanks for the question, Chris. So if you look at pet data, the -- I come from a PepsiCo background and a HP background, where you had near-perfect data in your categories. So the pet industry is not a perfect data. So we triangulate from industry sources. We triangulate from Petco Love in terms of rescues. We triangulate with online resources. At the same time, they are -- one of the biggest ways people source pets is person to person. So I will give you those caveats. What we're seeing is the category continuing at an elevated rate in terms of pet adoptions. We are not seeing heightened relinquishments. I know there's been stories of heightened relinquishment. Thank God, we're not same heightened relinquishments at this point, but we are trying to get ahead of that in case it does when people return more to work. Spend per pet continues to increase. As we said, Gen Z-ers and millennials are leading the humanization trend. They spend more. So the more pets that go into those folks' hands, the more puffer vest they're wearing, and their box are walking next them are wearing. So that is a positive trend. Overall, again, elevated, but it's slightly moderated from what we saw in '20 is what our triangulation is showing.

Got you. That's helpful. And then -- so it sounds like digital process these stores outpaced overall digital growth. Can you just help us like better understand your fulfillment options? I think you said 90% of your online sales are BOPUS and DoorDash. Can you give us a sense for the split of BOPUS and same-day? And kind of like how that's been kind of, I guess, trending sequentially, especially as, I guess, the economies reopen and consumers return to the store, that would be helpful.

Yes. So let me break down the data we shared. What we said is when BOPUS or same-day are available, think about at 4:00 o’clock, you can't do same day, right? So when they're available, 90% are choosing them, which highlights that there is customer momentum where we have capability that our online competitors do not have, because they can't do BOPUS, they can't do curbside, they can't do same-day. Here in our statistic, we provided that 80% of our e-commerce orders are fulfilled through our Pet Care Centers, whether that's ship-from-store, BOPUS, curbside or same-day delivery, again competitive advantage because we have inventory close to the customer, particularly in an environment where FedEx and UPS costs are going up. So those are 2 of the things. Specific to the offers, I think the only numbers we broke out, as we did say, the repeat delivery is up 40%, and we also have shared in the past over 50% of our e-commerce business is in recurring revenue programs.

Chris, the last thing I would add is just as a few questions on leverage here. In addition to being a fulfillment advantage for our customers, it gives us leverage across our model because we're leveraging the labor in our PCCs for that fulfillment. And our PCC leadership team has done an excellent job at driving task out of the process in store to have more customer-facing time. Further, with the fulfillment -- what our fulfillment options give us a real advantage on is fresh. We've done the model. We've run the math on delivering fresh from a PCC, the amount of packaging and delivering fresh. The costs associated with that, it gives us an advantage. It's faster to the customer. It shows up with minimum packaging. It's much more profitable for us.

Which is why, today, we're 5x -- or we estimate we're roughly 5x the size of leading online competitor in fresh frozen.

Our next question comes from Liz Suzuki with Bank of America.

It looks like the raised guidance seems to be mostly just flowing through the 3Q beat and implies some deceleration in sales on a 2-year growth basis. Are you just baking in a fair amount of conservatism given the heightened uncertainty around consumer behavior in the months ahead?

Yes, Liz. So first, I would say that the guidance was not just a direct add of flow-through from Q3. There was incremental on top of that. And I think if you do the math out, we guided to a high-20s percent 2-year comp; and for the full year, a 2-year stack of 30%. And as Ron indicated in the call, based on what we're seeing so far in Q4, we feel good about where we guided.

Great. And then it looks like inventory per store is up nicely. Just how much of that is due to inflation as opposed to higher unit volumes? And are there any categories where you found it difficult to procure enough inventory to meet the strong demand?

Let me start with the inventory levels, and then maybe Ron and I can tack-team the second part. So I would say that the inventory levels are more a function of us staying out in front of demand. There's also some seasonality in the back half, Liz, with Q3, reflecting a stock up of holiday, which tends to normalize a bit in Q4. But we will continue to look for opportunities to stay out in front of demand. On a broader question, I'd tell you that supply chain is tight, but I like our positioning relative to the market. And I would highlight to you that a minority of our revenue is from products sourced outside of the U.S. So we feel like we're well positioned. We like our model of leveraging our PCCs as micro distribution centers, as we just talked about. And I'd also tell you that in store, in our PCCs, our partners are a strategic advantage. They do a great job at redirecting customers to alternative brands and products, which optimizes substitutions as a result.

Let me just add color to that, right? You have a customer coming into the Pet Care Center and they say, "I need a food that has digested track properties." And we don't have their normal product. In most settings, whether it be a mass or supermarket or online, that sale is lost. In ours, they trust our Pet Care Center folks. They're knowledgeable, and they can redirect them to another product that has that same attribute. So we believe we're able to capture that sale, which I think is showing up on our consumable share gains that we talked about earlier. In terms of specific products that we're in or out of stock, it's been a volatile market, and we've had to be nimble. But I think the fact that we drove 15% growth in that market is big source trends.

Our next question comes from Stephanie Wissink with Jefferies.

This is Corey on for Steph. I wanted to ask if you could talk a little bit more about the puts and takes behind Q3 SG&A with COVID costs coming out and some of the investments you made? Then if you can talk about those dynamics into Q4, that would be great.

Yes. I mean, Corey, thanks for the question. I mean, I'll reiterate some of the things I said. Our SG&A leverage was down 3 points year-on-year. Although we saw dollar growth, there are areas that we continue to invest in. The 2 biggest ones being our labor model. So we've got a long-term labor model that we're executing against to make sure that we have that model right. Number two is advertising and marketing. We continue to like the ROI that we're seeing, and we're going to continue to lean in. But there's a big fixed cost component of our SG&A that we have line of sight to. I mentioned we have close to 1,500 PCCs. The rent associated with cost of those are very predictable, and we have those lined up. So that's about as much color as I can get into for you, Corey. But I would tell you that the investment areas are labor and advertising, but we have leverage overall.

Got it. And then in terms of seasonality in Q4, would you typically expect to see a higher mix of supplies and hard goods? And the difference this year is the COVID adoption comp?

I would say that there's 2 differences this year across. So yes, typically, you see a bump up in supply quarter-on-quarter. That said, we have a lot of momentum in consumables, and that's why we indicated on the call that we expect that momentum to continue into Q4. Now the growth rate, if you look at this quarter, you had 21% growth in consumables, 6% growth in supplies and companion animal, 2-year supplies and companion was 34%. So we had very strong growth last year. So you've still got a lap dynamic in supplies, pending in year-over-year to Q4, but we would expect the consumables to stay strong and the growth rates to start to come closer together.

The thing I'd add, Corey, is the normal sequentials in the normal year-over-years are influenced by this dynamic of the heightened pet adoptions in '20, year 1 in '20 versus year 2 in '21, that is biasing some of those numbers from their normal trajectories.

Our next question comes from Seth Basham with Wedbush Securities.

My question is on the customer additions that you mentioned, Ron, 830 net in the quarter. Could you provide what you grew customers on a gross basis?

We did not provide that. If you look at kind of the adds, if you look at last quarter, in Q2, we had significantly more adds than our key competitor, almost 3x as many adds. And we believe that we led the market with Q3 as well in terms of net adds. And it reflects the strengths of our model, the strengths of our marketing. We're going to continue to flex this. We like the annuity of the customer acquisitions. So we're pleased with where we are, and we're pleased with the spend per pet, we talked about Gen Z and millennials spending more. But no, we did not provide the gross number. If we're going back to some of the stuff we talked about in Q2, there was no difference in the customers that we serve. It was just a categorization based upon a POS shift. So that really had no impact on our business.

Got it. And just a follow-up on that. So the attrition rate in your customer base isn't really changing from 1 quarter to the next. On a year-over-year basis for the net adds, for this quarter relative to last, how do those look?

The net adds is what I gave you in terms of the 830. And in terms of the retention, retention is basically flat. If we look at the cohorts, it's been roughly in line with historical cohorts. We're seeing similar buying patterns. So retention is in line, which is great because you pick up all these brand new pets, you think they might have different buying habits, but the retention is in line with prior cohorts.

Our last question today comes from Peter Benedict with Baird.

Two questions. I guess first one, the 4.1 million multichannel customers, I think that pencils out to maybe 17%, 18% of your active base. How is that penetration different, if at all, among some of your younger or newer customers? And where do you think you guys can kind of take that penetration over the next few years? That's my first question.

Yes. So on multichannel, I mean, it's something we've been focused on. We drove a double-digit increase. This is our third consecutive quarter of double-digit increases, and we're getting better and better at this. If you recall, Peter, when we talked earlier in the year and even a year ago, we talked about building capability on analytics, building capability on CRM to drive people across what we call One Petco and across the portfolio and across the portfolio offerings. We are seeing more and more strength with that. At the same time, we've been adding customers at such a rapid rate, right? 1 million customers last quarter; 830,000 customers this prior quarter. And so what happens is you get a customer in, and then you move them across your enterprise. And Vital Care is a perfect example that I cited, with -- over 30% new to supplies. So in general, that dynamic is a feeder system to our multichannel offering is what we're seeing.

Yes. That makes sense. And then my next question is just around the consumables. Obviously, the traction is very encouraging here. Can you maybe expand a bit on the success you're having within the fresh category? I'm curious if you can share anything on maybe the relative basket size or margin profile of transactions that include Just Food for Dogs or Freshpet and how that maybe compares to your typical ticket?

Yes. So what we're seeing from a fresh frozen is you see hiring and you see higher frequency. So actually, when we look at Just Food for Dogs in particular, what we look at is not just the benefits of Just Food for Dogs. We look at the enterprise-wide benefit, which is part of the financial analysis underneath why we're building out these pantries and these runs is because that frequency has lug on effect to the entire enterprise. So we like that a lot. It's significantly higher frequency of that channel being a pet parent that includes Just Food for Dogs and what I see my guy, I know the frequency is higher. Just hitting on your prior question for a second, the multichannel by kind of age cohort, it's generally a bit higher with millennials and Gen Z-ers, which given we've acquired a bunch of them in the last years being swelled to kind of future prospects.

No, that makes sense. Any chance you give us a run maybe what's the penetration of fresh and frozen within your food business at this point? Or maybe how it compares to a couple of years ago or a year ago?

What I would tell you is what we said is we grew 50% on that business. I would -- we'll tee that up for Analyst Day. How about that?

This concludes our question-and-answer session. I'd like to turn the call back over to Ron Coughlin for some closing remarks.

Thank you. So pulling back up, we delivered exceptional results on both the top and bottom line with strong flow-through. Our team has been incredibly nimble and effective in navigating this challenging supply chain and labor market. We're executing our proven strategy, and our unique model with its compelling advantages is working. Looking forward, we're focused on driving sustainable growth, optimizing our margin levers while we reinvest in our business and our people. That, combined with the momentum we're seeing early in Q4, gave us the confidence to again raise our guidance for the remainder of the year. With that, I want to thank our investors for their confidence in us as well as everyone who joined us today. Thank you very much.

That concludes Petco's Third Quarter 2021 Earnings Conference Call. Investor Relations will be available after the call if you have any follow-up questions.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.