Good morning, everyone, and welcome to Petco's First Quarter 2022 Earnings Conference Call. All participants are currently in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note today's conference call is being recorded. At this time, I'd like to turn the conference call over to Benjamin Thiele-Long, Petco's Director of Executive and Business Communications. Benjamin, you may begin.

Good morning, everyone, and thank you for joining Petco's first quarter 2022 earnings conference call. In addition to the earnings release, there is a presentation and infographic available to download on our website at ir.petco.com summarizing our first quarter 2022 results. On the call with me today is Mr. Ron Coughlin, Petco's Chairman and Chief Executive Officer; and Mr. Brian LaRose, Petco's Chief Financial Officer. In a few moments, I will invite Ron and Brian to provide their perspective on Petco's financial and operating performance for the quarter and our outlook and priorities for the quarters and year ahead. Before they begin, I would like to remind you that on this call, we will make forward-looking statements regarding 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 out in our earnings release and our filings with the Securities and Exchange Commission. These forward-looking statements are made only as of the date marked. 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 to the most directly comparable GAAP financial measures are included in our earnings release and our presentation as well as in our filings with the Securities and Exchange Commission. And finally, during the question-and-answer portion of today's call and to allow us time for questions from as many participants as possible, we would be grateful if you could keep to one question and one follow-up. With that, let me turn it over to Ron.

Good morning, everyone, and welcome. Given all the noise in the retail space, I will start very simply. Petco's team executed. We over-delivered on top line with a 5% comp. We over-delivered on EBITDA growth with a positive spread between revenue and EBITDA growth. Our guidance remains unchanged. We are comfortable with our inventory position, and it aligns well with near-term projected demand. The mix shift towards more premium products continues. The pet care and distribution center teams did an excellent job matching staffing costs with sales, and that has continued into Q2. For those of you who joined us at our inaugural Investor Day in March, you heard us outline our strategic vision to boldly redefine the future of pet parenting through a one-of-a-kind end-to-end pet health and wellness ecosystem. That includes differentiated services and merchandise delivered through an advantaged Retail 3.0 omnichannel model. We also talked about our confidence as operators to deliver whether in times of tailwinds and or headwinds. Make no mistake about it. Petco has been, is and will continue to be a growth company. This is our 14th consecutive quarter of growth. Q1 was a quarter that not only reinforced our ability to drive growth but also exemplified the team's operational prowess. And importantly, once again, we delivered that performance with purpose: improving lives of pets, pet parents and our Petco partners. For the quarter, our resilient category, our advantaged model and the team's operational excellence translated into comping last year's stimulus-aided 28% comp with the 5% comp I shared earlier. That generates an incredible 2-year comp of 33%. First quarter revenue growth was 4%, and growth has continued into Q2. And our ability to generate leverage from our model delivered a positive spread to adjusted EBITDA with 5% EBITDA growth. Gross profit was…

Thanks, Ron. As just mentioned, at our Investor Day in March, we emphasized our commitment to operational excellence with a relentless focus on cost management while making the appropriate long-term investments in our business, investments that will deepen Petco's relationship with our customers, driving share of wallet and providing pet parents with the one-stop shop they want and need. When I think about the first quarter, while we remain focused on driving performance every day, we are equally maintaining our commitment to making investment decisions with a long-term perspective, not limiting our horizon to a month, a season, a quarter or even a year but thinking about how to position Petco as the definitive leader in the pet health and wellness category. Looking at the quarter specifically, we delivered yet another strong quarter with comparable sales of 5% or 33% on a 2-year stack with particular strength in average basket trends, and net revenue at $1.48 billion, up 4% year-over-year. Services grew 19% year-over-year in the quarter and 83% on a 2-year stack across vet, grooming and training. You'll remember in our last earnings call, we outlined that supplies in companion animal would be lapping a stimulus-driven elevated prior year comparable. Like others, we've seen some softening in discretionary spend, but our total merchandising mix remains incredibly strong in aggregate. Momentum in consumables continued, up 28% on a 2-year stack and 15% year-over-year. Supplies in companion animal 2-year stack was 24%. These figures reflect the dynamic cost and supply environment, which have remained pervasive throughout the year. While the macro environment remains unsettled, it's clear our team is executing extremely well. And we were able to leverage our structural advantages versus our competitors, including the ability to offer BOPUS, same-day delivery and ship from store by leveraging our pet care…

Our first question today comes from Peter Benedict from Baird.

Brian, I just want to ask you about how your focus for the P&L would evolve over the balance of the year if demand ends up coming in softer than you expect. You've talked about the programmatic expense controls. But just curious if you guys would lean further into kind of pushing customer acquisition and for the top line, would you default to preserving profitability? That's just my first kind of bigger picture question.

Yes. Thanks for the question, Peter. Look, I'll first start with the category, Peter. We've talked about this. This is a resilient category. And if you look back over time, even through recessionary environments, the category has remained relatively resilient through those cycles. So strong category, and we're operating in an environment where we feel like we have a differentiated offering in that environment. And specific to costs, look, we've been building executional muscle for years, and we'll continue to do so. You referenced back to what we talked about at Analyst Day, where we talked about programmatic cost efficiencies that we're driving out of the P&L. Again, we've been doing this for years, typically generate $20 million to $30 million. We saw inflation coming back in the fall, and we kicked off programmatic initiatives across areas like procurement, spend management, customer service, supply chain. I would say also with our vendors, our Chief Merchant, Amy College, does a tremendous job engaging with vendors on a variety of both cost and term initiatives to maximize benefits to the company, help us manage the P&L and also gives us good visibility going into the back half of the year as we saw these things coming.

Okay. That's helpful. And then just second question is just around the level of inflation. Not sure if you could put maybe a little bit more numbers to that, what the impact was maybe in the first quarter, kind of how you just see inflation aiding your top line over the balance of the year.

Yes. I won't get into specifics on it, Peter. I will say, obviously, inflation did contribute to the comp for the quarter. But when we think about inflation and impact on pricing and other areas, it's really not kind of a one-size-fits-all answer. As we think about inflation, I mentioned Amy does a good job managing the visibility with vendors so that we see costs coming in. We then take a step back and look at analytics on a SKU-by-SKU basis. As we think about pricing, we monitor the broader market. We balance that, our pricing actions against consumer demand. And I would just say that the situation remains fluid, and we remain focused on just protecting our customers while optimizing margins.

The other thing I'd say, Peter, and thanks for the question, this is Ron, is we have a unique dynamic in this industry. It's been for a decade. And quite frankly, it's not changing here. It didn't change in Q1, and it's not changing here and now. And that's a shift towards more premium consumables. That shift towards premium and super premium has been here for about a decade. It's benefited us, it continued in Q1 and continuing into Q2. And so that is creating some pricing inflation that is not due to inflation, it's due to customer demand and the humanization trend Gen Zers and millennials adopting more of the new pets.

Our next question comes from Seth Basham from Wedbush.

Brian, if we could just follow up on some of the commentary you provided regarding the second quarter. Are you suggesting that comps should be in the 4% to 5% range based on what you're seeing right now? And as a follow-up to that, are you seeing more than expected pressure on the discretionary side of your business?

Yes, let me answer that 2 ways, Seth. So if you do the math, what we talked about was sequentially, historically, if you ignore 2020, which was an anomalous year, revenue Q1 to Q2 is flat to slightly up. So you can do the math on that and what that implies. In terms of the category, yes, we expect consumables to continue to outpace supplies and companion animal. Consumables, Ron mentioned in his prepared remarks, that's a category that's fundamentally a staple. It's not very different than what milk or eggs are in a human environment. So we expect that category to remain strong. We have seen some softening in the discretionary categories. As for instance, if you're going to get a new tennis ball for your pet, you may wait a little bit on that. There are elements in the supplies category that are less discretionary, but that would be the dynamic that I would call out.

Got it. So the confidence in maintaining your full year guidance despite some incremental pressure on the discretionary side is driven by continued strength on the consumables side and the other trends that you spoke to.

This is Ron. The thing I would add is you really have 3 tiers of product groupings. The first tier is consumables, which is staple, not only a staple, but I think milk and eggs, you don't have an upgrade dynamic that we have in our business, right? People aren't upgrading to higher-end eggs or milk, and maybe they are, I don't know that industry. But we have an upgrade dynamic within a strong staple category in consumables, which helps buoy us. Number two, in terms of services, grooming and vet isn't something that has a lot of discretionary impact. It has slightly more than consumables, but it doesn't really have discretionary impact. And then you get to the supply side. That said, about supplies, if you look at our Reddy brand, the fashion forward brand, it grew double digits in the quarter. So -- but yes, that's the tiering that we would have across our categories.

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

Great. So some of the broadline retailers that have reported this earnings season have talked about trade down in grocery, and I thought I heard this in your prepared remarks. But can you just clarify whether you're seeing any consumer shift in food from better or from best to better or from better to good? And have you ever seen that in any period in the company in prior recessions or economic downturn?

The answer is no. Next question. No, just kidding, Liz, but the answer is no. We're not seeing trade down. It's one of the best attributes of this category is the continued premiumization. And we've talked about it for a while. It is a category truth, which is why players like us benefit because some of the grocer types don't have those premium brands, number one. Number two, you have this migration to fresh frozen sitting on top of the historic premiumization of kibble. That category is supposed to go from $1.5 billion to $4 billion to $5 billion. So that is a gravitational pull upwards. So we are not seeing that. And I think the Reddy example within supplies is a good one as well. I mean, that is significantly a more expensive line, but people are paying for the fashion and paying for the functionality that, that brand has. So no, we're not seeing the down trade in our portfolio.

Great. Just wanted to clarify that. And then follow-up just on e-commerce. Have you seen customers shifting away from e-commerce at all and going more towards in-store and doing some trip consolidation or just trying to avoid additional shipping costs in this high inflationary environment?

Yes. It's been a few years of consumers flowing across from e-commerce to brick-and-mortar and back again. And so the great news is as an omnichannel player, and I think we shared the number before, I think the latest number was 39% of customers shop in an omnichannel fashion. So we don't really look at our customers in a segmented fashion. We look at them across the enterprise. We have seen strength in brick-and-mortar. We have seen trip consolidation. We have seen strong baskets, super strong baskets. The end result of that is higher efficiency for us, right? We have customers having higher baskets, and that's a more efficient customer for us. But we are seeing relative strength brick-and-mortar versus e-comm, but we're pleased with our e-comm double-digit growth for the quarter. And as we said, we grew double -- sorry, we grew share in the quarter on digital as well.

Our next question comes from Zach Fadem from Wells Fargo.

So there's been some evidence that the mass channel has begun to take some share back from the specialty channel. So first question is what you think could be driving that? And then to what extent your initiatives like Vital Care, fresh frozen, private label are sticky enough to keep your share gains building from here?

Yes. We look at the categories what we're focused on, which is premium, super premium, which is vet, which is digital, and we continue to gain share in those spaces. So we're gaining share in the areas where we're focused. And so we're happy with what we're seeing. I would add on grooming. There's a lot of noise in terms of openings and closings. Pre-COVID, we were at 5.5. Today, we're over 7 in terms of share. So we're pleased with what we're seeing in terms of share gains, where we're focused. We don't -- if you think about mass, I mean, we don't have a product that competes against the old rays of the world. We got out of artificial ingredients, artificial flavors. So we don't have products that compete against those. We're not focused on that. So that's not really subcategories that we're focused on. The categories that we're focused on, where the growth is, where the profit is, we're gaining share.

Got it. And then for Brian, at the gross margin line, can you talk about the extent that pass-through pricing is offsetting some of the mix and supply chain headwinds in your business? And as we look to Q2 and you begin to lap some of the deeper mix-driven headwinds from a year ago, are there reasons to believe we could start to see some relief at this line going forward?

Yes. Let me start with the first question, Zach. We took pricing actions in the back half of last year primarily. And what we said at that time is that in aggregate, we did not see an impact on a unit basis and also that those pricing actions were largely offsetting those cost increases. Now I would also say when you think about cost increases, you need to think about it holistically. So I mentioned Amy College, our new Chief Merchant. She does a great job working with vendors on total cost to serve. So as we see costs coming, and she has great relationships with them to get visibility into that, she will look at that total cost to serve. We'll work on terms vendor-funded ways to go to market together. And we look at that total bucket. Sometimes that may mean pricing actions. Sometimes that means if you look at the total cost bucket a little bit differently. In terms of gross margin, I would say for Q2, what I said on the call was that there are a couple of different dynamics in play. Going into Q2, we would expect consumables to remain strong, which is a good thing. The consumables customer is a high LTV, long-term valuable customer. We would expect that to remain strong into the second quarter. There also is a onetime 40 basis point impact to gross margin in Q2 associated with the Thrive transactions. Those are onetime associated costs as part of the $15 million to $20 million that we called out, but primarily, that will impact Q2.

Will that cost be adjusted out?

That piece of it, yes.

Our next question comes from Kate McShane from Goldman Sachs.

We wanted to ask a little bit more about the renegotiated contract with DoorDash. You mentioned lower fulfillment costs. Is that with regards to the contract or just the DoorDash relationship in general? And can you talk about the composition of fulfillment for your digital business as of Q1, where you're seeing the growth, whether it's BOPUS or same-day delivery and how the gross margin headwind from digital maybe gets diminished as those fulfillment options grow?

Yes. Kate, thanks for the question. In terms of the DoorDash contract, it's contractual, lower rate. And not just lower rates, but it also has a marketing component where we get incremental marketing support. So that's very good for us. And it is contractual, so it's structural. All of our go-to-market in terms of digital are growing. If you look at what we say in terms of pet care center fulfillment, that continues to be around 80%. So we continue to get faster to the customer, lower cost than our digital competitors. And we see that leverage continuing to be a significant competitive advantage. In terms of gross margin on digital, I'll let Brian make comments there.

Yes. We've seen expansion on gross margin in digital quarter-on-quarter and year-over-year, Kate. So if you look at where we're driving that, it's better baskets. It's better leverage from the fulfillment that we have. So as Ron mentioned earlier, as the customer dynamics change and you have fluidity between shopping online, coming into brick-and-mortar, trip consolidation, the great news is we're positioned well wherever the customer goes. We have BOPUS. We have same delivery. We have ship from store, and we have traditional digital. So it sets us up nicely. And as Ron mentioned, 80% of our orders continue to be fulfilled through PCC is giving us great leverage.

Our next question comes from Michael Lasser from UBS.

Given what you experienced in the first quarter and your comments around the second quarter, it looks like you'll have to experience a meaningful acceleration in your same-store sales growth in the back half of the year in order to get to the midpoint of your full year sales guidance. What would drive that meaningful acceleration?

Yes, I can take that one, Mike. I mean, you have to look at the lapping dynamic. If you go back to Q1 last year, right, we did a 5% comp this year on top of 28 last year. We know that last year was aided, we called out 700 basis points to 800 basis points of comp in Q1 last year. If you look at the comp, Q1, Q2, Q3, Q4, each quarter last year, that comp was lower than the quarter before that. So you have a lap dynamic that's factoring into the math associated with what to expect for the balance of the year.

The other thing I would say is it's no secret that at the category level, supply has chased demand. And our vendors' investments that they made when they saw the 11 million new pets in 2020 that I call the furry annuity, those investments are coming online. I was in Kansas during the quarter, and I saw Honest Kitchen's new factory. And it's great to see this new capacity coming online. So we would anticipate heightened or a narrowing of the gap between supply and demand as we progress through the year.

And my follow-up question is, as supply and demand comes closer together and perhaps the macroeconomic backdrop becomes a little weaker, would you expect promotions to increase across the sector, especially as many are looking to grab those high-volume, most loyal consumers, and that is where a lot of the promotional activity could be concentrated?

Yes. So let me start, and then I'll pass it over to Brian. We are very lucky. Roughly 70% of our products aren't sold at the mass players, aren't sold at the grocers. Many of our products aren't sold at our online competitor. Many of our products aren't even sold at some of our pet specialty competitors. So we have product insulation that helps us on this front. The second thing is there is map, a lot of the product lines that have overlaps with those players. So our exposure to irrational promotions is much, much lower than your average retailer, and that helps us insulate things. That said, there continues to be a gap between supply and demand that has brought rationality into the market, and we see that continuing for the next couple of quarters. But I'll pass it on to Brian to make further comments.

Yes. I would just add, Michael, that overall, we are not seeing the market as overly promotional. It's remained really rational. As we look to the balance of the year, we will continue to be very strategic on how we do employee promotions. We will use them to drive specific outcomes to drive things like loyalty program adoptions or other areas where we see a large LTV. We'll treat it like CAC.

We're much more interested in getting people into our Perks programs and our Vital Care program than we are doing high-load discounting. And we don't have to because a lot of our product line is insulated from a competitive standpoint.

Our next question comes from Oliver Wintermantel from Evercore ISI.

So my question is about the active customer growth and the retention rates. If you maybe comment a little bit on the retention rates over the last year, 1.5 years. And then secondly, where the active customer growth is coming from one -- from which segment.

Yes. We're pleased with the active customer growth. As we said, in terms of active customers, we're up double digit for the quarter. And we are roughly double pre-pandemic levels in terms of our adds, and we're about 60% ahead of our key online competitor in terms of the adds that they reported last quarter. So we're pleased with that. '20 and '21 were unique years because of all the adds that happen in terms of number of pets in '20 and '21. While we continue to see heightened adoptions, '20 and '21 were unique. And so it's natural to come off those numbers. But at 400,000, that's a pretty strong number. And in terms of retention, we're really focused on driving programs like Vital Care. We're focused on programs like our Perks programs that now have over 1.4 million members to drive retention in our business.

Got it. And the follow-up would be on the leverage ratio, Brian. Has anything changed there since the Analyst Day with the current environment? Or do you think still the leverage ratio is going further down, and then maybe in 2023, we could see some buybacks?

Yes, nothing's changed, Oli. That's an easy one. We're committed to our leverage target of 1.9 at exit '23.

Our next question comes from Steven Zaccone from Citi.

I wanted to follow up on the comment about discretionary softening. Maybe how much of your business would you characterize as discretionary versus more staple-like? And then within consumables overall, how much of your assortment would you say is premium versus maybe more mass channel?

So let me start with -- hey, Steve, thanks for the question. In terms of premium, I would say the majority of our products are premium. And we gravitate towards those, and we've had significant mix shift towards that space. And I would also extend that to supplies where we are increasingly premiumizing, though we're not as far as we are on the consumables side of the house. In terms of the second?

Yes. In terms of the overall split, Steve, I mean, if you look in the earnings presentation, we break out consumables, supply, CA and services and vet. And I would say you take consumables, services and vet those are nondiscretionary categories across the board. And if you look at supplies and CA, it's a portion of that. So largely, our total assortment across product and services is nondiscretionary. There's a component of it that is discretionary, of course.

I would add that we saw -- we're seeing improvement as we head into Q2 on the supplies and the companion business.

Okay. That's helpful color there. The other question I had is just could you elaborate a little bit more on the Vital Care rollout, maybe how that's progressing thus far? As you think about the customers that are kind of signing up, like where are you seeing them come from?

Yes. We are -- we couldn't be happier with Vital Care. We're ahead of our projections in terms of members. When we launched Vital Care 2.0, we added cat, and we added enhanced benefits. And that the sign-up rate for Vital Care has improved since the launch of Vital Care 2.0. We've accelerated, which is just great to see. As we said earlier, the Vital Care members have 1.5x higher traffic, 1.7x higher spend and generate 3x higher LTV. We're sourcing customers both from brick-and-mortar as well as digitally. I will tell you, I talked about all of the markets that I visited last quarter and the prior quarter as well. And our partners in the pet care centers love talking about Vital Care because they want to help the customers that shop. And Vital Care is a great way to provide value, $200 to $300 of value for an average customer. And so our partners in the pet care centers are signing people up left and right. They love this program. Our groomers love it because it drives frequency. It drives loyalty. So we have a lot of excitement across our enterprise for Vital Care, and that will continue. And as we continue to drive enhancements and expansion of the program, we would only see further acceleration in there.

And our next question comes from Anna Andreeva from Needham.

Great. Two quick ones from us. I guess to Ron, I wanted to follow up on vet. You guys have done a really good job there. But are you seeing labor gets tighter at all lately? Are there any less expensive options in the vet popping up in this space? And then secondly to Brian. Really nice expense management during the quarter, and you had talked about $20 million to $30 million in annual savings. Looks like you're finding some additional opportunities for expense management. Can you talk about some of the buckets of savings for us?

Yes. So let me start broadly on labor and then get into the vet piece. So we -- what we see is we've turned the corner on labor tightness. And we see a labor market that we're able to operate in, we're able to fill our needs. And our applications are up double digits. So we firmly believe we've turned the corner in terms of the tight labor market, and the labor market dynamics have fundamentally changed to the better. That's number one. In terms of vet, let me start with the acquisition. I mean, I am so thrilled at having over 90% of the Thrive partners coming on to Petco. That is just wonderful news. It was a concern in any type of transaction. Are you able to retain the talent? And they've signed on, which is just awesome. And it shows the power of our offering and how we've honed our vet experience inside Petco. And thanks to the team and Dr. Whitney for making sure that we do that. In terms of hiring of vets, the vet market is tight. We continue to operate at a faster time to fill than industry benchmarks. And as we've said, right now, we're focused on making sure we onboard all those wonderful Thrive vets and vet techs. But we'll get back to our 70 per year pace in Q3, Q4. We'll pick up the pace from Q1 and Q2. And we'll continue to execute. That's what we do.

Yes. And on your second part of your question, Anna, I'll pivot off of Ron's comments on labor. One of the largest line items that we have in terms of cost is labor, and Justin Tichy, who runs our PCC, just did an exceptional job this quarter at aligning our labor costs with our revenue trajectory. On a broader notion for that $20 million to $33 million, it's across those areas that I talked about that the great news about those programs that we have in place, and it's not binary. We drive those initiatives in environments where we're growing double digits, and we drive them in environments where we grow 4% like we did in the first quarter. We take those savings, we either reinvest in the business or we use them to offset cost inputs or drop to the bottom line. So I'm proud of the way the team executed once again this quarter.

The only thing I would add -- the only thing I missed in my commentary was our vet tech edu program. So we are taking center store partners. 100, we took -- we put 100 through already. We have another 100 going through now, and we help them with their education to become vet techs. So think about it as I'm a baseball fan of minor leagues, and we develop them and then they become full vet techs within our system. And that is a competitive advantage that we have that others don't have.

Our next question comes from Chris Bottiglieri from BNP Paribas.

First one if I could ask about SG&A. I think last year was a little bit lumpier kind of quarter-on-quarter throughout the year. Have you given your guidance on sales for Q2 versus Q1 and kind of just normal seasonality? Can you give us a sense of how we should think about modeling SG&A throughout 2022?

Yes. I mean, I'm not going to get into specifics by quarter or anything, Chris. But I would tell you that SG&A has components that are more fixed and some that are more variable. One, if you look at the investments that we continue to make, we're going to continue to invest in our people. We're going to continue to make sure we're investing in the vet build-out. We're going to continue to keep investing in our infrastructure. There are other areas that are part of our $20 million to $30 million of annual efficiencies. We think about overall spend management, procurement, et cetera. From a variability standpoint, we look at things like marketing where we continue to like the ROI on our marketing investments. There are years like last year where you have a bit heavier upper funnel spend as we relaunched our TV campaign and our brand platform. So we had more upper funnel versus lower funnel spend last year, and that slipped back a little bit this year. So puts and takes across the board. We're good at this. We continue to execute and manage the overall envelope.

Got you. Okay. And then the next question was just on transportation. Some good guys and bad guys with ocean freight context being renegotiated, just fuel costs going up now. And then positively, it sounds like the kind of third-party truck spot rate markets kind of softening recently. So can you just help us think through like a net of all of that, how do we think about supply chain pressure over the balance of the year relative to what you saw in Q1?

Yes. I mean, let me start with I think the team did a great job this quarter, Chris, managing through this. We haven't seen these types of environments in a while, and I thought the team managed through it very, very well. We do expect some of these headwinds to continue. Freight's one of those areas. I think the good news for us is we have a physical footprint that allows us to distribute digital orders through the PCCs. That gives us enormous leverage versus pure online competitors, particularly in areas like fresh. We've talked about this in the past as fresh continues to scale, that is a huge advantage for us to deliver fresh product on same-day delivery versus shipping from a DC. I think the team remains focused on reducing the number of packages per online order. And we remain confident in the tools in our arsenal to help offset some of that pressure.

Our next question comes from Steph Wissink from Jefferies.

I just wanted to go back to a prior question on pricing and make sure we're hearing you correctly. If you could just help us think through how much pricing you've taken. And then your inventory balance, I think you quantified as unit growth in line with sales. But does that give us some sense of what level of inflation is kind of yet to come through your pricing matrix, if you could just share with us a little bit about how much more pricing you expect to take, that would be helpful.

Yes. I won't get into forward-looking on pricing, Stephanie, for obvious reasons. But I will tell you that -- let me start with the inventory dynamic. You heard us right. If you look at inventory on the balance sheet, inventory dollars were up 19% year-on-year. We commented that units were roughly in line with revenue. So you can do the math on that and imply what's on the balance sheet in terms of pricing. I wouldn't read into that, that is pricing we have yet to take because a lot of those cost inputs are already in the back. If you look backwards for the last 6, 9 months, those costs have been coming in. It has been impacting inventory. We've taken pricing actions against that largely. There remain pockets, and we manage this thing holistically. So most -- the majority of those pricing actions have been taken in Q3, Q4. As we look to any further actions, we will weigh that against consumer demand. So we'll work with our vendors. We'll go SKU by SKU. We'll do deep analytics. We'll manage the demand environment, what consumers are looking for as well as our ability to control overall cost to serve with our vendors.

Okay. That's helpful. My final question is on Thrive. I'm just wondering if it changes your thinking regarding de novo versus acquisitions, just the success you've seen there with retention and integration if it reshapes your view of the balance of your growth?

We like our strategy. I think the evolution in our thinking was how much we like our own vet model, and that's why I cited Las Vegas because that was proving it to ourselves that we could run and own that network. Not only do we like that, but we like when we have multiple vet hospitals in a city. We see an exponential return when we do that. So we are dedicated to our own vet strategy. We will complement that with one and twosie vet acquisitions that have been relatively successful. That is the add-on strategy. That is not the core strategy. The core strategy is build out our step-and-repeat model of bringing hospitals, JustFoodForDogs and Reddy store in stores in existing pet care centers where we see not only the vet revenue, but the 4 to 5 lift in center store. That strategy works. There is hardly a retailer that has that type of step-and-repeat model that is inherent in our model, and we like it. We will supplement that with acquisitions opportunistically. But we've talked about 1, 2, 3, 4. It's not a mass. We don't like the valuations on the big networks in general.

Our next question comes from Simeon Gutman from Morgan Stanley.

The 400,000 net new customers, do you quantify it? Does it matter what percentage or what contribution it was within the 5 comp versus I think you did say spend per pet was up, I don't think you quantify it? And how important or how -- I guess, is that mix changing? And is that something you pay attention to?

We did say that we had 400,000 adds. We did say that we -- our spend per customer was up, and we're driving both. In the, I would say, in the 2021 window, when you had this explosion of pets, we were primarily focused on adds because that was a once-in-an-industry opportunity to capture new customers. And we got much more than our fair share. We are now taking a more balanced approach where we're both driving customer adds ahead of our pre-pandemic levels as well as ahead of our online competitors' levels. But we're really driving share of wallet and driving spend per customer as well. And I think we said on the earlier commentary, double-digit increase there, which is great. We really started focusing heavily on that about 3 or 4 quarters ago, and we're seeing the fruit of that. And the best example of that to me is Vital Care, right, where as we add Vital Care customers, 20% of them weren't buying food from us, 30% weren't buying or weren't having services from us. And so we're capturing that share of wallet, and we'll continue to do that. I think complementing that is these Perks programs, where we now have 1.4 million members in our grooming and our food perks programs that are generating royalties. So we are in a much more balanced approach right now, I think, which is fitting with the market dynamics. When pets were exploding, we wanted to get more than our fair share, which we did. Now to be clear, the latest projection from Euromonitor says that the number of pets is projected to be up 2% for the year. That's above the historic 1%. So the pet industry continues to get good news in terms of the new pet dynamics.

And then maybe one quick follow-up. The -- it sounds like your customers, as you said, still kind of moving up the ladder in terms of premiumization. And it sounds like your customer base in general is more middle, maybe even to upper income. Are you seeing -- first, is that fair? And are you seeing a divergence in the basket within different customer cohorts? And I think you made it clear we don't really have a big range of customer cohorts, but are you seeing some difference in different baskets of unique customers?

Yes. Good question, Simeon. Thank you. So we over-index on the higher-value customers, the highest value customers, which there's been lots of talk about that. You have a stratification. The mid- to high end is relatively inelastic. And that's where the majority of our customers are, and that's why we're seeing continued premiumization. The mid- to lower-end customers, which is not really our bailiwick, that's where what we see is more cutbacks across the retail industry. The good news is where we're really focused is the higher-end customer, which tends to correlate to the higher-income customer. And we're seeing much less elasticity from that customer. And that's why we have this dynamic of premiumization happening within our portfolio, which is really healthy. And it's not new. It's relatively timeless. I think there was a question of whether in an extra inflationary environment would that continue? And the answer is yes.

And our next question comes from John Heinbockel from Guggenheim.

Ron, a question. Service utilization picks up, maybe talk about affordability, right, for different income groups. And then does -- do we now get in a downturn here, an acceleration in Vital Care and insurance sort of a permanent acceleration to aid affordability?

Yes. Great question. So we are seeing an acceleration in Vital Care, and a lot of what we hear is about the affordability. And it helps me take the total care of my pet in a more affordable way. That's great for the customer, and it's great for us because that means we're picking up more share of wallet. I cited the share of wallet componentry earlier. So it is one of our key tools on providing affordability without kind of financially degrading. The other tool we have, obviously, is WholeHearted, which is a high-quality product for a more affordable price, but a strong margin for us, which is another win-win. So the answer is yes, I see that migration continuing. So the current economic environment should be a stimulant for Vital Care sign-ups, which then drives more recurring revenue, which drives more predictability for us. So I think that's good. Our insurance business grew strongly in the quarter, and we're continuing to work on ways to further enhance that. And I would anticipate further news on that front in the coming quarters on insurance. We see that if you recall what I said, I think, 4 or 5 quarters ago about Rx, I said it's a big opportunity. We're going to get after it. We got after it, and we're seeing strong growth in scaling. I would say the same thing about insurance. We have a nice business. It is growing robustly, but we have an opportunity to scale much more rapidly, and there'll be news in the next couple of quarters on that front.

And ladies and gentlemen, with that, we will be concluding today's question-and-answer session. I'd like to turn the floor back over to Ron Coughlin for closing.

Thank you, operator. Once again, thank you for spending time with us today. To our analysts, we appreciate the time and insights that you provide. And to our investors, thank you for showing faith in us every single day. To reiterate, we have been, we are and we will continue to be a growth company. Why? Because we operate in a category that remains strong and resilient even in times of economic headwinds. Our world-class team knows how to execute. And our model is differentiated with tangible competitive advantages. These attributes will continue to enable meaningful growth for Petco while concurrently bringing our long-term strategic vision to life and delivering against our purpose. Thank you for your time.

That concludes Petco's first quarter 2022 earnings conference call. The team will be available after the call if you have any follow-up questions. Thank you.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.