Wag! Group Co. Price & Performance (PET)

Thank you for joining Pet Value's call to discuss our fourth quarter twenty twenty four results. [indiscernible] were released earlier this morning and can be found on our website at investors.pudvalue.com. With me on the call is Richard Maltzberger, Chief Executive Officer Linda Drysdale, Chief Financial Officer and Greg Ramey, President and Chief Operating Officer. Before we begin, would like to remind you that management may make forward looking statements, which include guidance and underlying assumptions. Forward looking statements are based on expectations that involve risks and uncertainties. [indiscernible] could cause actual results to differ materially from those expressed today. For a broader description of risks related to our business, please see our Q4 twenty twenty four MD and A 2024 annual information form, and other filings available on SEDAR plus Today's remarks will also be accompanied by an earnings presentation. [indiscernible] can be viewed through our live webcast and is also available on our website. Now, would like to turn the call over to Richard. Thank you, James, and good morning, everyone. I'll begin today's call with some high level remarks, before handing over to Greg and Linda to walk through Q4 results and our 2025 plans. As I look back on our accomplishments in the fourth quarter and fiscal twenty twenty four, I continue to see the strong pillars of resilience, adaptability and compassion.

That have defined our actions and driven our successes over the long term. Our devoted pet lovers continue to seek the highest quality products While in the current environment, these customers are also seeking value for their money. I'm proud to say our teams executed programs to meet both sets of needs. Quality and value. And the compassion of our people remains steadfast. Helping to engender the strong loyalty we see in our customers, continually strong franchise inquiries and franchise retention, and yet another year reduced turnover of our Aces in our corporate stores and distribution centers. Our team's efforts and execution resulted in an improved trajectory in our same store sales. While meeting or exceeding our revenue, adjusted EBITDA and adjusted EPS expectations. These outcomes together with prudent management of our working capital, help further accelerate free cash flow. Opening up opportunities to provide greater returns to shareholders which Linda will cover shortly. Throughout the fourth quarter and twenty twenty four, we continue to advance key long term strategic initiatives. Including our supply chain transformation, our upgraded website platform, our launch of Performant Drink Culinary into the fastest growing food segment in Canadian Pet and opening over 40 new stores.

All these steps show the ability of our teams to adapt to near term conditions while making the right investments to continue leading the Canadian pet industry. And enable a return to same store sales and adjusted EPS growth as we progress through 2025. And with that, I'll now turn it over to Greg to walk through our operational accomplishments and what's in store for the year ahead. Greg? Thank you, Richard. We successfully executed our Q4 playbook driving better than expected profit outcomes. Let me unpack a few highlights. Starting with our first focus, Speed Canada's local and everywhere Pet special Our real estate team opened a record 19 new stores during Q4. For the year, we opened 41 new sites across all market types, ending the year with a total of eight twenty four locations coast to coast. We surpassed 600 franchise locations in Q4 adding 43 more franchise sites in 2024 through a combination of new openings and corporate resales. We continue to grow our network primarily through new franchise additions, which now account for 73% of our stores. We and our franchisees continued to reinvest in our [indiscernible] completing major renovations, expansions, or relocations on another 14 sites in the quarter and 39 for the year.

Adding this together with our new openings, and another handful of smaller store refreshes, our real estate team once again completed over 100 projects in 2024. Helping to maintain a consistent, engaging retail experience for millions of devoted pet lovers across Canada. In our digital channel, we continue to be pleased with the consumer engagement trends with our site now boasting a greater assortment and improved customer shopping experiences. Traffic orders and average order value were all up. Driving sales growth that is outpacing our consolidated results. We further enhanced our omni channel retail convenience in Q4 through a launch of Instacart same day delivery across over 600 stores outside of Quebec, further increasing our market leading strength of allowing customers to shop how, when and where they want. We also took action on our second focus, to deliver the best pet customer experience While remaining true to our holistic approach to value, we took decisive action in Q4 to lean into value seeking behaviors through a diverse set of initiatives, which ultimately enabled us to hold market share in the quarter and for the full year. We lowered prices on our industry leading Fresh for Life proprietary cat litter in early November.

This, together with actions earlier last spring, culminated in price investments across over 1,000 consumable products in 2024. Ultimately driving our ability to maintain and strengthen market share in key food and other consumable categories. We also listed hundreds of new products supported by our extended aisle capacity in our new GTA and Vancouver distribution centers. Our product category now exceeds over 10,000 items compared to roughly 7,000 before the beginning of 2024. [indiscernible] And we executed a strong commercial program through the fall and into the holidays.

Highlighted by three weekly flash sales centered around basket builders and supported with enhanced in store activations, and a three sixty degree marketing. And along with all these changes, we shared investments Together, these actions supported a sequential improvement our same store sales growth trajectory. Particularly around key events such as Black Friday, Cyber Monday, the lead up to the holidays. We further enhanced our value proposition through our growing portfolio of proprietary brands. Often priced 5% to 20% below national brand products of similar quality tiers. In 2024, introduced roughly 400 net new proprietary branded products. Including over two forty in hardline categories such as cat furniture, beds, leashes, toys and litter accessories. In consumables, the highlight was the resounding success of our mid year launch for Performance and Culinary. Our gently cooked lineup continues to be a particular standard where we added products like our limited time Tradukin ahead of the holidays as well as Beef Bison Bowl and Fish Florentine just last month. We are pleased with the reception and demand for these products. Which provide greater access to a compelling market segment with culinary customers visiting and spending twice as much as our network average. Supported by continued double digit culinary category growth and driving frequency of visits to our stores.

And we have continued expanding our selection of proprietary brands available to our Chico franchisees. We now have access to over 1,200 Quebec packaging compliant products, Together, these actions have helped maintain our proprietary brand penetration at 25% allowing them to grow alongside our industry leading national brand lineup. We also see continuing success of our loyalty programs. Penetration from our over 3,000,000 active loyalty members reached 85% of system wide sales in 2024, another record high. As devoted pet lovers increasingly engage and earn benefits to fulfill their needs. This success was driven by the strengthening appeal of our free bag program. As we work with suppliers to grow the list of eligible brands. One notable highlight was in November. When we became the first Canadian retailer to offer Royal Canadian in a frequent buyer program. In 2024, our loyalty members redeemed over 500,000 free bags and dog wash representing over $28,000,000 in retail value. We are also increasingly leaning into personalized promotions leveraging AI and machine learning to better segment and customize both the content and timing of our offers. Turning to our third focus, to fortify strong retail and wholesale fundamentals. Our implementation path on our supply chain transformation remains on time and on budget.

With our new GTA in Vancouver facilities now at steady state, [indiscernible] are turning our focus to the third and final new DC in Calgary, Alberta. We've just taken possession of this new 300,000 square foot facility and are commencing fit up work ahead of our planned start up in the third quarter. We are already starting to see benefits materialize from our results from these first two new DCs. First, our revenue growth is outpacing system wide sales as we extend our product availability to our franchisees and drive higher wholesale shipments. With a deeper catalog and greater capacity, our franchisees can order more of their needs from us. Simplifying their fulfillment and labor scheduling and enabling them to max This is particularly evident with our Chico franchisees whose wholesale penetration exceeded 30% at the end of twenty twenty four. [indiscernible] putting us well on our way of achieving an interim target of 50% wholesale penetration by Q4 of twenty twenty five. The second benefit is the operating productivity and efficiencies unlocked by earning facilities. Continuing a trend started in Q1. [indiscernible] we once again leveraged our variable distribution costs in the fourth quarter. Most impressively, our supply chain teams were able to significantly improve service levels and on time delivery while also leveraging inventory.

Providing a better experience for our corporate store staff and franchisees as we now provide over 900 store deliveries nationwide every week while also improving our free cash flow. Before turning the call over to Linda, let me highlight key elements of our playbook as we embark on 2025. First, we plan to continue to invest in our channels with approximately 40 new store openings continued focus on franchise growth and the further enrichment of our digital platform. Having already launched significant usability and speed improvements to our website and our pet profile tools in January of this year. We will also look to enhance our merchandising excellence. Leveraging new promotions and pricing planning systems, several new high quality and innovative food brand launches including Snack and Square Pet enhanced InstaR activations and sign packages, and the continued growth we are seeing in our expanded culinary offering. Over the first six months of Pet, I've been continually impressed with the collaboration and support provided by some of our strategic national brand suppliers. Such as Champion. Who continue to grow alongside us. We believe this showcases to all our suppliers the clear benefits power of our unmatched Canadian retail platform. And we'll be looking to lean into this more in 2025.

This will also be the year we complete our $100,000,000 supply chain transformation. By both opening our new Calgary distribution center and completing several key productivity enhancing system and process investments. As you can see, we have a full suite of initiatives underway this year designed to strengthen our position as Canada's leading pet specialty retailer over the long term [indiscernible] while continuing to meet the near term evolving needs Over to you, Linda.

Thank you, Greg. I will start by reviewing our full year and fourth quarter financial performance. Before discussing our outlook for 2025. Consumer demand continued to bifurcate in 2024, as many devoted pet lovers sought value to offset rising cost of living while others leaned even more into the highest quality foods and solutions. Such as culinary and super premium kibble brands. And we were able to compete effectively across both sets of customers. Full year revenue increased 4% to $1,100,000,000 Adjusted EBITDA grew 7% to $247,000,000 and adjusted net income per diluted share declined a modest $0.04 to $57 despite absorbing approximately $0.2 of incremental fixed cost related to new DCs. [indiscernible] Furthermore, prudent capital management enabled us to exceed $100,000,000 in free cash flow ahead of schedule, and advanced plans to enhance shareholder returns through share buybacks. All said, despite the year unfolding differently than expected, our flexibility and resilience delivered financial and strategic successes. Turning to the fourth quarter, system wide sales increased 2% to $388,000,000 driven by expansion in our store network, with the addition of 41 sites over the last four quarters. On a same store basis, sales were essentially flat as 2% growth in average basket was offset by a 2% decline in transactions.

At a category level, similar to recent quarters, consumables and services continued to grow while discretionary sales remained softer. That said, comps improved sequentially across both consumables and hardlines. Providing growing confidence in stabilizing demand trends from our devoted pet lovers. Q4 revenue grew 3% to $295,000,000 A system wide sales growth was supplemented by increasing wholesale penetration across our franchise network. [indiscernible] Gross profit was $100,000,000 up 2% from last year. As a percentage of revenue, gross margin rate was 34%, down 30 basis points from last year. Excluding costs related to the supply chain transformation from Q4, and the comparable period last year. Gross margin decreased two fifty basis points. Primarily driven by higher fixed distribution and occupancy costs from new distribution centers, and higher wholesale merchandise sales as we successfully increased our wholesale shipments to our TECO franchisees and grew franchise shipments faster than sales in Pet stores through expanded product availability in our GTA and Surrey DCs. We were pleased with the effectiveness of our pricing and promotional programs. But especially pleased with how our ACES activated these promotions in store. Drove a measurable improvement in basket adds and helped support favorable margins versus our prior expectations.

Selling, general and administrative expenses in the fourth quarter were $52,000,000 Excluding costs not indicative of business performance, our SG and A expenses were just shy of $49,000,000 and roughly in line with what we indicated on our Q3 call. While this represented a 9% year over year increase, [indiscernible] recall that last year in Q4, we benefited from lower variable compensation expense. Our teams continue to closely monitor discretionary expenses and project spend while investing in our long term strategic initiatives. Adjusted EBITDA was $68,000,000 down 4% from last year, but ahead of our implied guidance provided in Q3 due to stronger margins. Net income was $29,000,000 similar to last year.

Excluding items not indicative of our underlying performance, adjusted net income was $32,000,000 or $0.45 per diluted share, compared to $39,000,000 or $0.54 per diluted share last year. Looking at our balance sheet, cash on hand was $35,000,000 at the end of the quarter, and $210,000,000 in total liquidity when including our recently upsized revolver. Which remained undrawn through the quarter. Total debt Pet Pet of deferred financing costs was $278,000,000 Taking into account net lease obligations, our leverage ratio is 2.1x, well within our comfort zone. Our inventory balance at the end of twenty twenty four was $125,000,000 up a modest 2% from last year.

Our supply chain replenishment and merchandising teams continue to closely monitor and optimize our stock to consistently leverage inventories as a percentage of revenues through the year. We were particularly pleased with the sell through of carryover and clearance stock in the quarter. Leaving us with a strong quality and the right quantity. Product as we begin 2025. [indiscernible] Q4 net capital expenditures were $15,000,000 bringing us to $52,000,000 for 2024, was within expectations. After three years of elevated capital investments, we are now nearing the end of our supply chain transformation and expect lower net capital expenditures starting in 2025. And finally, turning to free cash flow, which represents a key element of our focus to enhance returns to our shareholders over time. [indiscernible] For the quarter, we generated $41,000,000 in free cash flow, up from $34,000,000 last year. This brought us to $103,000,000 for the year, representing free cash flow conversion of 42% relative to adjusted EBITDA, and exceeding the $100,000,000 milestone ahead of plan due to the keen cost management and favorable working capital leverage. Strong free cash flow generation has been a pivotal component in our decision to enhance returns to shareholders. Through share buybacks, which started in September under our normal course issuer bid.

These actions continued throughout the fourth quarter as we repurchased 1,100,000.0 shares for total consideration of $28,000,000 bringing us to $30,000,000 of share repurchases for fiscal twenty twenty four. To note, we renewed our NCIB in late November upsizing our repurchase limit to 5% of shares outstanding. We remained active under the NCIB into the first quarter under our automatic purchase program and continue to see repurchases as an appealing return at current valuation levels.

Now to our outlook for fiscal twenty twenty five. There are positive signs of normalizing inflation and falling interest rates. Providing potential building blocks for a more stable and constructive environment. And we saw some early signals of this in our fourth quarter and into the sales performance we have seen in the first two months of twenty twenty five. At the same time, there is growing uncertainty around potential for inflationary pressures across Canadian supply chains. Both from tariffs and the weakening Canadian dollar. [indiscernible] the situation continues to evolve, [indiscernible] we believe our domestically oriented supply network provides some insulation from potential impacts with approximately 23% of our 2024 merchandise purchase based in U. S. Dollars. And approximately 15% directly imported from The United States. [indiscernible] will continue to monitor the situation believe we have the right mechanisms in place to adapt our sourcing in necessary. Within these contexts, we believe our 2025 outlook centers on a gradual strengthening of same store sales growth, supported by continued advancement of our strategic priorities, completion of our supply chain transformation midyear a responsible focus on balancing near term promotional competitiveness a long term profitable growth Please note that our 2025 outlook reflects a fifty three week calendar compared to fifty two weeks in fiscal twenty twenty four, with the extra week falling in Q4.

We expect full year revenue between $1,170,000,000 and $1,200,000,000 representing growth of between 79%. This is supported by approximately 40 new store openings increased wholesale penetration with our franchisees and same store sales growth of between 14%. From a cadence perspective, we expect same store sales growth to accelerate from the low end of this range towards the higher end of this range through the year as demand continues to stabilize. Adjusted EBITDA, we expect to generate between $254,000,000 and $260,000,000 This incorporates strong revenue growth, together with intentional reinvestment into our compelling value offering wholesale revenues growing faster than overall sales, through our expanded supply chain capability and normalization in our SG and A expense expenses as we continue investing in key capabilities for long term growth and navigate cost inflation pressures across Canada. [indiscernible] We expect adjusted net income per diluted share to land between $1.66 and $1.66 This outlook includes the absorption of approximately $12,000,000 pretax or $0.12 per diluted share of incremental depreciation and lease liability associated with our new distribution centers, primarily felt in the first three quarters of the year.

I want to reiterate Greg's comments on the financial and operational benefits of our supply chain transformation investments. These are substantial and long lasting and are already materializing. First, we have supported and will continue to support a continued strong cadence of store openings. Outpacing our competition as we bring our brand and retail experiences to more pet households every day. Second, we've already begun expanding our available product catalog, both increasing our relevance for online shopping as well as tapping in new wholesale opportunities with our franchise network, driving incremental revenue and profit. And third, since the ramp up of the GTADC in mid-twenty twenty three, we have continually enhanced our productivity and efficiency, driving down variable supply chain costs a percentage of revenue runway to go. And finally, with respect to our capital allocation priorities for 2025, we have a well constructed and articulated framework, prioritizes our capital towards the highest return opportunities available. In that vein, net capital expenditures are expected to be approximately $35,000,000 consisting of new store growth, Pet up of our new Calgary DC and maintenance CapEx. This marks a step down from investments made over the last three years as we conclude our supply chain transformation.

Given our normalizing capital requirements, we aspire to convert more than 40% of adjusted EBITDA into free cash Fifth, together with our well managed leverage provides a growing capacity to return capital to shareholders. The first component of these returns is through our quarterly dividends, with our Board approving a 9% increase to $0.12 per share starting in Q1. Marking the fourth consecutive year of dividend growth. The second component is through our opportunistic share repurchases we commenced last year.

Given current conditions, together with the compelling valuation of our shares today, plan to allocate a significant portion of our free cash flow to share repurchases. In summary, remain in a strong financial position. Poised to accelerate both top and bottom line growth over the course of 2025 and beyond. With a focus on increasing returns to our shareholders over time. With that, I'll turn it back to Richard.

Thank you, Linda and Greg. As we close the books on 2024, I would like to take a moment to celebrate a few more successes that are core to what sets us apart in our [indiscernible] First, I'd like to celebrate our Companions for Change initiatives and in store product donation drives across Canada. We are incredibly grateful that together with the combined support of our customers, our franchisees and our company, [indiscernible] Our Companions for Change fundraising initiatives and our in store donations raised a record $4,100,000 last year. Providing an opportunity to support rescue and pet support organizations across hundreds of local communities in Canada. Second, I'd like to celebrate our continuing commitment to serve devoted pet lovers and our people across all walks of Canadian life. From the actions we take to lower prices, for everyday essentials such as pet food and cat litter, to the innovative products including thousands of Canadian made products we bring to market to the hours we invest in eighth and leader development to ensure compassion and expertise continue as hallmarks of our culture. To the steps we take to help our franchisees continue to build success in their locally owned Canadian businesses.

To our national partnership with the Lions Foundation of Canada Dog Guides where we are a sponsor of their new facility have invested over $7,000,000 to help them train over 200 dog guides for differently abled Canadians. And continue to provide free Performatrin Prime dog food to all dogs in training. All these actions and more are central to our role as a Canadian locally owned and operated company. And all of these will continue as we maintain our focus on the long term. With that, we are now happy to take your questions.

Our first question comes from the line of Martin Landry of Stifel. Please go ahead.

Hi. Good morning, everyone. My first question is on your outlook for your same store sales Linda, you did mention that you expect the pace to start at low end of your 1% to 4% guidance. And then accelerate throughout the year. Just wondering a little bit why do you expect same store sales to accelerate in the back end? Is it a function of easier comps or just trying to understand a little bit what would be driving an acceleration towards the end of the year?

Hi, Martin. Good morning. It's Linda speaking. Yes, I would say that [indiscernible] part of it as well as you know, as we the macro environment and normalized demand over the course of the year. Would be why we would think about it that way.

Okay. And could you break down in your guidance in your sales guidance what do you expect in terms of transaction growth versus basket size? So Martin, this is Richard. I'll just jump in there. No, we won't actually break that down any further. We will continue to strike the balance that you saw similar in Q4 and our commercial plans for the year will be a similar approach as we adjust to the environment that we Okay.

But just ask differently, is there any change in in traffic that or transaction that you would expect because it's been down this year and I'm wondering if that could stabilize for '25 Pet that we are required to navigate as we go through the year. Okay.

All right. Thank you and best of luck.

Thanks, Martin.

We have a question from Mark Petrie of CIB Please go ahead.

Yes. Thanks.

Good morning.

Promotional activity. It seems like this is both supported by your capabilities as well as opportunities you've seen in the market. So hoping you could just talk a bit more about this how Q4 played out versus your expectations and how you've approached that sort of balance on sales and margins 2025 and your planning? Hi, Mark. It's Greg. I'll jump in on that one. So So looking at Q4 in total, I think everyone was expecting a bit more robust industry. Demand than materialize. Inflation and interest rates have normalized from a year ago. But this is taking a bit of time to translate down to consumer confidence. Within that context, we were pleased with our performance. Our third party research shows we held share in the quarter and primarily through the strength in consumables. But we also saw improved performance in litter, treats, hardlines, all driven through our Q4 go to market strategy. So we were pleased with the effectiveness of the promotional program in Q4. We did see same store sales growth accelerate around those key events. Generated some nice excitement in traffic across our channel. And favorable margins based on what we had planned. As we saw we did a better job of having pet lovers add as [indiscernible] to their baskets.

So we saw momentum in Q3 Q4. We have seen that momentum improve as we've moved into the first two months of Q1. With the same approach strong commercial program. I think the you asked what we saw as far as what would translate into Q1. I think a couple of things. So I don't want to tip our hand too much, but a couple of highlights from that were were important for us. We did see the promotional focus and the targeted price investments we made drive needs based trips from our monthly customers and that's important We really like that. We also as we lead into strategies aimed at growing the basket, we saw those be successful. And we saw our devoted pet lovers look for an opportunity to spend a bit and tamper their Pet. And we saw ASUS do a strong job of activating those stores. So team did a solid job of executing those. Those are elements that within a stable environment stable trading environment over this year and this quarter, we'll look to replicate Okay. Thanks for that, Greg. And if I could just follow-up maybe [indiscernible] could you go into a bit more detail about what you're doing differently with regards to in store engagement?

You called that out a couple of times. And I'm just curious if that's kind of a continuation of the way you typically approach that or if there's sort of a new thinking on how you want to activate Instructure?

Mark, this is Richard. I'll start and Greg can provide a little more detail on specific quarter. But from a a long term perspective, you've talked about [indiscernible] talked with us very specifically around the work we've been doing to increase our investments in leadership development, the work we've been doing to ensure that we have competitive wages, including the living wage we provide to any of our And I think in general what you're seeing is between our local franchisees the work they do with their teams and our corporate stores and the investments we've made back into our work [indiscernible] longer term retention, very well trained ACES being able to have a conversation with the customer when they come into the aisle, especially as they're asking questions around products are made, what ingredients go into them, what opportunities do they have order to continue to improve the nutrition for their Pet. And then I'll give Greg a little more just what we saw specifically in Q4. Yes. So in Q4, we designed [indiscernible] commercial plan that had a lot of focus on allowing ASUS in store to add to the discretionary basket as customers came in. And as you know, one of the real strengths of our business is the connections that our aces have with their devoted pet lovers.

And we spent time on all of those promotions make sure that our Aces knew how to activate them and make sure that customers saw the value that we had and we took advantage of trying to add items to the basket.

I'll just reiterate what Greg said earlier. In response, while the overall market did not deliver quite the same growth that we were expecting, we were quite happy with the ways in which the people who did come in were activated by our Okay. Understood. Appreciate all the comments and all the best Thanks, Mark.

We have a question from Irene Nattel of RBC. Please go ahead.

Hi, good morning, everyone. Just wondering on the cost side of the equation, what types of conversations you've been having so far with your suppliers around from the expectations for costs in 2025. We're hearing anecdotally that some of the some of the national or international suppliers are still asking for big price increases. And then I guess the corollary or the follow on to that is, how to think about the impact of tariffs and your ability to for the 15% that you do source directly from U. S. To find perhaps us supplies here, expires in Canada? Thank you.

Certainly, Irene. Thanks for the question. This is Richard. I'll start in. This may be a bit of a tag team here across Ireland. And Greg, given the breadth of the question around not only inflation from costs provided, but also you threw in the potentials on the tariff conversation that are occurring. So Pet me go directly to the specific question around suppliers. We're seeing a relatively normalizing environment to date. As noted on the call by Linda, that normalizing environment was a key factor going into our overall guidance for the year.

But and there's always that big but that you brought up with is that normalized environment could be disrupted a bit through what may occur to the second part of your question around tariffs, etcetera. So let me say first, as a proud Canadian company with deep roots here and locally owned businesses with over three fifty owners. This is a specific topic we're paying a lot attention to. Trade policy environment is something that we expect to have an impact. And quite frankly, as we went into building our plans for the year, there were some specific assumptions we made around consumer uncertainty and a weakening Canadian dollar that are taken into account. But then turn it over to Linda to talk specifically around how that could affect our direct suppliers.

Yes.

Thanks, Richard, and good morning, Irene. As you heard me say in my prepared remarks, we have a domestically oriented supply network. Majority of our merchandise purchases coming from Canadian suppliers that provides us some insulation from direct tariff tariff impacts. As I said, approximately 15% of our come from that Many of these products are national branded. Consumables. Common across specialty, so potential tariffs would be felt industry wide. For most of these products, we also believe our selection provides devoted pet lovers with similar Canadian source alternatives.

Either through proprietary brands or Canadian based national brands. I'll also add their is a potential for broader tariff impacts on inputs or ingredients. Imported by Canadian based suppliers. But again, any potential flow through effect of this would be felt industry wide. In the meantime, as highlighted, we're taking out precautionary actions you'd expect reviewing our procurement options and identifying opportunities to work with more domestic vendors.

And Irene, it's Greg. Maybe I'll just add one final point on this. So both leveraging inventory and our work with our vendors has been a real strength of the business over the last number of years. So we've successfully leveraged inventory over the last eight quarters. Using the tools and systems that we've built as part of the supply chain transformation. As I said, this is an area of strength and given the current environment, we will have even more focus on it.

That's really helpful. Thank you. We have a question from Mike Van Elts of TD Cowen. Please go ahead.

Hi, good morning. I'd just like to continue on that line of questioning actually around The U. S. Supply. And typically, pet food is a little stickier, pet owners don't like to change brands that much. But have you seen any signs of buy Canadian movement in your stores like the grocers have for example?

Michael, it's Greg. We have seen increased in from devoted pet lovers circadian products and we responded quickly to that both with marketing efforts and in store signage. To highlight strengths Maybe a couple of key points on this for us. We've got deep roots in the Canadian marketplace, cert Pet head lovers for almost fifty years. Strong national presence, three fifty franchisees, operating source co to coast. So that's an important point for us that we're making known We also have a strong legacy of sourcing local emerging innovative brands. Many of which after we've started to sell them have grown into prominent brands across the country. And we have a really strong portfolio of Canadian products, both national brands, and our pro form a churn offering in Fresh for Life. So short answer is yes, we've definitely seen an increase and we're Okay. Thank you. And you said that you've built in some consumer uncertainty and weaker Canadian dollar into your forecast. For 2025. What is the Canadian dollar that you're forecast that you're using?

Yes. We use economist projections for the Canadian dollar assumptions. Mike?

So, okay. So whatever I see is consent guidance right now is what you would be consensus expectations for the exchange rate. That's that's a good one, good to use?

Correct.

Correct. And remember, there's a ninety day lag on Right. Okay.

And from a And from a tariff standpoint, how much have you built in? Like when you talk about building in some consumer uncertainty, obviously, there's you're going to have some increase in your in your costs from U. S. In terms of U. S. Products, but also a weaker consumer environment. And I'm wondering how much that's built into your same store sales forecast when you're you see an accelerating growth rate throughout the year? Certainly, Mike. I think I'm going to take it up just a bit of a notch even above above tariffs and really talk about what we're really seeing and considering in the overall consumer environment because it's not just uncertainties, there's also some points of strength. So I'd like to talk to both of those. And then Linda can talk a little bit about specifically how that impacts the range of our guidance. So first, generally, consumer trends we seen through much of 2024, we continue to see in the Q4 and into the beginning first couple of months. As Greg noted, we've seen some good momentum in the first couple of months of this year Yes, Devoted Pet Levers are prioritizing needs based purchases like food, litter and services, but there are specific areas especially in food and litter where we've really leaned into value and we saw some really great success in Q4.

Within consumables, we also continue to see bifurcation in demand that Linda highlighted on the call. That we've talked about for several quarters. So on one hand, we have consumers continuing to trade up to higher quality foods, really driving faster growth in culinary. Still well up over 20% growth in that category. For frozen raw gently cooked of course lead with the [indiscernible] line. But at the same time, we've seen a cohort of customers looking for great value. And that's where, as Greg noted, our loyalty program benefit additional brands coming into our loyalty program, as well as price adjustments we made on some of our own proprietary brand products is having success.

We do continue to see some value seeking behavior in discretionary business. So toys, treats, apparel, other hardlines, you'll see a bit more promotional intensity here, as well as you saw us fighting a little harder. In that space through some of our promotions around the key holiday events. So through all that, we saw sequential improvement in our same store sales growth. We continue to see some momentum into the beginning of this year. But all of that comes with just a certain level of uncertainty. And so I'll let Linda talk a little bit about how that played into the second part of your question in our guidance.

Yes, I'll pick that up. So similar to prior years, we look at inputs, obviously, when we build our outlook, both internal and external factors. External, as you mentioned, includes the Economist projections on macro indicators. Things like spending, GDP, FX and interest rates. And then equally important are the many internal initiatives we've planned to max These include actions like our store openings, our go to market selling to consumers and our franchisees and the product [indiscernible] we pursue across the organization.

All to say, lots of paths to getting to the high or low end of our outlook.

I will add a gradual return towards normalized demand for our discretionary products will help us reach the top end of our outlook. Conversely, if discretionary demand deteriorates, it would make that outcome a bit more challenging. To achieve. But let me reiterate, we believe the business model that we have and the flexibility of our teams enabled us to adapt to a wide range of environments And I think that our performance last year really showcased it.

Yes. And I just to wrap that off, Mike, I'll just reiterate that again with Lither just said, right? The performance over not just last year, but the year before and our ability to adapt in the environment. We think we've got a commercial plan that really balanced this holistic approach to value with the recognition that continue to see loyalties from some really strong devoted pet lovers and monthly shoppers, who continue to trade up And we think the balance we saw in Q4 is a good way to approach the year. Okay, that's helpful. And then I just wanted to touch on your Q4 margins because they did seem to strengthen I think you had the best gross margins that you've reported in the last two years. So or at least the first time you've actually seen an increase. Year over year or close to an sorry, guess that's not it wasn't actually an increase. Maybe let's call it the smallest decrease year over year in the last two years by a wide margin. So, what allowed you to do that? Is that Is that the efficiencies from the DC or is that something or is there something else that's also helping?

So what I would say Mike absolutely hit a key part of there. As Linda said on her call and Greg also reiterated, we are beginning to see strong efficiencies coming out, especially out of our GTA facility. Has now been in operation for eighteen months. But even out of our Vancouver facility, that just went live last year. That's one of the benefits we've already begun to see over supply chain. We noted the second quarter that we continue to leverage the variable cost within our DCs. That's despite all of the transition that we were going through in Q3 and Q4. So while we have the step up in fixed costs that we both had in 2024 that Linda noted, but also the step up in fixed costs we'll have in 2025 across the first three quarters. On the variable cost side, we're seeing real strength there. And then incremental to that, we did a great job increasing our revenues beyond our sales and really strong job of of finding the right value proposition on the incremental 3,000 SKUs we brought into our warehouses over the past year to be able to pick up incremental wholesale sales on some higher value product to our franchisees.

So overall, we were also quite pleased, and that played into some of the aspects how we plan the year.

Great. Thank you.

Thanks. We have a question from Vishal Shreedhar of National Bank. Please go ahead. Hi. Thanks for taking my questions.

With respect to the the pricing tools that you've implemented or are starting to implement and promote promotional effectiveness Can you just help us understand where you are Did that yield benefits in the quarter? And at what point should we anticipate seeing benefits in your results?

Vishal, it's Greg. The implementation of the promotional system happened late January. So you should Pet, I expect to see improvements through that, through through this year. But it was not in place in Q4. And the pricing system, so the what I'll call the shelf pricing system is about to go live.

Live.

And to the benefits expected, Vishal, that really does play into some of our expectations for improvement. As Linda just said, part of the the range in our guidance includes some of our own internal initiatives. And some of what we saw in the promo pricing tools, we're going through the testing and the planning and the use of those is something we plan to leverage in driving our commercial plan to continue to pick up sales in the New Year.

Okay. So should we see that in Q1? Or does it take a bit of time to kick in and you gradually implement It's Greg again. Our promotional planning cycle would mean that it won't kick in Q1 because we would have planned those promotions as we started to exit the year. So we are think of it as middle of the year timing as far as when we'd expect to see any material difference in how we're going to market But I would say though, Vishal, though, to Q1 and the momentum that Greg noted is that like any time there from a seasonal standpoint, you see a bit of a step down in promotional activity in Q1. From the heightened levels that you see during Q4. That is sort of what we anticipated and seen at the beginning of twenty twenty five. But as always, they're ready to compete. It is an environment that will require us to compete. And that's been baked into our commercial strategy for the full year.

Okay. And you invested in price in Q4 more so in certain categories. Wondering if you were satisfied with that investment? Did it yield the customer response that you were hoping for?

I would say Pet me start that first. Yes, Vishal. But note [indiscernible] most significant price investments we made were actually back in April and May and we're very well articulated to this group before we made them across both consumables and meaning food and litter and those really helped in our ability to maintain share throughout all of the full year of 2024, but we did take some incremental actions that Greg led in Q4 and I'll let him talk specifically in litter. Yes. And Vishal, so the investment we made in Fresh for Life litter in Q4, we saw nice returns from that. We also made investments in the promotional program, as you know, we saw that help deliver deliver the growth in discretionary items in the basket like hardlines. Treats, etcetera.

Okay. And do you have a sense of just amidst the slowing population growth in Canada, do you have a sense of competitive square footage growth or industry square footage growth?

Currently, maybe LTM and looking forward?

Yes. Michelle, we do. It's very much a normalizing environment. It's an environment in which we, through our continued strength of our balance sheet and our pipeline for real estate, have been able to maintain, our target roughly 40 store opening pace, which we've not seen matched.

In terms of maintenance of other square footage growth by other players, allowing us to both what we believe build an opportunity for share in 25% and in the next few years.

Thanks, Michel.

We have a question from Chris Murray of ATB Capital Markets. Please go ahead.

Yes. Thanks, folks.

Maybe thinking about some of the leverage you can pull around consumer [indiscernible] We go into 2025, can you talk a little bit about plans you may have for proprietary products?

And maybe any thoughts around being able to leverage the loyalty program a little bit more? We've seen some of your [indiscernible] some of the consumer behavior. So just thoughts on how that how that may see that evolve as we go into next year?

Yes, certainly. I think Greg and I will probably tag team that Chris. I'll talk a little bit about what we're doing in terms of our loyalty and then I'll give it to Greg to talk a little bit about the product as some of the focus there. So from the loyalty program, absolutely. We already expanded the program. In November, we became the first and currently still the only national pet specialty player with a bag program, a loyalty bag program by 12 Pet to thirteen, three with Royal Canadian Inn. Which is positioning us well and we packed that up with incremental promotions on Royal Canadian in the first quarter. We have also added other programs that I'll let Gary talk to some of the products that are coming into that. We're adding incremental products into our program. We're also leaning in We have begun to leverage some more advanced AI segmentation for our approach to actually recapture customers that may have experimented with other providers in the past year. So So we're leaning into winning some of those customers back. And then some of the promotions that we specifically ran in Q4 that we're quite happy with were not mass promotions, but they were very specific basket ad promotions.

That our loyalty team was able to execute for very targeted and pointed players in markets. So with that, I'll let Barry talk a little bit about what we're doing product. [indiscernible] So as Richard said, we're very happy with loyalty in 3Q4 and 3Q3 through so far in Q1. We are in the midst of adding a number of vendors to the frequent buyer program to help support loyalty. So First Mate and Pet and Smack would be sort of big products that our stores and our customers have wanted. That are being added So we expect that to help grow the 3,000,000 active users that we have on loyalty program and to allow the things that Richard just said around making sure that we're simulating monthly demand and and [indiscernible] pushing to get winbacks from many customers who have tried other competitors.

Through the rest of the year. You asked a question on proprietary brands. I think you'll see a couple of focuses from us. We are are continuing to be very excited about how culinary is performing. So we will accelerate that work. We are also quite excited about how brands or sub brands like Altra Treats are performing. So you'll see us be more with that in the marketplace. And especially with our performance trend in Fresh for Life brands being great brands that that are primarily Navy and you will see us really focus on those this quarter and through the rest of the year.

Okay. That's helpful. The other question is really around Quebec. As we think about next year, Now that you've got the GTADC in place, I think there's a little more call it, seasoning of the acquisition and maybe some additional opportunities there. But you've also seen some competitors, especially in the digital channels, pull away from Quebec, shutting down DCs and things like that.

So I'm just wondering, as we go into next year, should we be thinking about the evolution of Chico and the growth in Chico? From a lot of the different facets, be that digital or loyalty, or even just as you drive more of the proprietary products into that network, or even bring suppliers that are to go back into the rest of the network.

Certainly, Chris. It's absolutely an opportunity for us I do believe it will pan out to be one of the best moves that we made strategically within the company to be able to enter specifically with Chico and the strength of that opportunity. Even post the end of the quarter, just give a brief update because including the openings in Q1, Chico is now up over 100 stores within Quebec and now has the leadership operating in that market.

From a proprietary brand perspective, they now have access to more than 1,200 Quebec language compliant proprietary brand offerings across all categories, food, consumables, litter, hardlines, toys, apparel, etcetera. That we've been able to bring to them at quite frankly substantially improved margins. Again, our proprietary brand products generally average at 1,200 basis points or higher total margin, some of which we eat, some of which we share directly with the franchisees.

The wholesale opportunity continues to go well, as noted. Our wholesale goal for this year is to be at more than 50% run rate by Q4. We were at more than 30% at the end of Q4 twenty twenty four. So well on track there. And now the fourth and final stage of our integration would be technology. We have begun to bring our Chico franchisees onto some of our technology platforms, including their web order process, which is now similar to what our franchisees do, so automation within the system. In fact, I get the opportunity on Tuesday of next week to be on stage and talk specifically with our Chico franchisees about the success we've been able to build together.

We do still see more than 100 plus store opportunities beyond the 100 stores we already have in Quebec. Continued opportunity to grow our proprietary brand penetration there. So while they have access, they're still growing their way towards that 25 plus percent rate that we have within our Pet value stores. And yes, we do see an up [indiscernible] Chico. But right now, quite frankly, with the store growth, the product growth, the wholesale growth, our franchisees are taking huge steps forward already.

All right.

Thanks, Chris. And we got time for one more question. Yes. Our final question comes from the line of Michael Vu of Barclays. Please go ahead.

Good morning, everyone. This is Mike Buhan for AIGRING YI. And is there any color you can provide on what you're seeing in the overall pet ownership trends quarter to date and expectations for the rest of the year and how we should think about that relative contribution to customer growth? Compared to some of your idiosyncratic initiatives that you've been working on?

Certainly, Michael. I would say in general, we've now completely cycled positive abnormality that we saw during the pandemic in any post pandemic environment. So really, we would expect pet population growth grow a little bit along with Canadian population growth, which unfortunately over the next year or two will be a bit constrained. And so that is a factor we've already considered within our plan. And another reason why Linda noted leaned into our own internal initiatives and to really more Pet the focus on controlling what we can control And one of the key things that we can control is the continued introduction of products, as Greg mentioned with lean into culinary, etcetera. That tap into the humanization trend that hasn't slowed down at all. Within the pet industry.

Great.

And then so just a second question on the increased marketing and advertising spend during the quarter.

Know you called that out during the last earnings call, but is there any color on additional initiatives to capture share of voice, generate sign in traffic?

And then is there any marketing trails that are working really well for you?

So yes and yes, good response most especially as Greg already noted earlier in the call from our monthly customers, Again, that is our primary focus in our marketing and advertising Pet. It was in line with the expectation we provided last quarter that we would be leaning into that. As part of our Q4 plan. And we continue to see really good performance really across all 360 degrees of the marketing. Really good brand and think scores as we measure our overall continues to grow across Canada. Both through a combination of our square footage growth, introducing us into new markets, but also our top of funnel marketing advertisement with some pretty funny and well received ads that we run digitally as well as on television. All the way down to some really strong success on the lower funnel. Whether that's investing in specific search terms that will line up with the key brands that we're supporting, especially with our Canadian made and proprietary brands. But also new things like weather triggers. So fortunately for you Michael you've not been in the Greater Toronto area for the past month or so or across Canada, but we've had just a wee bit of snow this year.

And the good news is the team introduced some very weather specific triggering marketing that's had a really strong click through response and great response to apparel. Has been a positive sign for us as we've gone into the first part of the year because well, we had some pretty nice winter coats.

That we're now seeing dogs across Canada walk around in their booties wearing because is still a lot of snow on the ground. So So Michael, thank you for that question. And I'll go ahead and just wrap us here because we're at time. So thank you to everybody. For the time that you have invested into the company. And we look forward to another great year as we continue to lean into our Canadian roots and serve devoted pet lovers all across the country. Thank you all so much, and we'll talk to you on the Q1 call.

This concludes today's call. Thank you for joining. You may now disconnect your lines.