Pet Valu Holdings Ltd

TSX:PET

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, everyone. Thank you for standing by. Welcome to Pet Valu's First Quarter 2023 Earnings Conference Call. My name is Alexis, and I will be coordinating today's call. [Operator Instructions]I would now like to turn the call over to James Allison, Investor Relations at Pet Valu. Please go ahead, Mr. Allison.

[James Allison, executive]

Good morning, everyone. Thank you for joining Pet Valu's call to discuss our first quarter 2023 results which we released this morning and can be found on our website at investors.petvalu.com.With me on the call is Richard Maltsbarger, President and Chief Executive Officer; and Linda Drysdale, Chief Financial Officer.Before we begin, I would like to remind you that management may make forward-looking statements which includes guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties which could cause actual results to differ materially from those expressed today. For a broader description of risks related to our business, please see our Q1 2023 MD&A, 2022 annual information form and other filings available on SEDAR.I would also like to note that today's remarks will be accompanied by a earnings presentation for Q1 2023, which can be viewed live through our live webcast and is also available on our website.Now I'd like to turn the call over to Richard.

[Richard Maltsbarger, executive]

Thank you, James, and good morning, everyone. I will begin today with an overview of our strategic and operational accomplishments in the first quarter of 2023, along with observations for the balance of the year and updates on some of the key initiatives driving our long-term profitable growth. Linda will then walk through a more detailed review of our financial performance in the quarter and discuss our outlook before opening the call up to take your questions.We are very pleased with our performance in the first quarter. The momentum we had in 2022 carried through into 2023, driven by the resilient growth characteristics that have underpinned the Canadian pet industry for almost 3 decades.From an operating perspective, our business continues to deliver on each of our key metrics. System-wide sales grew almost 19% as we continued to win market share. Same-store sales growth exceeded 9%, supported by basket and transaction growth.We opened 7 new stores, bringing our network to over 750 locations by the end of the quarter. And we continued to drive increased traffic through our e-commerce channels. These strong fundamentals were partially offset by external factors, such as unfavorable FX and interest rate swings. The quarter unfolded just as we had anticipated, delivering strong revenue growth and adjusted EBITDA of $49 million and giving us conviction to reaffirm guidance.Our success is directly tied to execution on key strategic initiatives, which we map to our growth formula. First, we continue to expand our store network. We opened 7 new stores in Q1 and 49 over the last 12 months, ending the quarter with 751 locations.Our data-driven real estate strategy continues to yield excellent results with the 2020, 2021, and 2022 new store cohorts tracking ahead of our expectations. Most openings were franchised and our franchise owners continue to play an integral role in our success as their entrepreneurial spirit, hard work and close community ties help turn a good location into a great store.We drove same-store sales growth of over 9% in the quarter, supported by both basket and traffic growth. Performance continues to remain relatively consistent across geographies, market types, and vintages. Our real estate team completed 2 renovation, expansion, or relocation projects in the quarter and 28 in the last 12 months. These efforts expand square footage, provide strong returns on capital investment and help maintain customer experience consistency across our network.From a category perspective, growth continues to be driven primarily by consumables and services. Within consumables, premium food tiers once again led the pack, a clear indication of the resilient nature of devoted pet lovers within the Canadian pet industry.We are seeing more customers transition to larger bags and can sizes, partially driven by better economics per pound, but also due to industry-wide adjustments to bag and can volumes. In hardlines, which account for less than a quarter of our sales, growth remains positive, though has softened sequentially across many assortments. These changes tie closely to our expectations of market growth working its way back toward long-term norms.On the marketing front, our teams continued to execute our 360-degree always-on media strategy. One particular highlight in the first quarter was the launch of our Let's Go Outside digital travel guide campaign, which expanded our Love Lives Here messaging to inspire devoted pet lovers to undertake pet-first adventures to explore the outdoors. Let's Go Outside represented a digital-first campaign, leveraging our improved capabilities to drive traffic to our website and deliver industry-leading content.Even further, we complemented the digital aspect of this campaign, leveraging one of our true strengths, the local compassion and expertise of our store managers, field teams and franchisees, many of whom represented Pet Valu across a plethora of local media engagement with morning shows, radio talk shows and more, truly extending the compassion and expertise of our ACEs and franchisees beyond the store to help connect with devoted pet lovers across Canada.We continue to see increased use of our full suite of e-commerce capabilities, which complements our growing store presence. Our website serves as a digital front porch to our brand and as a key resource for customers, helping to inform and educate users before they visit our stores and we continue to implement ongoing enhancements to improve user experience. And with more than a third of our online customers choosing to pick up their order in-store, it is clear our unmatched network of neighborhood stores provides strong value to our online customers.Our omnichannel strategy is founded on enabling Canadian devoted pet lovers to engage with us on their terms, whether through high touch service in our stores, the quick convenience of a buy online pickup order, or the benefits of direct-to-home orders. Our ecosystem is built to serve our growing customer base, when, where and how they want, with each component empowering the importance of the others.Another key pillar of our digital ecosystem is driving customer loyalty. We once again grew our active customer base in the first quarter, now exceeding 2.5 million active customers. Leveraging the wealth of data this program provides, our customer analytics team continues to leverage customized promotion to drive increased engagement and to expose our core devoted pet lovers to the innovative new products we are launching with our national brand partners and under our award-winning proprietary brand.And the final pillar of our growth strategy, enhancing our operating margins over the long-term. Margin rates in the first quarter came in as expected as we weathered the strongest year-over-year depreciation in the Canadian dollar since the pandemic, together with the annualization of purposeful investments in people and technology to drive long-term, sustainable growth in our business, including the addition of key talent at Chico.These investments are directly tied to enhancing our ability to compete on how we sell and provide service to devoted pet lovers and provide the runway for continued growth rates higher than the broader pet industry.As we look out over the balance of 2023, I'm excited for the trajectory of our business as we execute several key initiatives designed to further elevate Pet Valu's advantages in the Canadian pet marketplace and continue driving our long-term profitable growth model. As Linda will cover shortly, we are reaffirming our outlook for 2023.But let me first highlight a few operational aspects of our plan. First, we continue to deploy our successful brick-and-mortar strategy, as we expect to open between 40 and 50 new stores this year. With our pipeline pretty well locked for 2023, we are now selecting locations for 2024 and beyond.Our physical presence within the Canadian marketplace is a key differentiator, as our network of over 750 stores provides unmatched convenience versus peers. On a same-store basis, we are happy with our pace to date in Q2, which is core to sustaining our sales growth above industry levels.From a merchandising perspective, our team executed a smooth transition to the rebranded Performatrin Prime. We have now supplemented this change with a re-launch of our Performatrin.com website in early Q2, providing a clean, easy to navigate experience, which enhances research and discovery and showcases the full breadth of our Performatrin lineup. These investments in our Performatrin brand of food will be further supported by a new television campaign that began this week highlighting the breadth of offerings in this premier lineup of food and treats.We are also honored to have been selected as the exclusive retailer for a unique collaboration between Canada Pooch and Mattel as they expand their Barbie brand to include a 20-piece line of fashionable and functional dog apparel and accessories, many of which are in the iconic Barbie pink hue. This is just one example of how we are leveraging our scale in the Canadian marketplace to continually thrill our customers and drive incremental traffic to our stores. At the same time, we are executing against our full agenda of ongoing enhancements to our digital platforms.In April, we soft launched Pet Profile, allowing loyalty members to create customized profiles for their pets online. While it is still very early in its evolution, this new functionality is providing better insight into our core customers. This capability further complements our VIP program within our loyalty offering, where we recognize truly devoted pet lovers and the years that they've been shopping with Pet Valu, including in the store recognition and presentation of VIP gifts, including an offer of connection with our executive staff.And finally, enhancing our operating margins over the long-term. We continue to expect operating leverage in the back half of this year, as we annualize the full breadth of our labor and technology investments made in 2022.As we anticipated, we continue to expect gross profit and adjusted EBITDA margin rate pressures in the first half of the year, driven primarily from unfavorable year-over-year FX rates. Fortunately, global supply disruptions are subsiding, providing several benefits to our business, with vendors beginning to reactivate SKUs and improving lead time and service levels for orders.In the near term, the combination of more SKUs being available and product arriving faster is lifting our inventory volumes and these developments are driving long-awaited better in-stock positions at our DC, our corporate stores and our franchisees, who are seeing the best fill rates from Pet Valu in 5 years.We are also seeing freight costs come off peak levels during the pandemic, which will help alleviate some of the FX pressure we are facing as we move through the year. One of the most critical initiatives for our future growth is the work we are doing to build Canada's strongest pet specialty supply chain. Construction of our new GTA distribution center is progressing on schedule and on budget. With walls and ceiling up and floors poured, we have gained early access to ready the building for racking, equipment and IT installation, as we work towards a ramp-up starting in early Q3.This highly anticipated opening of our new GTA DC will unlock substantial capacity, first benefiting our Pet Valu business through greater asset efficiency over time, as we reduce our use of more expensive third-party storage and leverage automation for our individual piece pick operations for store and e-commerce fulfillment.The increased capacity will also allow us to enhance our wholesale product catalog to our franchisees, tapping into higher potential future wholesale revenues to our legacy Pet Valu network. And starting next year, we will use this capacity to begin providing wholesale distribution to our network of over 80 Chico stores in Quebec, opening access to millions of wholesale revenue upside, as Chico franchisees consolidate their purchases over time with us.Altogether, this critical initiative both increases our efficiencies for store and e-commerce picking operations and enables greater wholesale revenue opportunities, ultimately supporting the growth of our business, while allowing us to maintain long-term stable gross margins.Finally, we are layering in well-planned additional investments of ours into our corporately owned stores during key selling periods to further capture share in Canada's growing pet industry, by leaning into one of our key points of difference, providing compelling and engaging in-store experiences to our customers, where our ACEs share in all the emotional highs and lows of pet ownership with our customers through deeply human connections.And with that, I'll pass it over to you, Linda.

[Linda Drysdale, executive]

Thank you, Richard, and good morning, everyone. I will start by reviewing our first quarter financial results, followed by some comments on our full year outlook. As a reminder, Q1 2023 performance includes a full quarter impact from the acquisition of Chico which was completed in February 2022. As a result, Chico impacts year-over-year growth rates across several key metrics. We are pleased with our Q1 performance, which was right on track to how we expected the beginning of the year to unfold.First quarter system-wide sales increased 19% to $340 million. Excluding Chico in both comparable periods, system-wide sales grew 13%. Our business once again delivered robust same-store sales growth of 9.4%, supported by basket up 6% and traffic up 3%. We opened 7 new stores in the quarter and ended Q1 with 751 locations, 70% of which are franchised. We continue to expect to grow our franchise mix over time.Turning to our company's performance, first quarter revenue was $250 million, an increase of 17%. Excluding Chico, revenue grew by 16%, outpacing system-wide sales growth as industry supply conditions continue to improve through the quarter, allowing us to deliver better fill rates to our franchisees and drive strong wholesale revenue.Gross profit was $87 million, an increase of 13%. As a percentage of revenue, gross margin rate was 34.8%, down 130 basis points from 36.1% last year and right in line with what we planned for in the first quarter. This was almost entirely driven by a weaker Canadian dollar, which increased costs on foreign-sourced products.As a reminder, approximately 30% of our annual merchandise is sourced from outside of Canada and is denominated in U.S. dollars. From a sensitivity perspective, every penny change to the U.S.-Canadian exchange rate year-over-year roughly translates to a 10 to 15 basis point move in gross margin, typically on a 90-day lag basis given inventory terms.Other factors impacting our gross margin rate include higher wholesale merchandise sales related to increased franchise source mix and improved fill rates, which were largely offset by lower freight costs and the acquisition of Chico. Note that supply chain transformation costs had a negligible impact on gross margin in the first quarter.Selling, general and administrative expenses in the first quarter were $52 million. Excluding IT and business transformation costs, share-based compensation and other non-operating items, our SG&A expenses were approximately $49 million, an increase of 25%, primarily attributable to purposeful investments in head counts, wages and additional labor hours in our corporate stores to support long-term growth and higher technology costs, as we continue to modernize our platform.Adjusted EBITDA increased 4% to $49 million in line with our expectations. As a percentage of revenue, adjusted EBITDA margins was 19.5%. Net income was $19 million, down $4 million from Q1 last year. Adjusted net income, which excludes items not indicative of our underlying performance, was $23 million compared to $25 million last year, as growth in adjusted EBITDA was offset by higher interest expense due to rising rates. Adjusted net income for diluted share was $0.32 compared to $0.35 last year.Now turning to the balance sheet. We ended the quarter in a comfortable liquidity position with $12 million of cash on hand, while our $130 million revolver remained undrawn. Based on the current interest rate environment and this comfort, we decided to repay an additional $28 million of our credit facility at the end of the quarter above our contractual quarterly repayment. Factoring this in, total debt net of deferred financing costs at the end of Q1 was $306 million. Taking into account leases, our leverage ratio sits at 1.8x.Our inventory balance at the end of Q1 was approximately $140 million, up 39% from Q1 last year, as we continue to make deliberate investments to feed our growing store base and materially improve in-stock levels at our DCs and stores. As Richard mentioned, SKU and volume availability from our vendor community continues to improve. These investments are paying off not only in better in-stock levels at our corporate stores, but also better fill rates with our growing network of franchise customers, such that they purchase more through us, driving up our wholesale revenue.Our fill rates are now at their highest levels in 5 years, while our inventory turns are healthy, providing us with comfort in the quality of our inventory today. We expect to begin to cycle improved in-stock levels by mid-2023. At such time, our inventory growth rates should realign with revenue growth.Net capital expenditures were $11 million in the first quarter, as we kick off a big year highlighted by substantial progress on our supply chain transformation. Free cash flow in the quarter was an outflow of $17 million, similar to last year.Now I will discuss our outlook for fiscal 2023. Coming off a solid first quarter, we continue to be excited about our growth potential in store for this year. With Q1 unfolding as we anticipated and factoring in our early observations in Q2, we are reaffirming our 2023 outlook, which was first shared in March.For the year, we expect revenue of between $1.05 billion and $1.075 billion, adjusted EBITDA of between $230 million and $237 million, and adjusted EPS of $1.60 to $1.66, implying solid growth across the board on top of exceptional results in the prior 2 years.Consistent with our messaging back in March, we expected the current FX rate environment to apply pressure on adjusted EBITDA margins in the first half of 2023 before we begin to cycle that in the second half. Q1 certainly played out as we had anticipated in this regard, and we expect adjusted EBITDA margins to be roughly similar in Q2 and then increasing in the back half. We are very happy with how the year has begun and are pleased with progress thus far in the second quarter.With that, I'll turn the call back to Richard.

[Richard Maltsbarger, executive]

Thank you, Linda. Before turning to questions, I am pleased to announce that earlier this spring, our organization was once again recognized in the Globe and Mail Women Lead Here List for fostering best-in-class executive gender diversity. Together, our diverse team is key to delivering on our mission to be Canada's preferred pet retailer, delivering the products, care, expertise and memorable moments that devoted pet lovers want, locally in stores and everywhere online.In fact, across all this great work, from store expansions and renovations, driving strong same-store sales growth, to the focus on growing operating margin dollars over time. All this great work is a direct result of the collaboration, compassion, expertise and efforts of our franchisees, ACEs and leaders. Together, this team knows what it takes to serve the most devoted pet lovers across Canada and we are excited about how our teamwork and passion comes together to help create our long-term profitable success.With that, we are now happy to take your questions.

[Operator]

[Operator Instructions] The first question comes from the line of Mark Petrie with CIBC.

[Mark Petrie, analyst]

I wanted to ask about the SG&A and it was a pretty material increase. I think some SG&A leverage was embedded in your outlook and presumably still is. So can you just walk us through the drivers there around Q1 and how Q1 came in versus your plans and then how we should think about OpEx through the balance of the year?

[Richard Maltsbarger, executive]

Yes. This is Richard. First, clarity coming out of Q4 and into Q1, we had a relatively similar level of SG&A dollar spend, and you can expect that to be pretty consistently on a quarterly basis as we go throughout the year. We are cycling some investments we made throughout the year in 2022 and it's that cycling as we move through the year that will be able to generate the leverage that we spoke about during our outlook and our conversations on the last quarter.In particularly, there are several key areas we're making investments from corporate talent, IT talent, technology capabilities, but more specifically, we had 1 very planned investment and 1 set of somewhat accelerated investments in Q1. The planned investment was layering in additional hours and select corporately-owned stores to better align those hours with key daily and weekly selling periods to further improve our superior customer experience and the things people have come to expect from Pet Valu.The 1 area where we did have slight acceleration were several enhancements to our digital platform, such as the recent expansion of our resource center, our launch recommendation widgets, our better product badging to allow customers to customize their searches, enhanced inventory visibility surrounding stores and launching our pet profile. We think all these investments are great examples of how we're always striving to make those small operating adjustments to lean into opportunities to take market share growth.So overall, we're pleased the SG&A is on track. A few slight accelerations on our digital development, but overall for the year, we're right along with our plan.

[Mark Petrie, analyst]

And I just wanted to ask on the top line, you're alluding to a belief that you grew faster than the industry and took market share. I'm just curious if you could talk about any shifts in the competitive dynamics that you've seen and specifically any change in sort of how you or your competitors are approaching promotions?

[Richard Maltsbarger, executive]

Yes, Mark. So on that front, we do believe that we did take share this quarter. Our market intelligence would indicate to us that the market is still healthy and growing slightly ahead of its mid single-digit pace, which of course we were able to outstrip that pace with a strong growth that we saw in the quarter.From a competitive dynamic, it's still a very rational market. We have seen a step back towards more normalized pre-pandemic promotional levels and intensity. We do believe that's primarily in the food, drug and mass channel, more so in pet specialty. Again, only about 10% of the brands we sell, especially in consumables, which are of course 75% of our business, actually overlap with the food, drug and mass channel.In our core pet specialty brands and especially pet specialty consumables, again 90% of our consumable business, we've seen very rational and proportional environment, well in line with what we expected.

[Operator]

The next question comes from the line of Irene Nattel with RBC.

[Irene Nattel, analyst]

Just continuing the discussion around top line, I guess, it's my usual question these days. What are you seeing in terms of consumer spending patterns, trade-downs, shift to private label, anything that you can tell us and any indications at this point in time of consumers pulling back in spending?

[Richard Maltsbarger, executive]

Certainly, Irene. Yes, so as you saw in our results and heard in our comments, the Canadian pet demand remains robust. We really drove solid positive growth in the industry as a whole, and again, especially growing spend with us as we continue to take share. We did see growth across all divisions led by consumables and in-store services.On the hardline side, growth does remain positive, but has slowed sequentially across most assortments. We are seeing one small change. We indicated it in 2 quarters ago, a little bit more last quarter and a little bit more this quarter, in which consumers are shifting to purchasing larger food bag sizes to better leverage the per pound economics as well as adapt to an industry-wide adjustment to bag sizes.At the margin, this drives fewer restocking trips, resulting in fewer opportunities to sell more impulse or discretionary hardline products. But at the same time, we're leaning into the opportunities to strengthen the appeal of our hardlines categories for the devoted pet lovers that are in the store. So through initiatives like exclusive offerings with our recently launched Barbie line with Canada Pooch and Mattel and expanding our proprietary brand SKUs.We're really pleased with what we're seeing. Our proprietary brand continues to hold its penetration. We are seeing certain national brand categories and especially frozen raw, the higher-end super premium categories where we don't yet have an entry point and proprietary brand are slightly outpacing, because it really is the premium branded consumable part of our business. That 90% that's not overlapped with food, drug and masks, that's really stepping out and leading our growth.So a little bit of consolidation, a few cutbacks and trips primarily driven by larger bag sizes that people are purchasing in this economy, but no real trade-down behavior and the quality of their food, and no real trade-off in the things that they're willing to purchase from us when they're in the store.

[Irene Nattel, analyst]

And as a follow-up, you mentioned services, you mentioned e-commerce. Can you please give us an update on where you are now in terms of percentage of sales from services and how that's been trending? And I guess related, e-comm, you said 30% is in-store pickup. I guess the math would imply that 70% is delivery to home. How much of that is subscription and where are you today in terms of overall penetration?

[Richard Maltsbarger, executive]

Certainly, Irene. So services, again, it's a relatively small part of our overall revenue mix, around 2% of our overall revenue and sales. But the great thing about that is they're usually incremental trips to the normal restocking trips people make for their food trips. And it's primarily driven by our self-serve dog wash, which in and of itself is an accretive service. But most especially, we generally see the average ticket for a dog wash being a little more than twice the actual cost of the wash. And people pick up incremental products when they come in to provide that service to their pet.So we like the traffic that it generates. And overall, we're seeing more dog washes this year than we saw last year, both of which are now pacing ahead of pre-pandemic norms that we saw before services were somewhat curtailed.The e-commerce business continues to grow strongly. We continue to see year-over-year growth in that. Remember for us, though, e-commerce is very much an omni-channel part of our mix. It is not a specific channel focus. In fact, we don't conduct any channel-specific promotions. We want to be when, where and how the devoted pet lover chooses to shop.Having stated that, our subscriptions continue to grow. A significant proportion of our subscriptions, more than a quarter, are still the brand new, net new customers to Pet Valu. So that offering is enabling us to get into some of the pockets of the country where even though we cover 75% of all Canadians within 5 kilometers of our stores, there's still a few places left for us to grow, right? We do still have an opportunity for 500 more stores in Canada, so in the meantime, we're serving that with a bit of our e-commerce demand.So very pleased with what we're seeing. The new functionality and the website is coming through very well. Our customers are still somewhat learning to use our site. In fact, we have almost no online exclusive customers. The vast majority are both channels, online and in-store and growing pretty helpfully, especially amongst our core sort of monthly customers.

[Operator]

The next question comes from the line of Michael Van Aelst with TD Securities.

[Michael Van Aelst, analyst]

So the wholesale sales were up quite strong and it sounds like that's mostly from restocking and better in-stock positions, if I'm not mistaken? Can you talk a little bit more about the self-distribution levels at Chico? And I didn't hear the timing you said when you are going to start to ramp it up, but how long once you start ramping it up, how long do you expect it to take to get to a more substantial level?

[Richard Maltsbarger, executive]

Certainly, Michael. Let's start first with the first part of your statement on the wholesale sales. They are up as we noted on the call. We have finally been able to get our distribution centers back into what we would call relatively normal pre-pandemic operating mode. Many of our vendors have made new SKUs or what were previously sort of temporarily discontinued SKUs now re-available to us. And most importantly, the volume levels that our vendors have had available and the shipping times it's taken us to get, say, overseas or cross-border shipping have all reduced, really conspiring to put us into great in-stock positions and allow us to achieve those fill rates, best that we've seen in 5 years.A lot of really happy franchisees out there has been able to finally put all the different types of products back on the shelf that they really want to buy from us, but unfortunately, they've had to sort of shop around a bit in the -- basically, disruption of the market that the supply chains are causing. So that's helping to drive those wholesale sales, really good, healthy sign for the long-term continuation of our business.Even better will be the fact that most of that is still upside at Chico. Today, only about 5% of what Chico sells is coming from our distribution. We really won't bring Chico online for wholesale distribution until early part of 2024 once we're fully active within our new GTA distribution center. We are expecting to activate that distribution center later summer, so mid to late summer of this year, but that would be primarily for our bulk operation. We won't go full integration until first part of 2024 with our piece pick. Once both of those elements are in place, we will begin to layer in self-distribution to Chico. As we noted on the call, that will open up millions of dollars of upside wholesale revenue sometime during the middle part of next year.

[Michael Van Aelst, analyst]

And how like what are you targeting in terms of self-distribution levels and over what period?

[Richard Maltsbarger, executive]

Certainly. So today in our Pet Valu network, we cover about 90% of all wholesale purchases resold in our franchise stores come from our distribution. We don't think we'll ever get quite that high in Chico because there are some very good Quebec specific and Quebec manufactured goods that just from a sheer movement of goods would make more sense to distribute locally there in Quebec. But we do see an absolute path to 50% to 70% of wholesale purchases over the long-term being able to come out of our self-distribution. It will take us a few years once we activate before we get up to those levels.

[Michael Van Aelst, analyst]

And then just on the OpEx, following up on that, you talked about accelerating some of your IT spend. Does that start to -- does that some of that spend start to come off then in the future in the next 3 quarters?

[Richard Maltsbarger, executive]

We do believe there's a little bit of timing on the SG&A there pulling a little bit further into front half of the year. We have an opportunity to be able to accelerate some of the development and so we chose to do so. Overall, like I said, our SG&A for the year is well online, and we would expect a pretty consistent dollar pace to what you saw this quarter across each of the next 3 quarters. There could be a little fluctuation, a million, up a million down each quarter, just depending upon when specific projects get delivered. But generally, the SG&A dollar level you saw this quarter is a good rough estimate for each of the quarters going forward.

[Michael Van Aelst, analyst]

Just finally on the same-store sales, can you talk about how it trended through the quarter and roughly where you're seeing it heading into Q2?

[Richard Maltsbarger, executive]

Certainly. Really pretty consistent throughout the quarter. Actually, a little lighter in January, but that was primarily caused by the holiday shift.As we noted in our MD&A, a little over 100 basis point adjustment, really to, not adjustment, but shift on same-store sales growth. This simply caused by when New Year's Day hit. If you were to take that out, we had pretty consistent performance throughout the quarter. As we move into Q2, we're happy with what we're seeing to date and expect it to be well in line with the overall expectations that we've provided.

[Operator]

The next question comes from the line of Martin Landry with Stifel.

[Martin Landry, analyst]

With the increase in interest rates, I was wondering if this is having an impact on your pipeline of franchise applicants. Just wondering, if I recall you had a really strong pipeline of applicants a year or 2 years ago. I don't know where it stands right now, but I'm just trying to understand if the macroeconomic environment has had an impact and slowed the number of applicants?

[Richard Maltsbarger, executive]

At this point, no. We have a very healthy pipeline of both site and franchisees continuing to flow in. As we noted in our AIF, we had about 1,400 inbound inquiries from interested parties last year. We are tracking a similar rate since we began the beginning of this year. As importantly, and you and I have talked about this in some depth, but just to share again, a lot of our purchases of new franchise stores and the resale of some of our corporate stores, in fact, more than half generally go to existing franchisees.And again, today, we have 87% of our franchise owners only have 1 or 2 stores. And generally, our rule of thumb is you can operate up to 5. So we still have ample opportunity for many of our existing owners today to continue to reinvest into their business. As we noted on our call last quarter and to repeat, we are making some incremental investments into the wholesale costs that we provide to our franchisees this year. It's one of the things impacting our year-over-year margin and we noted it on the call, as we lean into helping them to work through this high-cost inflation environment. They are rewarding us with continued reinvestment back into their businesses, both through new stores as well as renovations and expansions of their existing stores.

[Martin Landry, analyst]

Maybe just a follow-up on your subscription model, you mentioned that 25% of your new subscribers are new customers that have never shopped with you guys before. Just trying to see a little bit how you are acquiring those customers. What's the outreach that you're doing, or are you doing any outreach, or are these customers coming to your platform on their own?

[Richard Maltsbarger, executive]

We absolutely are doing outreach. As I noted on the call, our Let's Go Outside campaign this quarter was digital first, so we've really been able, over the last 2 or 3 years, to quite a bit of improvements in our implementation of digital-first marketing, including search, including very specific loyalty promotions, including identifying new customers and the types of environments which highly attractive new customers engage on the web, either through banner advertising or other approaches.Our whole 360 degree always on media approach is really at the core of attracting these customers. And then to note, our subscription offer is not discounted. Our subscription offer really taps into the heart of who we are as a company and in return for signing up for a subscription, we provide an incremental $20 donation in the feeding of the Lions Foundation of Canada Dog Guides program for all in-training puppies as they're coming donation in the service.And so there's a great dual benefit for us continue to lift who we are as a brand and supporting the Lions Foundation even as new and again almost 75% being existing customers sign up for subscriptions.

[Operator]

The next question comes from the line of Vishal Shreedhar with National Bank.

[Vishal Shreedhar, analyst]

Can you comment on the competitiveness of the market and the possible disruption that a new competitor may have if one enters and how typically the industry reacts? I know it's a bit of a difficult question to answer, but any perspective that you could share would be helpful.

[Richard Maltsbarger, executive]

Certainly, Vishal. We -- look we monitor every bit of competitive development pretty closely. We're always aware of public comments made. We're always aware of any patients that come in through the market. The most important thing is to take a step back. What we focus on is the devoted pet lover. That is our target customer. Least price-sensitive, most discerning, most specifically of the expectations of what it is that retail is to them in terms of the understanding of what they need for their customer.So again, our focus is on making sure that we have what it is that our target customers. So fortunately for us, it's a position we hold today. It's not something we take for granted. Every day we wake up focused on what it takes to defend and expand our market for the devoted pet lovers that really drive our business. You've seen us over the last 4 years push hard into a customer-facing technology by launching our fully integrated omnichannel experience to customers with our website, our national direct-to-home shipment, our click-and-collect across most stores, our auto ship subscription service. We continue to expand the stores that our focused customers desire to come into, having opened our 750th store this quarter and most importantly it's our people.Our people continue to make the difference. I know you and I have actually had this very specific conversation on some of our calls around the difference makers that our ACEs and our franchisees are in the stores, but also the difference makers are people in our DCs are. As we continue to invest into a new, modern, what we believe to be the strongest pet specialty supply chain in Canada, all of our ACEs are what make the difference as we go up against any type of competitor, online, offline, omni-channel, it doesn't matter.So we pay close attention, but we believe the steps that we've taken to be a truly competitive omnichannel retailer are the right ones, regardless of who the entry may or may not be.

[Vishal Shreedhar, analyst]

Okay. Is it correct to say that the younger demographic typically spends more on their pets than the older demographic? And if that is correct, is it also correct to say that the younger demographic is more inclined to e-commerce shopping versus in-store?

[Richard Maltsbarger, executive]

So the first statement that you shared isn't correct actually and the fact that we don't actually see a skew based on age for actual spending on the pets. It's really more driven by the type of pet, the age of the pet, the length of time in which the pet's been at the home and most importantly, whether or not the home is multi-pet. And what we find is there's no real discernible trend of multi-pet being correlated with any one particular age. We also don't find a significant skew anymore in how people shop.If you look at our omni-channel customer, those who shop online and in-store, it really does spread across all the different generations. It is truly one of the great things to be in a business where your target customers start at about 8 or 9 years old and go to about 98 years old. So the good news is we sort of have applicability across the range.

[Vishal Shreedhar, analyst]

Okay. Changing topics, the inventory investment that you made is significant and you're saying that you're seeing benefits. Are you able to trace the inventory investment that you made to same-store sales growth? Are you able to see that line and understand the benefit that you're getting from the higher inventory dollars that you're putting on your balance sheet?

[Richard Maltsbarger, executive]

Yes, we are. It's been great. We've been able to see the turn, as Linda noted in her remarks, our inventory returns continue to be healthy and our fill rates are up. So a lot of what it is, is we are doing a good job of once again sort of reclaiming some of the sort of longer tail skews that simply weren't as available from our vendors before or they had sporadic allocations across the industry. We now are fully stocked again in our DCs and we're being able to reconsolidate that spend from our specific franchisees.

[Vishal Shreedhar, analyst]

Okay. So are you content with the inventory dollars currently, or should we think that you're still in the investing phase and that we expect that to build?

[Richard Maltsbarger, executive]

No, we're content where they are. In fact, we will continue to work to manage them down a little from where they are today. There was a bit of early receipt, as Linda noted on her response or her script, because, again, we have, let's face it, it's been taking months to be able to import products. And I think everybody's noticed that the supply chain has opened up a bit. And what used to take months is sometimes now only taking weeks and we did have a little bit of early receipt towards the end of the quarter that we expect we'll be able to work through across Q2 and Q3.

[Vishal Shreedhar, analyst]

Okay. And maybe lastly as you reflect on the FX impact through the P&L, is there any way that management has hedging practices to smooth that FX volatility in the P&L, or is it just a function of the way that Pet goes to market?

[Linda Drysdale, executive]

Yes, currently -- hi, Vishal. This is Linda. Currently, we don't hedge the FX pressure on our purchases. And recall, approximately 30% of our purchases on an annual basis are denominated in USD, upwards of 70% are sourced domestically. We don't like the current hedge win, but we want to make sure that if we do run a hedging program that it makes sense long-term for the added cost and complexity. That said, it's something that we continuously reassess as we grow and there may be a time when it makes more financial sense.

[Richard Maltsbarger, executive]

And, Vishal, I think I would just add to that, we are in a bit of a peculiar environment. Normally, this is something that we would better just manage as the course of business as we move through, one of the reasons why we don't hedge. But you have to really look at the context of the incremental year-over-year FX pressure on top of the ongoing product cost inflation that we've seen over the past year.So there's only so much that the consumer will adjust to in terms of overall retail price increases. And so we have just a little bit of a compounding effect going on right now, which in order for us to most importantly maintain our competitiveness in the industry, we are having to absorb the FX pressure a bit in the short term. Longer term, the industry has a great track record of passing along all different types of cost inflation.We fully expect as we move through the year, we will begin to see some lessening of this pressure, but it is pretty significant both in Q1 and as we noted on the call, will continue to have significant impact in Q2, such that Linda highlighted that we should see a similar impact to overall adjusted EBITDA margins in Q2.

[Operator]

[Operator Instructions] Our next question comes from the line of [ Michael Zhu ] with Barclays.

[Unknown Analyst]

And I would like to first extend a warm welcome to Linda. So we were recently looking at your website and I know you mentioned during the call related to the Barbie collaboration and we know in the retail/consumer discretionary space a lot of companies are leveraging collaborations to drive awareness and sales. And with that said, do you expect to continue to add collaborative products into your mix? And if so what do you expect the impact to be to the overall business?

[Richard Maltsbarger, executive]

Michael, certainly where it makes sense, we will add any of the key collaborations for whom we believe it's a great fit for our devoted pet lover. This one in particular really stood out. As we did the sort did the pre-decision research into some of our devoted pet lovers, we identified a significant proportion of especially nostalgia-based approach to some of our very devoted -- call it perhaps Exer and Boomer customers for whom there was a great nostalgia for that.We also believe, of course, there should be some buildup to the Barbie line continuing over time as media really lean into this. For us it's mainly about what's the best fit for our devoted pet lover. It doesn't matter if it's a collaboration, a proprietary brand, a new national brand. Last year for example we launched Bark and brought in several of the toy collections from Bark that had a tremendous sort of response.On our proprietary brand side, right, we launched our Performatrin freeze-dried raw last year and this year it's up for a retail packaging award, because of the way in which it stood out on the shelf and the tremendous uptake that we've had from that launch, our first steps into the culinary category. So absolutely open to collaborations, but again, the most important criteria for us is how is it going to play with our devoted pet lover.

[Unknown Analyst]

Perfect. And as a quick follow-up to your comments about the VIP program that you mentioned earlier in the call, we were just wondering how much of an impact that is for driving repeat sales and what the VIP program will look like at Chico's and how the uptake has been from there and if you could provide any color on the rate of signups for the overall program?

[Richard Maltsbarger, executive]

Certainly. Just to be clear our VIP program is not a separate program that you sign up for. It is an extension of our existing loyalty program. It's a set of incremental benefits that we really surprise and delight our most loyal customers with. It's not a separate thing that we actually introduced within the program. It's really highly personalized.So for each one of these VIP customers, many of whom have spent almost a decade being a loyal customer to Pet Valu, oftentimes with $10,000 to $20,000 to $30,000 to spend over their lifetime with us, we actually customize a very specific gift box that's tied to the pets that they're purchasing for within our Pet Valu stores.We then, in partnership with our local franchisee or store manager, invite the VIP customer into the store and actually through something only we can do with our true store-based human connection, really say thank you, a deep, personal, heartfelt thank you as we hand over this VIP box completely customized to them. Inside every box is a handwritten note from me thanking them for their business and an opportunity to speak with someone on our executive staff if they just like to give more input into how we could be an even better partner for them in the pet space.So I think the important thing to take away, Michael, right, is this isn't something new. This is something that is at the premier level of our existing loyalty program in which we just want to say thank you to our very best customers.

[Operator]

That concludes the question-and-answer session. I will now pass the line back to Richard for closing or additional remarks.

[Richard Maltsbarger, executive]

As always, everyone, thank you so much for investing your time and your interest into Pet Valu. Later today, we have our Annual General Meeting. I hope some of you and our shareholding can join us for the meeting, which will highlight some of the key successes we had in 2022, but most importantly, you get just one more chance to hear how much we love what we do.So with that, thank you all so much, and we hope to talk to you again during our Q2 call in August. Have a great day.

[Operator]

That concludes the conference call. Thank you for your participation. You may now disconnect your line.