Pet Valu Holdings Ltd

TSX:PET

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, everyone, and thank you for standing by. Welcome to Pet Valu's Fourth Quarter 2021 Earnings Conference Call. My name is Chris, and I'll 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 fourth quarter and full year 2021 results, which were released this morning and could be found on our website at investors.petvalu.com.

With me on the call is Richard Maltsbarger, President and Chief Executive Officer; and Jim Grady, Chief Financial Officer.

Before we begin, I would like to remind you that management may make forward-looking statements, including 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 Q4 2021 MD&A and other filings available on SEDAR.

I would also like to note that today's remarks will be accompanied by an earnings presentation for Q4 2021, which can be viewed live through our webcast and is available on our website.

Now, I would like to turn the call over to Richard Maltsbarger. Richard?

[Richard Maltsbarger, executive]

Thank you, James. Welcome everyone, and thank you for joining us this morning. I will begin today's call with an overview of our strategic and operational accomplishments in 2021, and in particular the fourth quarter, along with a few highlights we look ahead to 2022. Jim will then provide a more detailed review of our financial results and outline our guidance for this year before taking your questions.

Looking back, 2021 was an incredible year for Pet Valu due to phenomenal work of our ACEs, franchisees and leaders we were able to produce exceptional financial results that exceeded our ambitious expectations while implementing significant changes throughout the organization, including reaching key milestones in our omni-channel capabilities, completing a record number of store openings and renovations and supporting a successful IPO.

At the same time, we navigated another year of evolving, government mandated operating restrictions, including changing capacity limitations, and curbside only shopping for 20 weeks at over 50% of our stores. Despite all that change, Pet Valu delivered 18% same-store sales growth on the year, bringing system-wide sales to nearly $1 billion and adjusted EBITDA growth of 26%.

All of what we accomplished was only possible through the resilience and dedication of our people. The compassion and expertise of our ACEs, franchise owners, supply chain and corporate teams is what drives our success.

2021 was a true testament to this, as our people helped deliver 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. Thank you again to all our teams for your devotion and commitment during 2021.

Turning to our fourth quarter results, performance again exceeded our expectations across all key metrics. Same-store sales rose 17% or almost 35% on a 2-year stack basis, outpacing the industry as we continue to earn additional market share. This drove operating leverage with our adjusted EBITDA margin expanding 40 basis points to 23.9% and adjusted EBITDA dollars up 12% to $53 million, despite lapping a 14 week quarter last year. At the same time, we continue to execute against our 3 pillars of growth: expanding our store network, driving same-store sales growth, and enhancing operating margins over the long-term.

Let me speak to each of these. First, expanding our store network. We opened 12 stores in the fourth quarter, bringing us to 30 new store openings for the year. At the end of Q4 and prior to the acquisition of Chico, we operated 633 stores, of which 64% are franchised.

30 new stores in 1 year represents a record for our organization and is a direct result of the effort and investments our teams have made and our capabilities and processes to accelerate this pace over the last few years.

Amid a very challenging sourcing, permitting and construction environment. We are also pleased with the performance of our 2020 and 2021 store clients underscoring the strength of our site selection process.

Shifting to our second growth pillar driving same-store sales growth, which was incredibly strong this quarter of 17% or 35% on a 2-year basis as we comp a strong 18% in Q4 last year. Performance remains consistent across all markets and product categories, and our proprietary brands maintain a solid 30% penetration rate in 2021.

We completed 10 renovations, expansions or relocations in the quarter and 23 for the year with a strong pipeline of additional store update plan for 2022 and beyond.

Our digital channels saw momentum building through the quarter, continuing the trend, we've seen since we exited lockdown measures in mid-June. Over the course of 2021, we have modernized our omni-channel capabilities, completing the national rollout of direct-to-customer shipping in February point-of-sale upgrades in July and the integrated click-and-collect in September.

In the fourth quarter, we further enhanced our e-commerce experience with upgrades to our platform to improve speed and usability, including search terms and recommended items to build baskets, resulting in improved conversion rates.

Our active loyalty base continue to grow in the fourth quarter as we capitalize on increased foot traffic to our stores and reached almost 2 million members by year-end. For the year, loyalty penetration reached 66% of system-wide sales, up from 53% in 2020 as we work to enhance the engagement and customer experience of our growing membership base.

From a marketing perspective, we started the quarter off by launching our fall marketing campaign "Love Lives Here" and we cannot have been happier with the reception from customers, franchisees and ACEs. We also ran our first ever Cyber Monday promotion, representing another key leverage point from our recent omni-channel investments. The team remained focused on delivering an always-on, 360 degree approach to marketing, helping amplify our brand to drive new customer acquisition and build loyalty.

And the final pillar of our growth strategy, enhancing our operating margins. Our strong top-line growth once again delivered meaningful expense leverage in the quarter despite public company cost and a partial quarter of the strategic labor investments we are making across our organization, which we highlighted on the Q3 call.

Before turning to 2022, I would like to provide an overview on our recent acquisition of Chico. As we've noted in the past, entering and growing in Quebec is a key long-term strategic focus for Pet Valu. As we learn more about the local market, it became that they were the best choice to be our partners in the province.

The founders of Chico have worked over the past 35 years to build a strong franchise-led business, as deeply committed as Pet Valu in providing compassion and expertise to devoted pet lovers. We could not be more excited to welcome Chico and its franchise owners to the Pet Valu family.

As Quebec's largest pet specialty franchisor with 66 franchise locations across Quebec, Chico provides an experienced platform for our entry into this key market and shares close cultural and operational similarities for our existing business model.

During the most recent calendar year, Chico achieved over $79 million in system-wide sales and $7 million of revenues. And after adjusting for transition and integration costs, is immediately accretive to Pet Valu's earnings. But the most exciting aspect of this announcement is the future potential for Chico banner and its franchise owners.

First, with only 66 locations today, we believe Chico has ample runway for continued new unit growth. Second, Chico's consistent commitment to customer experience standards and caring service for its customers will strongly support Pet Valu's focus on safety, compassion, expertise and efficiency.

Finally, we believe there's an opportunity to create incremental value for Chico, its franchisees and Pet Valu through sales growth and operating leverage by accessing Pet Valu's portfolio proprietary brands as well as our broader wholesale distribution network, both of which are under penetrated and the Chico model today.

Our strategy is to operate Chico as a separate Quebec focused subsidiary with its own dedicated management team who will be supported by the ongoing commitment of Chico's founders during the transition. While the Chico brand will continue to be the store banner for current and future stores in Quebec, this Quebec based team will work closely with Pet Valu to introduce key aspects of our successful formula into Chico. We look forward to working together with local leadership and Chico's franchisees to help build even greater long-term success.

Turning now to fiscal 2022. We expect to drive continued growth on top of strong performance in 2020 and 2021. The Canadian pet industry continues to display its strength given the robust underlying tailwinds of increasing humanization of pets, together with the continued growth of Canada's pet population.

These trends have wholly accelerated through the pandemic, where recent studies suggest approximately 3 million pets have been welcomed into Canadian homes over the last 2 years alone, with over 80% of those being less than 2 years old. But almost 70% of our sales coming from recurring food, treats and other consumables, we expect Pet Valu to benefit from the step up and the pet population for years to come, while we also continue to deploy strategies to grow our market share and this attractive industry.

While our growth formula is expected to continue into 2022, as you will hear, we are continuing to balance between leveraging investments already made while making new investments to support future growth.

On new stores. We are targeting between 30 and 45 new openings this year, consisting of 25 to 35 across our Pet Valu operations and 5 to 10 new openings under the Chico banner in Quebec. Work is well underway for this full docket of openings and we are already filling our pipeline for 2023 in 2024. We continue to see ample whitespace opportunities in existing and new markets.

On our same-store sales growth, we expect to see continued momentum in 2022 at a pace slightly higher than the industry's mid-single digit long-term run rate as we began to lap the adoption boom and cycle through the pandemic restrictions experienced in early 2021.

On pet adoptions, our ongoing channel checks, reinforce continued healthy adoption rates, albeit beginning to settle back to more normalized conditions as we've entered 2022. This is a good sign that the 3 million additional pet seem to have become permanent members of their new families.

On the omni-channel front, following a very busy 2021 full of implementations, we are shifting our focus towards optimizing our processes to drive greater efficiency and effectiveness. To note, recent mobile and website usability enhancements implemented in late Q4 are delivering 80 basis points higher conversion rates, and higher returns on advertising spend during the first few weeks of 2022. We have a prioritized agenda of usability releases planned throughout the year.

We are also continuing our focus on finding minutes in our stores through the reengineering of processes to help shift more time away from tasking to better serving our devoted pet lovers including a recent update to our weekly store communications process and enhancement in our cycle counting procedures.

We are also leveraging the purchase data from our growing loyalty program to better understand our core customers, adapt our offerings and provide targeted value in key situations. For example, we confirm that a significant proportion of our most valuable monthly customers also have small animals such as rabbits or hamsters in their household.

In 2022, with our vendor partners, we are expanding our frequent buyer programs to include key items such as Timothy Hay helping to further increase the depth of Pet Valu's role in the devoted pet lovers household.

And finally, enhancing our operating margins over the long-term. As we discussed last quarter, we are broadening our investment focus beyond omni-channel and new store growth to include supply chain infrastructure, human capital initiatives and other key support systems.

Global supply chain disruptions and higher freight costs have continued into 2022. We are working to manage associated risks by maintaining elevated levels of safety stock across core items, once again accelerating seasonal procurement processes and making proactive investments in supply chain capacity as we prepare for continued volume growth. We are also in the final stages of securing a new larger facility which we believe will become operational in 2023 and support our long-term growth objectives.

On product sourcing, early observations and discussions indicate that the elevated pace of vendor cost inflation in 2021 will continue into this year. While we have been successful in passing much of this along state, we continue to take a very measured approach to how we address this to ensure we maintain our competitive positioning. One key tool in our toolbox is the breadth, awareness and quality of our extensive award winning proprietary brand portfolio, which offers multiple options for customers seeking more value.

On the human capital side, we successfully implemented strategic labor investments across our stores, supply chain and head office midway through the fourth quarter, which has helped us to adjust to the realities of today's labor market. We continue to stay ahead of provincial minimum wage increases, all while rewarding the expertise of our agents.

And with that, I'll conclude by saying I'm as equally proud of what our people have helped accomplish in 2021 as I am excited with what we have in store for 2022 and beyond, now with 700 stores across all 10 provinces and a full suite of online capabilities to serve our devoted pet levers.

Over to you, Jim.

[Jim Grady, executive]

Thank you, Richard, and good morning, everyone. I will start by reviewing our fourth quarter and full year 2021 financial results before discussing our outlook for 2022.

As Richard highlighted, 2021 was an exceptional year for Pet Valu, both operationally and financially. 2021's system-wide sales reached approximately $1 billion, up 19% from last year. Our growth on a same-store basis was 18%. The strong sales led to a terrific earnings growth with adjusted EBITDA up 26% and adjusted net income more than doubling from 2020. These results outpaced our expectations throughout the year, and the fourth quarter was a great finish.

Before discussing the quarter, I want to remind everyone that 2020 included an extra 14th week in the fourth quarter compared to a 13-week quarter in 2021. This had a noticeable impact across all reported growth rates, except same-store sales growth, which was calculated by aligning calendars and using periods of comparable length.

Q4 system-wide sales increased 11.7% to $288.5 million. Excluding the extra week last year, system-wide sales grew 18.2%, driven predominantly by strong same-store sales growth of 16.7%, which was comprised of same-store transactions growth of 10.8% and an increase of 5.4% and average spend per transaction. On a 2-year stack basis, same-store sales growth was 34.7%. We opened 12 new stores during the quarter and closed 1 store, bringing our network to 633 locations at year-end. In total, we opened 30 new stores in 2021, reaching the high end of the range provided last quarter.

Our franchise network comprised just over 64% of our store count at the end of the year, up from 62% at the end of 2020, driven predominantly by a combination of 15 new franchise stores and 18 corporate store resales through the year, including 2 resales in the fourth quarter. Including the acquisition of Chico, we now operate 700 stores, 67% of which are franchised.

Turning to our company performance. Fourth quarter revenue was $223.1 million, an increase of 9.7% or 18.7% (sic) [ 18.6% ] after excluding the extra week last year. As a reminder, our reported revenue is comprised of retail sales at our corporate stores, direct-to-customer e-commerce sales as well as wholesale and other franchise revenue, but not franchise retail sales.

Gross profit in the fourth quarter was $82 million, up from $75.5 million in Q4 2020. As a percentage of revenue, gross margin rate was 36.8% versus 37.1% last year, a decline of 30 basis points and in line with our expectations.

This decline was primarily driven by the expected higher freight costs related to global supply chain constraints and higher distribution costs associated with incremental wages and storage to support increased demand and e-commerce as noted last quarter. This was partially offset by the easing benefit from a stronger Canadian dollar as well as continued leverage gained on fixed costs due to higher revenue.

Selling, general and administrative expenses in the fourth quarter were $40.8 million. Excluding IT transformation costs, share-based compensation and other non-operating items, our SG&A expenses were approximately $37.3 million or 16.7% of revenue. SG&A dollars increased slightly from our Q3 run rate as we recognized a partial quarter of the planned labor investments that we highlighted last quarter. But we achieved leverage over the last year due to the strong revenue growth.

Adjusted EBITDA increased 11.5% to $53.3 million. Adjusted EBITDA margin improved 40 basis points to 23.9%, driven by the favorable SG&A leverage I just mentioned. Net interest expense in Q4 was $4.4 million, consistent with the Q3 trend and our expectations. Late in the quarter, we benefited from a step down in the interest rate on our 2021 credit facilities, resulting from our reduced leverage.

Net income was $26.7 million compared to $13.8 million in the same period last year. Excluding the items not indicative of our underlying performance, adjusted net income was $29.3 million or $0.41 per diluted share, up significantly from $17.3 million last year.

Now, turning to the balance sheet. We ended the quarter in a strong liquidity position with $50 million of cash on hand and access to our full $130 million revolver, which remained undrawn through the quarter. Total debt, net of deferred financing costs, ended the quarter at $345.5 million. Taking into account leases, our leverage ratio dropped to 2.1x from 2.4x at the end of Q3.

We are pleased with our inventory levels heading into 2022 with a balance of approximately $92 million, up 18% from a year ago. This intentional increase is a direct result of the higher sales volumes within our stores, the support of 28 net new stores in 2021 as well as our continued practice of holding heightened inventory levels to ensure better in-stock positions. Free cash flow in the fourth quarter was $35.3 million, a significant increase from $11.9 million last year, driven primarily by the strong operating results.

Given our strong financial position, together with our confidence in our outlook and expected capital requirements for our Quebec expansion, I am happy to announce our Board of Directors approved an increase in our quarterly dividend from $0.01 per share to $0.06 per share, payable on April 15, holders of common shares of record on March 31.

Now I will provide our outlook for fiscal 2022. Please note that the following guidance figures, except for same-store sales growth include the impact of Chico, which was acquired on February 25. Following record performance in 2021, we are excited for our planned growth for 2022, which is more in line with our long-term growth model.

We expect full year revenue between $845 million and $870 million, supported by same-store sales growth between 6% and 9% and 30 to 45 new store openings this year. This includes between 5 and 10 new openings planned under the Chico banner in Quebec.

There are 2 dynamics I want to draw your attention to that we expect to impact the cadence of our sales and revenue growth through 2022. First, we are cycling various forms of capacity restrictions and curbside shopping lockdowns for 20 of the first 26 weeks of 2021, which pressured sales volumes at our stores. And second, we continue to expect industry growth to gradually normalize back to historic levels through 2022 as pandemic spend tailwinds ease.

As a result of these 2 factors, we expect year-over-year growth to be stronger in the first half of the year and in particular, the first quarter compared to growth in the second half. The relative distribution of our system-wide sales and revenue is expected to be more representative of pre-pandemic years, such as 2019.

Turning to adjusted EBITDA, we expect to reach between $187 million and $194 million. This incorporates 3 main factors we have called out in recent quarters, including a full year incurring public company costs, the proactive human capital investments being made across our stores, supply chain and corporate functions, and higher freight costs and investments in third-party storage and throughput capacity to meet current demand as we progress with our supply chain strategy.

Our guided adjusted EBITDA range implies a modest contraction in our adjusted EBITDA margin in 2022 when compared to 2021. It is important to note that this is largely due to intentional investments we are making to support continued growth for the long-term success of the business and that we expect margins to be softer in the first half of the year as we adjust to high freight loss. These investments are required to accommodate strong revenue and sales growth achieved during 2021 and are intended to drive gradual margin enhancement over the long-term, in line with our growth outlook.

We expect adjusted net income per diluted share to be between $1.37 and $1.44, assuming a tax rate of between 26.5% and 27.5% and a fully diluted share count of 72 million. We anticipate incurring approximately $9 million in information technology transformation expenses as well as $7 million in share-based compensation both of which are excluded from the calculation of our adjusted figures.

And finally, we expected net capital expenditures to be between $20 million and $25 million to fund both new store growth and ongoing renovations, including full renovations of the majority of our Total Pet damaged stores as well as additional capital for Chico investments.

Regarding our supply chain strategy, as Richard mentioned, we are nearly complete on the selection and leasing of an ideal location in the Greater Toronto area for our future facility. Due to the timing of lease commencement and build out, we now expect the majority of the investments to occur in 2023 and 2024. As such, we expect minimal investments related to this project to impact our 2022 capital budget.

With that, we would now like to open the call up to your questions. Operator?

[Operator]

[Operator Instructions] Our phone first question is from Adrienne Yih with Barclays.

[Adrienne Yih-Tennant, analyst]

Really well done for the year, for the quarter. It's interesting here in Canada, so it's very rare that we hear first half sales growing faster than back half sales because in the U.S., it's obviously not the case.

So Richard, I guess my first question is going to be on the acquisition of Chico's the 66 stores. What is the future store potential? What are the similarities and differences in the store bases? And how long have you been or had you been in discussions before consummating the deal?

I guess also on that, Jim, can you talk about the level of accretion. You said it was immediately accretive, so what are the expectations for sales in the 2022 guide as well as the level of accretion?

[Richard Maltsbarger, executive]

Adrienne, thanks for the question, and thanks for the congratulations. It was a great year and credit out to all the team and the franchisees. On the Chico acquisition, so first, let's talk just some of the similarities and differences. It's primarily similar. The average store sizes are roughly the same.

The product mixes are oriented to the better and best, so premium and super premium approaches, including they're growing out their Frozen Raw business similar to how we're doing ours. The customer service standards and the expectations are just as high, especially around the compassion and the expertise. So overall, more similarities than differences.

Minor differences would be just a newer store fleet. So they've quadrupled their store size in the last 4 years. So at least 2/3 of their stores are new within the last 5 years. So they're very early in their growth cycle, which is great to see, and it's helping to contribute to strong year-over-year growth within the network.

In terms of store potential, roughly 66 stores today, maybe 67 as of this morning. We're opening another store this week, so a great opportunity. And our prior to the acquisition modeling that we did, as we noted with you all during the IPO in the last few quarters, we'd identified at least 200 opportunities in the Quebec markets.

As we looked at the overlap between our modeling and the footprint of Chico, we saw a great alignment between where we thought the most optimal sites would be, but they've also actually had a few sites in places that we didn't quite expect which may indicate even more potential long-term. So looking forward to getting in, understanding operation more deeply and then possibly recalibrating to an even higher target for possible expansion in the future. With that, Jim, turn it over to you on accretion.

[Jim Grady, executive]

Yes. I mean I would echo what Richard said, obviously, we're very excited to get in and talked about it. When I talked about sales growth looking forward, I would say we're not going to break it out separately from the rest of the guidance, so it is embedded in the outlook we provided. I just want to remind you that although their system-wide sales are roughly around $80 million, the revenue flow through because they don't have wholesale yet, and they don't have a strong private brand business yet, is much lower than our flow-through. So it's only $7 million, so it won't have a significant influence on the total company at this point. But we'll give you more insight as we move along with the integration plans and the growth plans.

[Adrienne Yih-Tennant, analyst]

And then my follow-up question is on the average spend per transaction that has maintained this mid-single-digit growth over the last these -- earlier part of the year with sort of low single-digit. So the question there is, is that pricing flow-through or units or both and can we maintain that into 2022? And then what are you doing with your private label prices? How much are you potentially increasing those, if at all?

[Jim Grady, executive]

Yes. So a couple of dynamics there. So to answer the question directly, is some of it in pricing, yes, absolutely. As we have been talking about each quarter, we have seen inflation, and we've been pleased with our ability to pass it along historically and anticipate continuing to be able to do so.

The other call out I'd make sure you remember is that, last year with the pandemic we're comping on some odd times of basket in transactions, right? Customers are definitely making fewer trips and buying larger baskets. So there's a comparison to that as well.

And then looking forward, to your point, yes, as everybody is talking about, there's definitely inflation in this. As we talked about in the remarks, we are seeing that both in product as well as freight given fuel, et cetera, and the overall supply chain challenges. So, yes, we see inflation continuing and our answer really remains the same. We will continue to be absolutely positive that we're competitive in the market, but we've been pleased with our position and our ability to pass it along.

[Richard Maltsbarger, executive]

And just to round out, Adrienne, the more specific part of your question around proprietary brands. We are also selectively passing off proprietary brand increases roughly at the rate of national brand increases.

[Adrienne Yih-Tennant, analyst]

That make sense. I mean it's a staple good for a family member, so totally makes sense to us.

[Operator]

Our next question is from Irene Nattel with RBC Capital Markets.

[Irene Nattel, analyst]

I just want to continue on the inflation discussion for a moment. So in your guidance, are you implicitly assuming an accelerating pace of inflation, certainly in the foreseeable future as we stare higher agricultural commodity prices in the face.

[Jim Grady, executive]

Irene, I think the answer is, yes, we are assuming an increase in the level of inflation. We're not going to be explicit and call out numbers on the assumption. But yes, given recent events, we have considered that it will be higher. Of course, we saw it higher in the fourth quarter. So that is really what we're seeing continue on there.

[Irene Nattel, analyst]

And one of the things that we're hearing from, let's say, the food retailers is in terms of consumer behavior, very difficult response including rising private label. Have you seen that at all? I mean, I know when you look at the statistics overall, but given the challenge of switching animal nutrition are you seeing any trade, are you seeing behavior or really -- in the past when you've seen inflation consumers just like they absorbed that?

[Richard Maltsbarger, executive]

Irene, it's Richard. I will take that question. Today, we've not seen a significant shift in any of our consumer behavior. Remember to note, we have roughly 5 price point levels with our stores, especially on consumables and our food items at different quality and price levels. And at each one of those prices, except for one, in Frozen Raw, we also have a private brand alternative for the customer that already incorporates incremental value.

So while to date, we've seen relatively inelastic demand and limited levels of brand shifts or changes in our consumer behavior, our ACEs are well trained and ready to engage. Should a customer talk about what other value priced options may be available in a similar quality of food, they are ready to have that conversation for our proprietary brand. And in past inflationary periods, we have seen an ability to increase our penetration in proprietary brands. So again, no real change in behaviors that we've seen yet to date, but we are preparing for that should the consumer come in and ask.

[Irene Nattel, analyst]

That's really helpful. And then finally, just on Chico's. Obviously, Jim, in your remarks, you alluded to the fact that they don't have any wholesale distribution yet -- caught the yet. Can you talk about how you're currently thinking conceptually about rolling out the wholesale distribution?

And can you also talk about Chico does seem to have an e-commerce platform, but doesn't seem to be, at this point in time, terribly well -- terribly fulsome, shall we say, in terms of availability, so what the plans might be there.

[Richard Maltsbarger, executive]

Sure. So Irene this is Richard, I would like to take that. So first let's talk about the integration overall. So, here during year one, very specifically we have a few goals, right? The first is to establish our Quebec based management team on the ground, some incremental talent hires to help continue to support the growth and make a wonderful transition with the founders of the firm who are day to day completely involved in the business still in a post-acquisition state.

Our second priority, as noted, is to open 5 to 10 new stores, continuing to find new franchisees and work with those to continue to grow the success in sales. Like I said earlier, with 2/3 of the stores being in the first 5 years, there's a lot to do just continue to maintain the same-store sales growth they've seen.

The third priority then will become our proprietary brand penetration and the conversation with them around what are the most appropriate brands that we have already worked over the last couple of years to begin to make Quebec compliant with dual language to ensure that we can introduced some of our products into their mix.

Then longer term, past the first year, Irene really that's where we'll start talking about wholesale penetration, the ability to service their stores and ways through our distribution network. We are recalibrating our overall network to supply study now that we have confirmed our entry into Quebec to determine what next would be the right investments beyond 2022 to service that business.

And then yes, there is a nascent e-commerce platform available there today. Longer term, again, beyond year one, we will look at what other technology and back office support makes sense for them to be able to tap in to the strength of a national player.

[Operator]

Our next question is from Vishal Shreedhar with National Bank.

[Vishal Shreedhar, analyst]

I just want to circle back on Chico, in your disclosure material it looks like it was $17 million plus some contingent payment in the future. That was lower than I anticipated wondering if you can give us context on the EBITDA multiple paid for that business.

[Jim Grady, executive]

Vishal, it's Jim. Just to be clear, it was $17 million including contingent payments, but subject to a typical working capital adjustment that that will be settled down the road, but it's 17 total, including contingent benefits. We're not going to provide the exactly EBITDA multiple that we paid.

We were happy with the performance in the business. Obviously, we're thrilled to purchase it. We're thrilled to be partnering with the founders. I'd say, it's similar to other small to midsize company multiples that have been out there in the past but we're not going to get into the specifics of the EBITDA model.

[Richard Maltsbarger, executive]

But to help guide Vishal, perhaps a question behind the question, this is Richard, the actual margins of the Chico business at the adjusted EBITDA level are roughly similar to slightly higher than our existing business. Of course, their gross margins are clearly higher because they're primarily a franchise revenue based business today without a wholesale distribution component. But as you flow that down through the P&L, they had slightly higher adjusted EBITDA margins to our existing business.

[Vishal Shreedhar, analyst]

And you noted the pet market in Canada benefited from substantial pet adoptions throughout the pandemic, which is, you've captured your more than your fair share of that spend. Wondering if you can give us some context on the life cycle of the spend on a pet? Is it fairly even throughout the lifecycle of the pet or is it more front-end loaded or how can we consider that?

[Richard Maltsbarger, executive]

So, Vishal, it is roughly even throughout the life cycle with a slight tilt to the very first year or the sort of make home, right when you're buying the very first time for a crate, very first time for bed. Generally, you'll see an ongoing monthly consumption cycle.

Again, remember, 68% of our sales come from consumables, so food and treats. So that is the majority of the spin that you will see in the life cycle. And if you look further out, you will also continue to see annual or biannual updates on the beds, on the crates, on the other supplies as people go into the natural life of some of those materials. And then of course, toys and other play things are oftentimes come throughout the year and especially in the holiday and giftable seasons.

If you look at some of the external research that exists, Vishal, you'll see roughly about $1,000 per year spin on a dog and anywhere from $700 to $800 per year spend on a cat beyond year 1. So with over 80% of those 3 million pets being adopted that are under age 2, we see anywhere from 8 to 12 year lifespan and those average spend rates going forward for these pets.

[Vishal Shreedhar, analyst]

And as you look back on prior periods of heightened inflation or even periods of consumer stress. I'm not saying we're there yet, but the market is looking that way. Have you seen a trade down either to private label or to lower cost channels? Have you seen that in your experience, or is it fairly resilient, the pet channel?

[Richard Maltsbarger, executive]

So, Vishal, it's a very resilient channel in terms of overall spending. And if you look back at the last 2 recessions, which are quite representative of the environment we're in today, given the higher inflation now. But if you look at the last 2 recessions, you'll see that the industry continue to grow throughout those recessions. And generally, you have relatively inelastic demand from your customers.

Once they have their food selected, and their dogs, cats or other animals are on a particular routine, they have a tendency to stay with that routine. If they do need to make a trade off, as I said earlier in response to Irene's question, we have our staff trained and our ACEs are ready to help them make food tradeoffs.

And as a note, in response to Adrienne's question, we do have a proprietary brand that's very comparable to the national brands. And we are maintaining roughly the same price value equation as we have, so that there is a value base step down into our proprietary brand at all of the different quality levels.

[Operator]

Our next question is from Mark Petrie with CIBC.

[Mark Petrie, analyst]

So, really nice momentum on the transaction growth and obviously there's noise in there from the pandemic. But do you have a sense if that is more new customers or engagement from existing customers?

And then I guess related to that, a nice pickup in loyalty program membership. How are you leveraging that today? And is that something you think could take on greater prominence in 2022?

[Jim Grady, executive]

Sure. Mark, thanks for the questions on transaction growth in the mix. It is a mix. We're continuing to see new customers as noted -- as you just noted also, and put in our remarks, now having grown our loyalty membership base or activate loyalty membership base to almost 2 million customers. So over 0.5 million customer growth throughout the year. So we are seeing new customers.

Also in the analysis of the data, we are continuing to see incremental trips from existing customers. That is probably the biggest highlight I will give you from how we're using the loyalty data. And what we're seeing is we're continuing to better understand the composition. Per the remarks I had within the script, one of the key analysis the team did was really the overall life cycle basket analysis of our loyalty customers, helping identify that many of our monthly customers also have introduced small animals during a pandemic into their mix -- so rabbits, hamsters, turtles, and several other small furry or scaly rodents. And so, we have expanded now our frequent buyer program to be more applicable to those small animal holders.

And then the last part Mark is, we just have better insight now, right, and the lapse or potentially losing customers and an ability to be more persuasive and going back to them and inviting them to come back into the store.

[Mark Petrie, analyst]

And Jim, you mentioned the implied margin compression in the guidance. Can you just give us a sense of the magnitude of the impact of the higher distribution and storage costs as well as the store labor investment and then any other material factors in that?

[Jim Grady, executive]

Yes. Sure, Mark. So what we've been stressing is that over the long-term as we talked about at the -- during the IPO presentation that our gross margins were around the 35% to 36% range. And last year, as we called out each quarter, we really benefited from a few unusual items, right? We had very strong FX tailwinds in the middle part of the year and into Q3 and the beginning of Q4.

We had really low discounts during the pandemic in the market, right? There was not a lot of promotional activity. So we see some of that going back. And then our sales during last year continue to get ahead of the investments we needed to make to sustain the higher volume. So we see that coming in.

And then, of course, the freight is playing into that. It has been significantly higher towards the end of the year, and we have seen it continued into the quarter -- the beginning of the quarter, the beginning of the year.

So I guess for '22, we're really calling a gradual movement back to the long-term average for the business. And then we're seeing some variability in the quarter-to-quarter, right? We expect to see pressure from the heightened freight costs and higher promotions kind of impacting the first half of the year in particular.

And then turning more towards the labor investments and those that we talked about, we're continuing to make the investments we talked about at the end of Q4, right? We talked about higher wages in the store as an incentive for the additional training, we talked about the need to invest in our supply chain network with some temporary storage and some 3PL activities to support the higher volume. So we're seeing that in play out in 2022 as we described last quarter. So the net is, it is going to result in lower margins as we called out some variability, especially in the first quarter.

[Mark Petrie, analyst]

And then just the last one. I'm not sure if I missed it or if you are going to quantify it. But could you just -- any detail you can provide with regards to the private label penetration today? And sort of specifically, would love to know a bit about the progress in -- on the hard goods side and any kind of target or anything you can quantify for 2022?

[Richard Maltsbarger, executive]

So Mark, I did note it quickly in my remarks but yes, we are still at 30%. So our 2021 penetration was the 30% rate similar to where we were going into the IPO period. We have seen an uptick in hard lines as we expected. We have seen a bit of pressure on that penetration rate on the consumables side. As I noted during the IPO, and I'll always reiterate, there is no arbitrary target for penetration rate given to our merchants. It is their responsibility to identify what it is the customer is most demanding and ensure that that's what we have available for sale.

As such, we have seen some very strong outsized growth in some of our largest national brand partners, some of whom we've worked with on daily basis to be able to align our ordering to their production cycles, to ensure that we can create the right safety stock to help support our customers. As such, we have seen customers who have been unable to source some of those national brand products, that other competitors actually switch and become some of our new customers entering into our stores throughout this past year. So again, that's put a little pressure on our consumable proprietary brand penetration, which has been offset by the increase in our hard lines business.

[Mark Petrie, analyst]

And I guess just to follow up on that. I mean, do you think hard goods continues to -- penetration continues to rise in 2022 or are you sort of at maturity?

[Richard Maltsbarger, executive]

Yes, Mark. No, we are confident to see some increase in hard goods penetration. Again, we only began to form our hard goods proprietary brand team in the middle part of last year. And so we're really looking forward to the launches they're going to bring out throughout this year.

[Operator]

[Operator Instructions] The next question is from Martin Landry with Stifel.

[Martin Landry, analyst]

My first question is just a bit of a segue into the last question. You mentioned that some of your competitors have had difficulties with in-stock position. Wondering if you had any issues stocking your national brands and if you've had out-of-stock positions in the last couple of months, given what we've seen with Omicron.

[Richard Maltsbarger, executive]

Martin, yes, we have also faced some of the global supply chain disruptions and challenges that, frankly, in a few of our national brand partners, have been industry-wide. And so there are specific delays in certain raw materials, certain packaging or even some labor shortages within some of our manufacturers that have just put them in a position to be able to keep up with heightened demand.

So yes, if you were to walk into our stores, there are some particular brands that similar to many of our competitors, you will find a relative disparate amount of stock available. It is one of the key reasons why we've invested in heightened level of safety stock across other core assortments, most especially in our proprietary brands so that we can assure that those brands are always available to the customer need to make a trade-off.

We are also going to continue to do some of the activities we did last year, such as front-loading our seasonal purchasing. So we are already well into have made our Christmas purchases for the year to ensure that any other delays within the supply environment we are trying to work to mitigate.

[Martin Landry, analyst]

And then my follow-up question is on vendor price increases. Wondering if there's any upcoming price increases that have been announced? And what are the extent of those that have been announced by your vendors?

[Jim Grady, executive]

Yes. Hey, Martin, it's Jim. So we don't really I'd say that the price increases from vendors vary on the timing of them. And we're not disclosing any specific vendor price increases at this time. As I mentioned, we have seen an increase in inflation and therefore price increases in the latter part of last year, including the fourth quarter, and we expect those to continue. And yes, we will evaluate the market at that time. But historically, we've had a good track record of passing the price increases along.

[Martin Landry, analyst]

Okay. And just – I am sorry. Go ahead.

[Jim Grady, executive]

We have time for just one more question. Sorry, Martin, we only have time for one more question. So Chris, if would you take one more question?

[Operator]

Certainly. Our final question is from Anthony Linton with Laurentian Bank.

[Anthony Linton, analyst]

Mike, just turning it back to Chico, I was just wondering, is the intention that -- I assume most of those 66 stores, if not all are franchised businesses, I was wondering if the intention is to keep that business model fully franchised or if there's any opportunity to open corporate stores? And then how does that franchise pipeline look like?

[Richard Maltsbarger, executive]

So let me answer actually in reverse order there, Anthony. The Chico franchise pipeline looks robust. We have continued interest both from existing owners, several of whom Jim and I had the opportunity to meet last week there on our first official visit into Montreal to meet with our owners. The -- we also have new -- Jim and I have actually toured some in construction stores in sites last week as well. So very excited around the pipeline that they have put together.

In terms of mix, just as we are at value, we will be predominantly franchised. We don't have any existing plans today to open any corporate stores within the Chico banner. However, having said that, I would like to get our new leadership team on board, complete a full transition from the founders and understand what, if any, value some corporate stores may play within the mix. But it will be -- is and will be and continue to be a primarily franchised, if not fully franchised operation.

[Anthony Linton, analyst]

And then just one more. With some of the restrictions in Q4, how did growth in the omni-channel platform look like? And where is it sitting as a percentage of sales? Sorry if I missed that earlier.

[Richard Maltsbarger, executive]

No, you didn't, Anthony. So in 2021, we had just a bit over 1% of our business was digitally generated, so that, of course, could mean a direct-to-customer sale or a click-and-collect sale. So last year was a bit of an odd year, right, Anthony. So we have the first 20 weeks -- 20 to 26 weeks in Ontario being in curbside, which drove an abnormally large amount of interest in our online sales as it was basically mandated by the government. So if you reset to July as sort of a more normalized environment, we continue to see record website traffic growth since that time frame.

I think the biggest thing to highlight in our omni-channel is, is we did a system and site upgrade for usability, improvements in our search recommendation engines, et cetera, during Q4. And since that time ended -- the beginning of this year, we've seen an 80 basis point improvement in conversion on our sites. So we are continuing to see really strong performance going into the beginning of this year.

And most particularly as we expected, we're seeing about half of that business be click-and-collect and the other half be direct-to-customers. So, so far so good, really in line with the penetration rates we were expecting we were right on target last year. And very much flowing out the way we expect to see the business shape up.

All right. So with that, everyone, thank you for joining our call. We appreciate the time and investment that you make into Pet Valu. One last time for all of our ACEs, our franchisees, our leaders and all of our teams, thank you so much for all the work you did to deliver a phenomenal 2021. Looking forward to the excitement that we have ahead of us in 2022.

With that, Chris, we will wrap up the call.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.