Mr. Richard Maltsbarger reports

PET VALU REPORTS SECOND QUARTER 2023 RESULTS

Pet Valu Holdings Ltd. has released its financial results for the second quarter ended July 1, 2023.

Second Quarter Highlights

• System-wide sales (1) were $343.9-million, an increase of 10.1 per cent versus the prior year. Same-store sales growth was 6.0 per cent, with both basket and traffic growth contributing.
• Revenue was $256.4-million, up 12.6 per cent versus last year.
• Adjusted EBITDA (2) was $53.8-million, up 3.9 per cent versus the prior year, representing 21.0 per cent of revenue. Operating income was $40.2-million, up 2.3 per cent versus the prior year.
• Net income was $24.1-million, down from $25.3-million in the prior year.
• Adjusted Net Income (2) was $26.3-million or $0.36 per diluted share, compared with $27.9-million or $0.39 per diluted share, respectively, in the prior year.
• Opened 7 new stores and ended the quarter with 758 stores across the network.
• The Board of Directors of the company declared a dividend of $0.10 per common share.

2023 Outlook

The company expects 2023 revenue between $1,050 and $1,075-million, driven by same-store sales growth between 7 per cent and 10 per cent and 40-50 new store openings, Adjusted EBITDA between $230 and $237-million and Adjusted Net Income per Diluted Share (2) between $1.60 and $1.66.

"We are pleased with our second quarter results, rounding out strong performance for the first half of 2023, in which our business delivered on all key metrics," said Richard Maltsbarger, President and Chief Executive Officer of Pet Valu. "Our double-digit growth in consumables, such as pet food and cat litter, makes it clear our expert level customer service, curated offering of premium products and strengthening omni-channel shopping capabilities continue to resonate with devoted pet lovers across Canada.

"With a recent shift in consumer demand, our teams are prioritizing key projects, investments and talent to those actions that will continue to deliver the greatest value across the second half of 2023 and support our long-term profitable growth," continued Mr. Maltsbarger. "Our Supply Chain transformation proceeds on-plan with shipments to stores from our new GTA facility commencing this month. We are also investing in our customer-facing ACEs, growing our franchise ownership base, and accelerating investments in our e-commerce experience, all while closely managing key cost levers."

Financial Results for the Second Quarter Fiscal 2023

All comparative figures below are for the 13-week period ended July 1, 2023, compared with the 13-week period ended July 2, 2022.

Revenue was $256.4-million in Q2 2023, an increase of $28.7-million, or 12.6 per cent, compared with $227.7-million in Q2 2022. The increase in revenue was driven by growth in retail sales, as well as franchise and other revenues.

Same-store sales growth was 6.0 per cent in Q2 2023 primarily driven by a 4.8 per cent increase in same-store average spend per transaction and a 1.2 per cent increase in same-store transactions. This is compared with same-store sales growth of 21.2 per cent in Q2 2022, which primarily consisted of a 19.3 per cent increase in same-store transactions and a 1.5 per cent increase in same-store average spend per transaction. Q2 2022 same-store sales growth was elevated given the comparative period, Q2 2021, was impacted by a shift in consumer behaviour associated with COVID-19 restrictions.

Gross profit increased by $6.7-million, or 7.9 per cent, to $92.1-million in Q2 2023, compared with $85.4-million in Q2 2022. Gross profit margin was 35.9 per cent in Q2 2023, compared with 37.5 per cent in Q2 2022. Excluding costs related to the supply chain transformation of 0.20 per cent, the gross profit margin was 36.1 per cent and decreased by 1.4 per cent. The decrease was primarily driven by: (i) the unfavourable impact of the weaker Canadian dollar on non-domestic sourced products primarily denominated in U.S. dollars; (ii) higher wholesale merchandise sales due to increased franchise penetration and improved fill rates to franchisees; partially offset by (iii) favourable product margins as lower inbound freight costs more than offset higher distribution costs.

Selling, general and administrative ("SG&A") expenses were $51.9-million in Q2 2023, an increase of $5.8-million, or 12.6 per cent, compared with $46.1-million in Q2 2022. SG&A expenses represented 20.2 per cent and 20.2 per cent of total revenue for Q2 2023 and Q2 2022, respectively. The increase of $5.8-million in SG&A expenses was primarily due to: (i) increased compensation costs as a result of headcount and salary investments; (ii) higher depreciation and amortization from store growth and investments, and other assets; partially offset by (iii) lower professional fees.

Adjusted EBITDA increased by $2-million, or 3.9 per cent, to $53.8-million in Q2 2023, compared with $51.8-million in Q2 2022. Adjusted EBITDA excludes $0.5-million of lower costs from business transformation, investment in associate, other professional fees, information technology transformation, share-based compensation, and loss (gain) on foreign exchange. Adjusted EBITDA was also impacted by higher EBITDA of $2.5-million in Q2 2023 compared with Q2 2022. Adjusted EBITDA as a percentage of revenue was 21.0 per cent and 22.8 per cent in Q2 2023 and Q2 2022, respectively.

Net interest expense was $7.2-million in Q2 2023, an increase of $2.6-million, or 56.9 per cent, compared with $4.6-million in Q2 2022. The increase was primarily driven by higher interest expense on the 2021 Term Facility (as defined in the company's management's discussion and analysis ("MD&A") for the second quarter ended July 1, 2023) resulting from higher interest rates compared with Q2 2022.

Income taxes were $9-million in Q2 2023 compared with $9.5-million in Q2 2022, a decrease of $0.5-million year over year. The decrease in income taxes was primarily the result of lower taxable earnings in Q2 2023. The effective income tax rate was 27.1 per cent in Q2 2023 compared with 27.3 per cent in Q2 2022. The Q2 2023 and Q2 2022 effective tax rate is higher than the blended statutory rate of 26.5 per cent primarily because of non-deductible expenses.

Net income decreased by $1.2-million to $24.1-million in Q2 2023, compared with $25.3-million in Q2 2022. The change in net income is explained by the factors described above.

Adjusted Net Income decreased by $1.6-million to $26.3-million in Q2 2023, compared with $27.9-million in Q2 2022. Adjusted Net Income as a percentage of revenue was 10.2 per cent in Q2 2023 and 12.2 per cent in Q2 2022. The 2.0 per cent year over year decrease results from the factors described above.

Adjusted Net Income per Diluted Share decreased by $0.03 to $0.36 in Q2 2023, compared with $0.39 in Q2 2022 primarily from the factors described above.

Cash at the end of the second quarter totaled $8.8-million.

Free Cash Flow(2) amounted to $13-million in Q2 2023 compared with $20.4-million in Q2 2022, a decrease of $7.4-million primarily driven by an increase in cash used for investing activities primarily due to higher Net Capital Expenditures, an increase in repayment of principal and interest on lease liabilities due to store network expansion, partially offset by an increase in cash from operating activities.

Inventory at end of Q2 2023 was $130.8-million compared with $118.4-million at the end of Q4 2022, an increase of $12.4-million primarily due to growth in revenue, improved vendor fill rates and timing of receipts resulting from global supply chain improvements.

Dividends

On August 7, 2023, the Board of Directors of the company declared a dividend of $0.10 per common share payable on September 15, 2023 to holders of common shares of record as at the close of business on August 31, 2023.

Outlook

For the full year 2023, the company expects:

Revenue between $1,050 and $1,075-million, supported by same-store sales growth of between 7 per cent and 10 per cent, and 40 to 50 new store openings;

Gross profit margin slightly below the company's historical range of 35 per cent to 36 per cent, as the company faces unfavourable foreign exchange rates and incurs approximately 100 basis points of cost associated with its supply chain transformation;

Adjusted EBITDA between $230 and $237-million, which incorporates expense leverage on investments made in 2022, partially offset by the unfavourable foreign exchange rates;

Adjusted Net Income per Diluted Share between $1.60 and $1.66;

Business transformation costs of approximately $17-million, Information Technology costs of approximately $4-million, and share-based compensation of approximately $7-million, all of which are excluded from Adjusted EBITDA and Adjusted Net Income per Diluted Share; and

Net Capital Expenditures(2) of approximately $60-million, roughly half of which is attributable to investments in the company's supply chain transformation. (1) This is a supplementary financial measure. Refer to "Non-IFRS Measures and Supplementary Financial Measures" below and to the section entitled "How We Assess the Performance of our Business in the MD&A for the definitions of supplementary financial measures. (2) This is a Non-IFRS financial measure. Non-IFRS financial measures are not recognized measures under IFRS and do not have standardized meanings prescribed by IFRS. They are therefore unlikely to be comparable to similar measures presented by other companies. Refer to "How We Assess the Performance of our Business" in the MD&A for the second quarter ended July 1, 2023 for the definitions of Non-IFRS financial measures. Conference Call Details

A conference call to discuss the company's second quarter results is scheduled for August 8, 2023, at 8:30 a.m. ET. To access Pet Valu's conference call, please dial 1-833-950-0062 (ID: 675228). A live webcast of the call will also be available through the Events & Presentations section of the company's website at https://investors.petvalu.com/.

For those unable to participate, a playback will be available shortly after the conclusion of the call by dialing 1-226-828-7578 (ID: 869032) and will be accessible until August 15, 2023. The webcast will also be archived and available through the Events & Presentations section of the company's website at https://investors.petvalu.com/.

About Pet Valu

Pet Valu is Canada's leading retailer of pet food and pet-related supplies with over 700 corporate-owned or franchised locations across the country. For more than 40 years, Pet Valu has earned the trust and loyalty of pet parents by offering knowledgeable customer service, a premium product offering and engaging in-store services. Pet Valu's neighbourhood stores offer more than 7,000 competitively-priced products, including a broad assortment of premium, super premium, holistic and award-winning proprietary brands. To learn more, please visit: www.petvalu.com.

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