Petco Health & Wellness Company, Inc. Goodwill & Intangibles Disclosure
6. Goodwill
The changes in the carrying amount of the Company’s goodwill were as follows (in thousands):
|
|
February 3, |
|
|
January 28, |
|
||
Beginning balance |
|
$ |
2,193,941 |
|
|
$ |
2,183,991 |
|
Activity from acquisitions |
|
|
8,880 |
|
|
|
9,950 |
|
Impairment |
|
|
(1,222,524 |
) |
|
|
— |
|
Ending balance |
|
$ |
980,297 |
|
|
$ |
2,193,941 |
|
The Company has one reporting unit. The Company performs its annual impairment test during the fourth quarter of each fiscal year or more frequently when warranted by events or changes in circumstances. During the third quarter of fiscal 2023, the Company concluded that indicators of impairment existed due to declines in the Company's share price, as well as current macroeconomic conditions, and performed an interim quantitative impairment test. The fair value of the Company’s reporting unit was estimated by management with the assistance of a third-party valuation specialist. Fair value estimates used in the quantitative impairment test were calculated using a combination of discounted cash flow analysis and a public company analysis. The discounted cash flow analysis measures the value of an asset by the present value of its future estimated cash flows. The Company makes estimates and assumptions about sales, gross margins, selling, general and administrative percentages and profit margins, based on budgets and forecasts, business plans, economic projections, anticipated future cash flows, and marketplace data. The public company analysis analyzes transactional and financial data of publicly traded companies to develop valuation multiples. These multiples are then applied to the Company to develop an indication of fair value.
Significant assumptions used in the determination of fair value of the reporting unit generally include prospective financial information, discount rates, terminal growth rates and earnings multiples. The discounted cash flow model used to determine the fair value of the reporting unit during the third quarter of fiscal 2023 reflected the
Company's most recent cash flow projections, a discount rate of 16.4% and a terminal growth rate of 3%. The reporting unit fair value measurement is classified as Level 3 in the fair value hierarchy because it involves significant unobservable inputs.
As a result of the impairment test, the Company concluded that the carrying value of the Company’s reporting unit exceeded its fair value and recorded a pre-tax goodwill impairment charge of $1,222.5 million during the third quarter of fiscal 2023. This charge was recorded in goodwill impairment in the consolidated statements of operations. During the fourth quarter of fiscal 2023, the Company determined that the fair value of its reporting unit was greater than its carrying amount, and therefore no additional goodwill impairment charge was recorded.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2024 | Apr 3, 2024 | Showing above |
| 2023 | Mar 28, 2023 | |
| 2022 | Mar 24, 2022 | |
About Goodwill & Intangibles Disclosures
Goodwill and intangible asset disclosures reveal the premium paid in acquisitions and how management assesses whether that premium retains its value. Since goodwill is no longer amortized under US GAAP, the annual impairment test is the only mechanism that adjusts carrying values downward — making the assumptions behind that test critically important for investors.
Key signals: a history of goodwill impairments suggests management consistently overpays for acquisitions. Watch the gap between reporting unit fair value and carrying amount — when fair value exceeds carrying amount by less than 10-20%, a small decline in business performance could trigger a write-down. For finite-lived intangibles, examine useful life assumptions across customer relationships, technology, and trade names; aggressive estimates inflate near-term earnings. Compare total intangibles-to-total-assets ratios against peers to assess acquisition dependency. Rising goodwill as a percentage of equity can signal balance sheet fragility.