Core Insights - Petco Health and Wellness is currently undergoing a turnaround plan, with the first stage focusing on hiring management experienced in discount operations [1] Company Overview - Petco Health and Wellness is identified as a struggling business, indicating potential challenges in its operational and financial performance [1] Turnaround Strategy - The company is in the second stage of its turnaround plan, suggesting ongoing efforts to improve its business model and financial health [1]

Group 1: Momentum Investing Overview - Momentum investing deviates from the traditional strategy of "buying low and selling high," focusing instead on "buying high and selling higher" to maximize returns in a shorter timeframe [1] - Fast-moving trending stocks can be challenging to enter at the right time, as they may lose momentum if future growth does not justify their inflated valuations [2] Group 2: Investment Strategy - A safer investment approach involves targeting bargain stocks that exhibit recent price momentum, utilizing tools like the Zacks Momentum Style Score to identify promising candidates [3] - Petco Health & Wellness (WOOF) is highlighted as a strong candidate, having experienced a 5.3% price increase over the past four weeks, indicating growing investor interest [4] Group 3: Performance Metrics - WOOF has shown a 14.2% price gain over the past 12 weeks, with a beta of 1.74, suggesting it moves 74% more than the market in either direction [5] - The stock has a Momentum Score of B, indicating a favorable entry point for investors looking to capitalize on its momentum [6] Group 4: Earnings and Valuation - WOOF has achieved a Zacks Rank 1 (Strong Buy) due to upward revisions in earnings estimates, which typically attract more investor interest and drive prices higher [7] - The stock is currently trading at a Price-to-Sales ratio of 0.18, suggesting it is undervalued, as investors pay only 18 cents for each dollar of sales [7] Group 5: Additional Opportunities - Besides WOOF, there are other stocks that meet the criteria of the 'Fast-Paced Momentum at a Bargain' screen, presenting further investment opportunities [8] - Investors can explore over 45 Zacks Premium Screens tailored to different investing styles to identify potential winning stocks [9]

Core Viewpoint - Kuehn Law is investigating potential breaches of fiduciary duties by officers and directors of Petco Health and Wellness Company, Inc. related to misrepresentation of the company's business model and performance during the pandemic [1]. Summary by Relevant Sections - **Fiduciary Duties Investigation** - Kuehn Law is examining whether certain insiders at Petco misrepresented or failed to disclose critical information regarding the sustainability of the company's pandemic-related growth and its business model focused on premium pet food [1]. - **Misrepresentation of Business Performance** - The investigation highlights that insiders allegedly overstated the strength of Petco's differentiated product strategy and downplayed the severity of issues affecting the company's performance [1]. - **Impact on Financial Statements** - The lawsuit claims that public statements made by Petco were materially false and misleading, affecting the perception of the company's ability to achieve sustainable and profitable growth [1].

Core Insights - Store closures are a significant trend in the retail sector, with many established chains reducing their physical presence and some filing for bankruptcy [2] - Petco Health and Wellness Company is reevaluating its brick-and-mortar operations as it faces challenges in improving its financial performance, with shares down nearly 16% year-to-date and 26% over the past year [3] Store Closures - Petco plans to close 25 locations in 2025, matching the number of closures in 2024, as net sales decreased by 2.3% to $1.5 billion in the second quarter, with comparable sales down 1.4% [4] - As of the end of the second quarter, 10 locations had already closed, reducing Petco's U.S. store count to 1,388 [4][5] - A review indicates that at least 13 Petco locations have closed in 2025, spanning 11 states and the District of Columbia [7]

Core Insights - Petco Health and Wellness Company, Inc. (NASDAQ:WOOF) is recognized as one of the 12 best NASDAQ penny stocks to buy according to hedge funds [1] - Jefferies has reiterated a Hold rating on Petco, maintaining a price target of $4.15 [1][3] - The company reported Q2 FY2025 revenue of $1.5 billion, which aligns with estimates and reflects a year-over-year increase of 2.3% [2] - Operating income increased significantly by $40.6 million to reach $43 million compared to the previous year [3] - Adjusted EBITDA rose by $30.3 million to $113.9 million, indicating strong operational performance [3] - The average price target for Petco is $4, suggesting an upside potential of nearly 15.61% from current levels [4] Financial Performance - Revenue for Q2 FY2025 was $1.5 billion, consistent with estimates and up 2.3% year-over-year [2] - Operating income increased to $43 million, a rise of $40.6 million from the previous year [3] - Adjusted EBITDA reached $113.9 million, up by $30.3 million, showcasing robust operational performance [3] Strategic Insights - E-commerce is becoming more profitable for Petco, with ongoing transformation efforts [2] - Inventory control is improving, balancing customer needs effectively [2]

Core Viewpoint - Momentum investing focuses on "buying high and selling higher" rather than traditional strategies of buying low and waiting for recovery [1] Group 1: Momentum Investing Strategy - Momentum investors often face challenges in determining the right entry point for fast-moving stocks, which can lead to investments with limited upside or potential downside [2] - A safer approach involves investing in bargain stocks that exhibit recent price momentum, utilizing tools like the Zacks Momentum Style Score to identify promising candidates [3] Group 2: Petco Health & Wellness (WOOF) Analysis - Petco Health & Wellness (WOOF) has shown significant recent price momentum, with a four-week price change of 18.1%, indicating growing investor interest [4] - Over the past 12 weeks, WOOF's stock has gained 48.2%, demonstrating its ability to deliver positive returns over a longer timeframe [5] - WOOF has a high beta of 1.74, suggesting it moves 74% more than the market in either direction, indicating fast-paced momentum [5] - The stock has a Momentum Score of A, suggesting it is an opportune time to invest for maximum success probability [6] Group 3: Earnings Estimates and Valuation - WOOF has received a Zacks Rank 1 (Strong Buy) due to upward revisions in earnings estimates, which typically attract more investor interest [7] - The stock is currently trading at a Price-to-Sales ratio of 0.20, indicating it is undervalued, as investors pay only 20 cents for each dollar of sales [7] - This favorable valuation suggests that WOOF has significant room for growth at a fast pace [8]

Group 1 - The company is undergoing a significant transformation this year, focusing on a multiphased approach [1] - The first phase emphasizes strengthening retail fundamentals, indicating a strategic focus on improving core operations [1] - There is an inquiry about the company's current positioning and the timeline for progressing to the next phase of its initiatives [1]

Financial Data and Key Metrics Changes - The company has seen significant improvement in EBITDA, particularly in Q1 and Q2, as part of its transformation strategy focused on execution and implementation [5][19] - Inventory was down 9.5% while sales decreased by 2%, indicating effective inventory management [46] Business Line Data and Key Metrics Changes - The company is focusing on optimizing its services, particularly in veterinary operations and grooming, to drive traffic and improve efficiency [12][14] - The average store size is about 13,000 square feet, which the company believes is optimal for its operations [23] Market Data and Key Metrics Changes - The company has closed 25 stores last year and expects to close a similar number this year, with a potential for growth starting in 2027 [20] - The competitive landscape is described as fragmented, with a mix of solid competitors and a need for differentiation in the market [15] Company Strategy and Development Direction - The company is in a multi-phased transformation strategy, currently in phase two focused on execution, with plans for phase three centered around enhancing store experience, merchandise differentiation, scaling services, and winning with omnichannel [4][8] - The strategy includes a test-and-learn approach for merchandise differentiation, ensuring that changes are validated before full rollout [10] Management's Comments on Operating Environment and Future Outlook - Management expresses cautious optimism about consumer resilience despite rising consumer debt and potential tariff impacts [39][40] - The company is focused on improving its pricing strategy and managing inventory effectively to navigate potential macroeconomic volatility [46][48] Other Important Information - The company has established a professional procurement team to negotiate better deals with suppliers, which has already begun to yield benefits [27][29] - There is a strong emphasis on improving the customer experience through targeted promotions and better inventory management [24][26] Q&A Session All Questions and Answers Question: How does the company view its store count and performance evaluation? - The company evaluates store performance based on financial metrics and market positioning, with over half of its stores up for lease renewal in the next few years, providing flexibility for future decisions [19] Question: What is the company's approach to pricing and promotions? - The company is focusing on responsible execution of promotions to prevent margin deterioration while still offering value to customers [24] Question: How does the company plan to manage inventory growth in the second half? - The company aims to maintain a healthy relationship between inventory and sales, with a focus on SKU rationalization and effective inventory management [46] Question: What are the expectations for non-tariff related margin drivers? - The company is confident in its position regarding freight and supply chain management, having established medium-term contracts to control pricing [48] Question: How does the company view market share consolidation in 2026? - The company anticipates a return to pre-COVID consolidation rates, emphasizing the need for differentiation and relevance in the retail space [49]

Core Insights - Petco Health and Wellness raised its full-year guidance for a key profitability metric, leading to a significant stock price increase of almost 24% following the release of its second-quarter earnings [1] Financial Performance - Petco's net sales for the second quarter declined over 2% year-over-year to $1.5 billion, which was anticipated by management and slightly exceeded analyst predictions of $1.49 billion [2] - Comparable sales fell by 1.4% for the quarter, but the company reported a GAAP net profit of nearly $14 million, or $0.05 per share, a turnaround from a loss of nearly $25 million in the same quarter of 2024 [3] - Analysts had lower expectations for profitability, with an average estimate of only $0.01 per share [3] Strategic Outlook - CEO Joel Anderson stated that the first half of the year established a solid foundation for the company's transformation, focusing on strengthening its economic model and improving retail operating fundamentals [4] - Petco raised its guidance for non-GAAP EBITDA for the full year 2025 to a range of $385 million to $395 million, despite anticipating net sales to decline in the low-single-digit percentages compared to 2024 [4]

[General Information](index=1&type=section&id=General%20Information) Petco Health and Wellness Company, Inc. filed its Form 10-Q for the quarter ended August 2, 2025, incorporated in Delaware, trading on Nasdaq under WOOF, and classified as an accelerated filer [Filing Details](index=1&type=section&id=Filing%20Details) Petco Health and Wellness Company, Inc. filed its Form 10-Q for the quarterly period ended August 2, 2025. The company is incorporated in Delaware, trades on Nasdaq under WOOF, and is classified as an accelerated filer - The document is a Quarterly Report on Form 10-Q for the period ended August 2, 2025[2](index=2&type=chunk) - Petco Health and Wellness Company, Inc. is incorporated in Delaware with Commission File Number: **001-39878**[2](index=2&type=chunk) Title of each class and Trading Symbol(s) | Title of each class | Trading Symbol(s) | Name of each exchange on which registered | | :------------------ | :---------------- | :---------------------------------------- | | Class A Common Stock, par value $0.001 per share | WOOF | The Nasdaq Stock Market LLC | - The registrant is an **accelerated filer**[4](index=4&type=chunk) Shares Outstanding as of August 27, 2025 | Class of Stock | Number of Shares Outstanding | | :--------------- | :--------------------------- | | Class A Common Stock | 242,466,853 | | Class B-1 Common Stock | 37,790,781 | | Class B-2 Common Stock | 37,790,781 | [Forward-Looking Statements](index=3&type=section&id=Forward-Looking%20Statements) This section outlines the nature of forward-looking statements within the Form 10-Q, emphasizing that they are based on current expectations and assumptions, subject to significant uncertainties and risks, and are not guarantees of future performance [Nature and Risks of Forward-Looking Statements](index=3&type=section&id=Nature%20and%20Risks%20of%20Forward-Looking%20Statements) This section outlines the nature of forward-looking statements within the Form 10-Q, emphasizing that they are based on current expectations and assumptions, subject to significant uncertainties and risks, and are not guarantees of future performance - Forward-looking statements concern expectations, beliefs, plans, objectives, goals, strategies, future events or performance, and underlying assumptions, rather than historical facts[8](index=8&type=chunk) - Such statements are subject to many risks, uncertainties, and other factors, including increased competition, reduced consumer demand, reliance on key vendors, ability to attract and retain qualified employees, and macroeconomic pressures (inflation, interest rates, tariffs)[10](index=10&type=chunk) - The company undertakes no duty to update publicly any forward-looking statement, except as may be required by applicable law[11](index=11&type=chunk) [PART I. FINANCIAL INFORMATION](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents Petco's unaudited consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, equity, and cash flows, along with detailed notes [Item 1. Financial Statements (Unaudited)](index=5&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This item provides the unaudited consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, equity, and cash flows, along with detailed notes explaining significant accounting policies and specific financial line items [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) Consolidated Balance Sheet Highlights (in thousands) | Metric | August 2, 2025 | February 1, 2025 | Change ($) | Change (%) | | :-------------------------------- | :------------- | :--------------- | :--------- | :--------- | | Cash and cash equivalents | $188,748 | $165,756 | $22,992 | 13.9% | | Merchandise inventories, net | $608,506 | $653,329 | ($44,823) | (6.9%) | | Total current assets | $939,558 | $973,619 | ($34,061) | (3.5%) | | Total assets | $5,153,282 | $5,194,430 | ($41,148) | (0.8%) | | Total current liabilities | $1,058,566 | $1,139,163 | ($80,597) | (7.1%) | | Total liabilities | $4,014,179 | $4,080,800 | ($66,621) | (1.6%) | | Total stockholders' equity | $1,139,103 | $1,113,630 | $25,473 | 2.3% | [Consolidated Statements of Operations](index=6&type=section&id=Consolidated%20Statements%20of%20Operations) Consolidated Statements of Operations Highlights (Thirteen Weeks Ended, in thousands) | Metric | August 2, 2025 | August 3, 2024 | Change ($) | Change (%) | | :------------------------------------------------ | :------------- | :------------- | :--------- | :--------- | | Total net sales | $1,488,529 | $1,523,755 | ($35,226) | (2.3%) | | Gross profit | $585,319 | $580,725 | $4,594 | 0.8% | | Operating income (loss) | $43,022 | $2,468 | $40,554 | 1643.2% | | Net income (loss) attributable to Class A and B-1 common stockholders | $13,972 | ($24,823) | $38,795 | N/A | | Basic Net income (loss) per share | $0.05 | ($0.09) | $0.14 | N/A | Consolidated Statements of Operations Highlights (Twenty-six Weeks Ended, in thousands) | Metric | August 2, 2025 | August 3, 2024 | Change ($) | Change (%) | | :------------------------------------------------ | :------------- | :------------- | :--------- | :--------- | | Total net sales | $2,981,928 | $3,052,895 | ($70,967) | (2.3%) | | Gross profit | $1,155,287 | $1,159,385 | ($4,098) | (0.4%) | | Operating income (loss) | $59,381 | ($14,314) | $73,695 | N/A | | Net income (loss) attributable to Class A and B-1 common stockholders | $2,311 | ($71,306) | $73,617 | N/A | | Basic Net income (loss) per share | $0.01 | ($0.26) | $0.27 | N/A | [Consolidated Statements of Comprehensive Loss](index=7&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Loss) Consolidated Statements of Comprehensive Income (Loss) Highlights (Thirteen Weeks Ended, in thousands) | Metric | August 2, 2025 | August 3, 2024 | Change ($) | | :------------------------------------------------ | :------------- | :------------- | :--------- | | Net income (loss) attributable to Class A and B-1 common stockholders | $13,972 | ($24,823) | $38,795 | | Foreign currency translation adjustment | $7,637 | ($10,921) | $18,558 | | Total other comprehensive income (loss), net of tax | $8,346 | ($19,631) | $27,977 | | Comprehensive income (loss) attributable to Class A and B-1 common stockholders | $22,318 | ($44,454) | $66,772 | Consolidated Statements of Comprehensive Income (Loss) Highlights (Twenty-six Weeks Ended, in thousands) | Metric | August 2, 2025 | August 3, 2024 | Change ($) | | :------------------------------------------------ | :------------- | :------------- | :--------- | | Net income (loss) attributable to Class A and B-1 common stockholders | $2,311 | ($71,306) | $73,617 | | Foreign currency translation adjustment | $7,669 | ($9,256) | $16,925 | | Total other comprehensive income (loss), net of tax | $5,952 | ($12,444) | $18,396 | | Comprehensive income (loss) attributable to Class A and B-1 common stockholders | $8,263 | ($83,750) | $92,013 | [Consolidated Statements of Equity](index=8&type=section&id=Consolidated%20Statements%20of%20Equity) Total Stockholders' Equity (in thousands) | Date | Amount | | :---------------- | :------- | | August 2, 2025 | $1,139,103 | | February 1, 2025 | $1,113,630 | | **Change** | **$25,473** | - Key drivers for the increase in total stockholders' equity from February 1, 2025, to August 2, 2025, include **net income of $13,972 thousand** and **equity-based compensation expense of $18,252 thousand** (sum of two quarters)[24](index=24&type=chunk) [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Consolidated Cash Flows (Twenty-six Weeks Ended, in thousands) | Cash Flow Activity | August 2, 2025 | August 3, 2024 | Change ($) | Change (%) | | :---------------------------------------- | :------------- | :------------- | :--------- | :--------- | | Net cash provided by operating activities | $70,438 | $60,956 | $9,482 | 15.6% | | Net cash used in investing activities | ($58,091) | ($58,065) | ($26) | (0.0%) | | Net cash used in financing activities | ($4,280) | ($5,894) | $1,614 | 27.4% | | Net increase (decrease) in cash, cash equivalents and restricted cash | $8,067 | ($3,003) | $11,070 | N/A | - Cash, cash equivalents and restricted cash at the end of the period increased to **$189,732 thousand** as of August 2, 2025, from **$133,646 thousand** as of August 3, 2024[26](index=26&type=chunk) - The increase in operating cash flows was primarily driven by a decrease in inventory purchases, lower payroll and fringe benefits, and reduced operational costs, partially offset by higher payouts of prior year accrued incentive bonuses[107](index=107&type=chunk)[108](index=108&type=chunk) [Notes to Unaudited Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) [Note 1. Summary of Significant Accounting Policies](index=10&type=section&id=Note%201.%20Summary%20of%20Significant%20Accounting%20Policies) - The consolidated financial statements are prepared in accordance with GAAP for interim financial information and instructions to Form 10-Q, with no significant changes from the prior annual report[31](index=31&type=chunk)[32](index=32&type=chunk) - The Company uses interest rate cap, collar, and swap agreements as cash flow hedges to limit exposure to variable interest rates (Term SOFR), with fair value changes reported in accumulated other comprehensive income (loss)[34](index=34&type=chunk)[35](index=35&type=chunk) [Note 2. Revenue Recognition](index=11&type=section&id=Note%202.%20Revenue%20Recognition) Net Sales by Product Type and Services (Thirteen Weeks Ended, in thousands) | Category | August 2, 2025 | August 3, 2024 | Change ($) | Change (%) | | :---------------------------- | :------------- | :------------- | :--------- | :--------- | | Consumables | $729,918 | $744,766 | ($14,848) | (2.0%) | | Supplies and companion animals | $495,687 | $518,983 | ($23,296) | (4.5%) | | Services and other | $262,924 | $260,006 | $2,918 | 1.1% | | **Net sales** | **$1,488,529** | **$1,523,755** | **($35,226)** | **(2.3%)** | Net Sales by Product Type and Services (Twenty-six Weeks Ended, in thousands) | Category | August 2, 2025 | August 3, 2024 | Change ($) | Change (%) | | :---------------------------- | :------------- | :------------- | :--------- | :--------- | | Consumables | $1,477,988 | $1,508,740 | ($30,752) | (2.0%) | | Supplies and companion animals | $989,508 | $1,034,740 | ($45,232) | (4.4%) | | Services and other | $514,432 | $509,415 | $5,017 | 1.0% | | **Net sales** | **$2,981,928** | **$3,052,895** | **($70,967)** | **(2.3%)** | [Note 3. Goodwill](index=11&type=section&id=Note%203.%20Goodwill) - The Company has one reporting unit and performs annual goodwill impairment tests in the fourth quarter, or more frequently if warranted[38](index=38&type=chunk) - An interim impairment test was performed in the first quarter of fiscal 2024 due to declines in share price, but goodwill was not impaired as the estimated fair value exceeded its carrying value[39](index=39&type=chunk) - No triggering events or indications of goodwill impairment were identified during the thirteen weeks ended August 3, 2024, and the thirteen and twenty-six week periods ended August 2, 2025[41](index=41&type=chunk) [Note 4. Senior Secured Credit Facilities](index=11&type=section&id=Note%204.%20Senior%20Secured%20Credit%20Facilities) - The First Lien Term Loan had an outstanding principal balance of **$1,595.3 million** as of August 2, 2025, with a weighted average interest rate of **7.9%**[45](index=45&type=chunk) - The ABL Revolving Credit Facility has availability of up to **$581.0 million**, with **$495.2 million** available as of August 2, 2025, and no amounts outstanding[42](index=42&type=chunk)[47](index=47&type=chunk) - The Company was in compliance with its covenants under both the First Lien Term Loan and the ABL Revolving Credit Facility as of August 2, 2025[44](index=44&type=chunk) [Note 5. Derivative Instruments](index=12&type=section&id=Note%205.%20Derivative%20Instruments) - The Company uses interest rate swap, caps, and collars as cash flow hedges to manage variable interest rate risk related to Term SOFR[49](index=49&type=chunk) - As of August 2, 2025, accumulated other comprehensive income (loss) included unrealized losses of **$1.9 million** (**$1.5 million**, net of tax) from cash flow hedges[49](index=49&type=chunk) - Approximately **$0.2 million** of pre-tax gains deferred in AOCI were reclassified to interest expense during the thirteen weeks ended August 2, 2025[49](index=49&type=chunk) [Note 6. Fair Value Measurements](index=13&type=section&id=Note%206.%20Fair%20Value%20Measurements) Assets Measured at Fair Value on a Recurring Basis (August 2, 2025, in thousands) | Asset | Level 1 | Level 2 | Level 3 | | :------------------------------ | :------ | :------ | :------ | | Money market mutual funds | $136,983 | $— | $— | | Investments of officers' life insurance | $— | $15,031 | $— | - No impairment was identified for goodwill or the indefinite-lived trade name during the reported periods, following an interim test in fiscal 2024 for both assets[56](index=56&type=chunk)[58](index=58&type=chunk) - Fixed asset and right-of-use asset impairment charges of **$0.3 million** and **$0.9 million** were recorded for the thirteen and twenty-six week periods ended August 2, 2025, respectively[58](index=58&type=chunk) [Note 7. Stockholders' Equity](index=14&type=section&id=Note%207.%20Stockholders'%20Equity) Equity-Based Compensation Expense by Award Type (Thirteen Weeks Ended, in thousands) | Award Type | August 2, 2025 | August 3, 2024 | | :----------- | :------------- | :------------- | | RSUs and RSAs | $6,908 | $8,946 | | Options | $1,439 | $2,465 | | ESPP | $415 | $314 | | Other awards | $27 | $189 | | **Total** | **$8,789** | **$11,914** | Equity-Based Compensation Expense by Award Type (Twenty-six Weeks Ended, in thousands) | Award Type | August 2, 2025 | August 3, 2024 | | :----------- | :------------- | :------------- | | RSUs and RSAs | $14,643 | $19,668 | | Options | $2,804 | $8,018 | | ESPP | $753 | $634 | | Other awards | $9 | $1,028 | | **Total** | **$18,209** | **$29,348** | - Approximately **16.5 million** potential shares were anti-dilutive and excluded from the computation of diluted shares outstanding during the twenty-six weeks ended August 2, 2025[66](index=66&type=chunk) [Note 8. Commitments and Contingencies](index=15&type=section&id=Note%208.%20Commitments%20and%20Contingencies) - The Company is involved in legal proceedings and subject to other claims and litigation arising in the ordinary course of its business[67](index=67&type=chunk) - Accruals have been made for certain matters, but are not considered individually or in the aggregate material[67](index=67&type=chunk) - Management does not currently expect these matters to have a material adverse effect on its consolidated financial statements, though the ultimate outcome of any litigation is inherently uncertain[68](index=68&type=chunk) [Note 9. Reportable Segment](index=16&type=section&id=Note%209.%20Reportable%20Segment) - The Company manages its business as **one reportable operating segment**[29](index=29&type=chunk)[69](index=69&type=chunk) - Consolidated net income (loss) is the measure of segment profit or loss, and total assets is the measure of segment assets[69](index=69&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=17&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides a comprehensive discussion and analysis of Petco's financial condition and results of operations for the periods presented, including an overview of the business, key performance indicators, an executive summary of financial results, detailed analysis of revenue and expenses, reconciliation of non-GAAP measures, and insights into liquidity and capital resources [Overview](index=17&type=section&id=Overview) - Petco is a pet specialty retailer focused on improving the lives of pets, pet parents, and partners through an omnichannel ecosystem including over **1,500 pet care centers** and digital channels[72](index=72&type=chunk) - The company collaborates with Petco Love, a nonprofit organization, which has helped find homes for approximately **7 million animals**[74](index=74&type=chunk) - Macroeconomic factors such as interest rates, inflationary pressures, tariffs, and global economic/geopolitical developments continue to impact results, with their duration and ultimate severity being unpredictable[75](index=75&type=chunk) [How We Assess the Performance of Our Business](index=17&type=section&id=How%20We%20Assess%20the%20Performance%20of%20Our%20Business) - Key performance measures include comparable sales, Adjusted EBITDA, and Free Cash Flow, used to evaluate operating performance, generate future plans, and make strategic capital allocation decisions[77](index=77&type=chunk)[79](index=79&type=chunk) - Comparable sales measure period-over-period net sales from locations and digital sites open for **12 full fiscal months**, aiming to increase customer retention, frequency of visits, and basket size[77](index=77&type=chunk)[78](index=78&type=chunk) - Adjusted EBITDA and Free Cash Flow are non-GAAP financial measures, presented with reconciliations to GAAP measures, and are not considered substitutes for GAAP results[79](index=79&type=chunk)[95](index=95&type=chunk) [Executive Summary](index=18&type=section&id=Executive%20Summary) Executive Summary of Financial Results (Thirteen Weeks Ended) | Metric | August 2, 2025 | August 3, 2024 | Change ($) | Change (%) | | :------------------------------------------------ | :------------- | :------------- | :--------- | :--------- | | Net sales | $1.49 billion | $1.52 billion | ($35.2 million) | (2.3%) | | Comparable sales change | (1.4%) | 0.3% | (1.7%) pts | N/A | | Operating income | $43.0 million | $2.5 million | $40.5 million | 1643.2% | | Net income (loss) attributable to Class A and B-1 common stockholders | $14.0 million | ($24.8 million) | $38.8 million | N/A | | Adjusted EBITDA | $113.9 million | $83.5 million | $30.4 million | 36.4% | [Thirteen and Twenty-six Weeks Ended August 2, 2025 Compared with Thirteen and Twenty-six Weeks Ended August 3, 2024](index=19&type=section&id=Thirteen%20and%20Twenty-six%20Weeks%20Ended%20August%202,%202025%20Compared%20with%20Thirteen%20and%20Twenty-six%20Weeks%20Ended%20August%203,%202024) [Net Sales and Comparable Sales](index=19&type=section&id=Net%20Sales%20and%20Comparable%20Sales) Net Sales and Comparable Sales Change | Period | Net Sales Change (%) | Comparable Sales Change (%) | | :---------------------------- | :------------------- | :------------------------ | | Thirteen weeks ended Aug 2, 2025 | (2.3%) | (1.4%) | | Twenty-six weeks ended Aug 2, 2025 | (2.3%) | (1.3%) | - The sales decrease primarily reflects lower transaction volume and a lower pet care center count, alongside a disciplined approach to managing unit costs, pricing, and promotional strategies[84](index=84&type=chunk) - The company continues to experience momentum in services, driven by strategic investments in customer acquisition and retention, and optimization of its veterinary hospital footprint[84](index=84&type=chunk) [Gross Profit](index=20&type=section&id=Gross%20Profit) Gross Profit Rate as Percentage of Net Sales | Period | August 2, 2025 | August 3, 2024 | | :---------------------------- | :------------- | :------------- | | Thirteen weeks ended | 39.3% | 38.1% | | Twenty-six weeks ended | 38.7% | 38.0% | - The increase in gross profit rate reflects improved utilization of the services footprint, as well as more effective management of inventory, unit costs, pricing, and promotional strategies[86](index=86&type=chunk) [Selling, General and Administrative ("SG&A") Expenses](index=20&type=section&id=Selling,%20General%20and%20Administrative%20(%22SG%26A%22)%20Expenses) SG&A Expenses as Percentage of Net Sales | Period | August 2, 2025 | August 3, 2024 | | :---------------------------- | :------------- | :------------- | | Thirteen weeks ended | 36.4% | 37.9% | | Twenty-six weeks ended | 36.8% | 38.4% | - The decrease in SG&A expenses was primarily due to lower payroll and other compensation costs, including improved actuarial results from employee benefits optimization initiatives, and lower consulting costs[87](index=87&type=chunk) - The prior year's twenty-six week period included disposition costs related to the Pupbox business[87](index=87&type=chunk) [Interest Expense](index=20&type=section&id=Interest%20Expense) Interest Expense (in thousands) | Period | August 2, 2025 | August 3, 2024 | Change ($) | Change (%) | | :---------------------------- | :------------- | :------------- | :--------- | :--------- | | Thirteen weeks ended | $33,297 | $36,805 | ($3,508) | (9.5%) | | Twenty-six weeks ended | $66,791 | $73,622 | ($6,831) | (9.3%) | - The decrease in interest expense was primarily driven by lower interest rates on the First Lien Term Loan[88](index=88&type=chunk) [Other Non-Operating Loss](index=20&type=section&id=Other%20Non-Operating%20Loss) - No other non-operating income or loss was recognized during the thirteen and twenty-six week periods ended August 2, 2025[89](index=89&type=chunk) - An other non-operating loss of **$2.7 million** was recognized for the twenty-six weeks ended August 3, 2024[89](index=89&type=chunk) [Income Tax Expense (Benefit)](index=21&type=section&id=Income%20Tax%20Expense%20(Benefit)) Income Tax Expense (Benefit) (in thousands) | Period | August 2, 2025 | Effective Tax Rate | August 3, 2024 | Effective Tax Rate | | :---------------------------- | :------------- | :----------------- | :------------- | :----------------- | | Thirteen weeks ended | $746 | 5.1% | ($4,651) | 14.7% | | Twenty-six weeks ended | $1,241 | 34.9% | ($9,128) | 11.3% | - The change in effective tax rates was primarily driven by a change in earnings and a decrease in the amount of compensation associated expenses not expected to be deductible for corporate income tax purposes[90](index=90&type=chunk) - The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, reduced current income tax expense (due to **100% bonus depreciation** and immediate expensing of R&E) but was substantially offset by an increase in deferred income tax expense, with no material impact on the effective tax rate for the period[91](index=91&type=chunk)[92](index=92&type=chunk)[93](index=93&type=chunk) [Reconciliation of Non-GAAP Financial Measures to GAAP Measures](index=21&type=section&id=Reconciliation%20of%20Non-GAAP%20Financial%20Measures%20to%20GAAP%20Measures) - Non-GAAP financial measures, including Adjusted EBITDA and Free Cash Flow, are presented to enhance understanding of financial and operational performance by excluding certain material non-cash, unusual, or non-recurring items[96](index=96&type=chunk)[100](index=100&type=chunk) - These non-GAAP measures are used by management and the board to evaluate operating performance, generate future operating plans, and make strategic decisions regarding capital allocation[96](index=96&type=chunk) - Non-GAAP financial measures are not calculated in accordance with GAAP and should not be considered superior to, as a substitute for, or alternative to, GAAP measures[95](index=95&type=chunk) [Adjusted EBITDA](index=21&type=section&id=Adjusted%20EBITDA) Adjusted EBITDA and Margin (Thirteen Weeks Ended, in thousands) | Metric | August 2, 2025 | August 3, 2024 | Change ($) | Change (%) | | :------------------ | :------------- | :------------- | :--------- | :--------- | | Adjusted EBITDA | $113,860 | $83,523 | $30,337 | 36.3% | | Adjusted EBITDA Margin | 7.6% | 5.5% | 2.1% pts | N/A | Adjusted EBITDA and Margin (Twenty-six Weeks Ended, in thousands) | Metric | August 2, 2025 | August 3, 2024 | Change ($) | Change (%) | | :------------------ | :------------- | :------------- | :--------- | :--------- | | Adjusted EBITDA | $203,309 | $159,167 | $44,142 | 27.7% | | Adjusted EBITDA Margin | 6.8% | 5.2% | 1.6% pts | N/A | - Adjusted EBITDA includes **50%** of the Mexico joint venture's operating results, adjusted to reflect a basis comparable to the company's Adjusted EBITDA[98](index=98&type=chunk) [Free Cash Flow](index=22&type=section&id=Free%20Cash%20Flow) Free Cash Flow (Twenty-six Weeks Ended, in thousands) | Metric | August 2, 2025 | August 3, 2024 | Change ($) | Change (%) | | :-------------------------------- | :------------- | :------------- | :--------- | :--------- | | Net cash provided by operating activities | $70,438 | $60,956 | $9,482 | 15.6% | | Cash paid for fixed assets | ($60,516) | ($60,029) | ($487) | (0.8%) | | **Free Cash Flow** | **$9,922** | **$927** | **$8,995** | **970.3%** | - Free Cash Flow is calculated as net cash provided by operating activities less cash paid for fixed assets, measuring the ability to generate additional cash from business operations[100](index=100&type=chunk) [Liquidity and Capital Resources](index=23&type=section&id=Liquidity%20and%20Capital%20Resources) [Overview (Liquidity)](index=23&type=section&id=Overview%20(Liquidity)) - Primary sources of liquidity are funds generated by operating activities and available capacity for borrowings on the **$581.0 million** ABL Revolving Credit Facility[103](index=103&type=chunk) Total Liquidity (August 2, 2025, in millions) | Component | Amount | | :-------------------------------- | :----- | | Cash and cash equivalents | $188.7 | | Availability on ABL Revolving Credit Facility | $495.2 | | **Total Liquidity** | **$683.9** | - The company believes its current resources, anticipated cash flows, and borrowing capacity will be sufficient to finance operations and fund capital investments for at least the next **12 months**[104](index=104&type=chunk) [Cash Flows (Liquidity & Capital Resources)](index=23&type=section&id=Cash%20Flows%20(Liquidity%20%26%20Capital%20Resources)) Summary of Consolidated Cash Flows (Twenty-six Weeks Ended, in thousands) | Activity | August 2, 2025 | August 3, 2024 | | :------------------------ | :------------- | :------------- | | Operating activities | $70,438 | $60,956 | | Investing activities | ($58,091) | ($58,065) | | Financing activities | ($4,280) | ($5,894) | | Net increase (decrease) | $8,067 | ($3,003) | - Net cash provided by operating activities increased due to decreased inventory purchases, lower payroll and fringe benefits, and reduced operational costs, partially offset by higher payouts of prior year accrued incentive bonuses[107](index=107&type=chunk)[108](index=108&type=chunk) - Net cash used in investing activities remained stable, primarily consisting of capital expenditures to support the business[109](index=109&type=chunk) [Sources of Liquidity (Senior Secured Credit Facilities, Derivative Instruments)](index=24&type=section&id=Sources%20of%20Liquidity%20(Senior%20Secured%20Credit%20Facilities,%20Derivative%20Instruments)) - The company's liquidity is supported by a First Lien Term Loan (**$1,595.3 million** outstanding as of August 2, 2025) and an ABL Revolving Credit Facility (**$495.2 million** available)[111](index=111&type=chunk) - Derivative instruments, including interest rate cap, collar, and swap agreements, are utilized to limit maximum interest on variable-rate debt and decrease exposure to interest rate variability[113](index=113&type=chunk) [Critical Accounting Policies and Estimates](index=24&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) - The preparation of consolidated financial statements requires management to make assumptions and estimates that affect reported amounts, based on historical experience and current trends[115](index=115&type=chunk) - Actual results could differ materially from these assumptions and estimates due to the inherent uncertainty of future events[115](index=115&type=chunk) - There have been no material changes to the critical accounting policies and estimates compared to those described in the 2024 Form 10-K[116](index=116&type=chunk) [Recent Accounting Pronouncements](index=24&type=section&id=Recent%20Accounting%20Pronouncements) - Information regarding recently issued accounting pronouncements is provided in Note 1, 'Summary of Significant Accounting Policies,' to the Notes to Consolidated Financial Statements[118](index=118&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=25&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Petco is exposed to market risks primarily from interest rate fluctuations, as well as changes in its credit standing. The company does not hold instruments for trading purposes and does not use forward currency contracts to hedge foreign currency exposure [Interest Rate Risk](index=25&type=section&id=Interest%20Rate%20Risk) - The company is subject to interest rate risk due to its variable-rate First Lien Term Loan (**$1,595.3 million** outstanding as of August 2, 2025) and ABL Revolving Credit Facility[120](index=120&type=chunk) - A hypothetical **100 basis point increase** in variable rates on these facilities would increase annual cash interest by approximately **$16.2 million**[120](index=120&type=chunk) - Cash flow hedges (interest rate caps, collars, and swaps) are used to limit maximum interest rates and exposure to interest rate variability[120](index=120&type=chunk) [Credit Risk](index=25&type=section&id=Credit%20Risk) - Substantially all cash and cash equivalents are maintained at major financial institutions in the United States, with current deposits likely in excess of insured limits[122](index=122&type=chunk) - The company believes these institutions have sufficient assets and liquidity, posing little to no credit risk[122](index=122&type=chunk) [Foreign Currency Risk](index=25&type=section&id=Foreign%20Currency%20Risk) - Substantially all business is conducted in U.S. dollars, with a small amount denominated in foreign currencies[123](index=123&type=chunk) - A hypothetical **10% change** in foreign currency exchange rates would not have a material effect on operating results[123](index=123&type=chunk) - The company does not enter into forward currency contracts to hedge its foreign currency exposure[123](index=123&type=chunk) [Item 4. Controls and Procedures](index=25&type=section&id=Item%204.%20Controls%20and%20Procedures) This item addresses the effectiveness of Petco's disclosure controls and procedures and reports on changes in internal control over financial reporting [Management's Evaluation of Disclosure Controls and Procedures](index=25&type=section&id=Management's%20Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) - Management, under the supervision of the principal executive officer and principal financial officer, evaluated the effectiveness of disclosure controls and procedures as of August 2, 2025[125](index=125&type=chunk) - It was concluded that the disclosure controls and procedures were effective at a reasonable assurance level[125](index=125&type=chunk) [Changes in Internal Control over Financial Reporting](index=26&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) - There was no change in internal control over financial reporting during the quarter ended August 2, 2025, that materially affected, or is reasonably likely to materially affect, internal control over financial reporting[126](index=126&type=chunk) [Limitations on the Effectiveness of Controls](index=26&type=section&id=Limitations%20on%20the%20Effectiveness%20of%20Controls) - Disclosure controls and procedures are designed to provide reasonable assurance, not absolute assurance, of achieving their objectives[127](index=127&type=chunk) - No control system, regardless of design, can prevent or detect all error and fraud, nor can it provide absolute assurance that all control issues have been detected[127](index=127&type=chunk) [PART II. OTHER INFORMATION](index=27&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, unregistered sales of equity securities, defaults, mine safety disclosures, other information, and a list of exhibits [Item 1. Legal Proceedings](index=27&type=section&id=Item%201.%20Legal%20Proceedings) This item refers to Note 8, 'Commitments and Contingencies,' for a description of legal proceedings, which are incorporated by reference - Information regarding legal proceedings is incorporated by reference from Note 8, 'Commitments and Contingencies,' to the Notes to Consolidated Financial Statements[129](index=129&type=chunk) [Item 1A. Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) This item refers to the 'Risk Factors' section in the 2024 Form 10-K for information on risk factors. No material changes to these risk factors have occurred, but investors are cautioned to consider them as they could materially and adversely affect the business - Reference is made to Part I, Item 1A, 'Risk Factors' included in the 2024 Form 10-K for information concerning risk factors[130](index=130&type=chunk) - There have been no material changes with respect to the risk factors disclosed in the 2024 Form 10-K[130](index=130&type=chunk) - Investors should carefully consider such factors, which could materially and adversely affect the business, financial condition, and/or results of operations[130](index=130&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=27&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) There were no unregistered sales of equity securities or use of proceeds to report for the period - None to report[131](index=131&type=chunk) [Item 3. Defaults Upon Senior Securities](index=27&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) There were no defaults upon senior securities to report for the period - None to report[132](index=132&type=chunk) [Item 4. Mine Safety Disclosures](index=27&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[133](index=133&type=chunk) [Item 5. Other Information](index=27&type=section&id=Item%205.%20Other%20Information) No directors or Section 16 officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the quarterly period - None of the company's directors or Section 16 officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the quarterly period covered by this Form 10-Q[134](index=134&type=chunk) [Item 6. Exhibits](index=28&type=section&id=Item%206.%20Exhibits) This item provides a list of exhibits filed as part of this Quarterly Report on Form 10-Q, including certifications, the Amended and Restated Executive Severance Plan, and XBRL related documents - The exhibits include the Amended and Restated Executive Severance Plan (10.1†), Certifications of Principal Executive Officer and Principal Financial Officer (31.1, 31.2, 32.1*, 32.2*), and Inline XBRL documents (101.INS, 101.SCH, 104)[135](index=135&type=chunk) [Signatures](index=29&type=section&id=Signatures) The report is duly signed on behalf of Petco Health and Wellness Company, Inc. by Sabrina Simmons, Chief Financial Officer, on August 29, 2025 [Report Signatures](index=29&type=section&id=Report%20Signatures) The report is duly signed on behalf of Petco Health and Wellness Company, Inc. by Sabrina Simmons, Chief Financial Officer (Principal Financial and Accounting Officer), on August 29, 2025 - The report was signed on **August 29, 2025**[140](index=140&type=chunk) - The signatory is Sabrina Simmons, Chief Financial Officer (Principal Financial and Accounting Officer) of Petco Health and Wellness Company, Inc[140](index=140&type=chunk)