Financial Data and Key Metrics Changes - Petco reported a net sales decline of 3.1% with comparable sales down 2.2% due to the closure of 25 stores in 2024 and an additional 9 closures year-to-date, ending the quarter with 1,389 stores in the U.S. [17][18] - Gross margin expanded by approximately 75 basis points to 38.9%, driven by a disciplined approach to average unit retail and cost management [18][19] - Adjusted EBITDA increased by 21% or $17 million to $99 million, with an adjusted EBITDA margin expansion of nearly 140 basis points to 6.7% of sales [19] - Free cash flow for the quarter was $61 million, significantly above the prior year, with year-to-date cash flow from operations nearly doubling to $161 million [20][21] Business Line Data and Key Metrics Changes - The services segment continues to be the fastest-growing category, with improvements in staffing and appointment availability contributing to growth [10][11] - The company is focusing on enhancing the integration of services and store operations, which has historically been siloed, to improve customer experience and operational efficiency [13][14] Market Data and Key Metrics Changes - The overall pet industry has remained stable with flattish growth, while Petco's services business is already experiencing growth [71] - Consumer behavior has shown caution due to external economic factors such as tariffs and interest rates, impacting overall market sentiment [71] Company Strategy and Development Direction - Petco is in phase II of its transformation, focusing on improving profitability and preparing for a return to growth in phase III [7][15] - The company outlined four pillars to support its return to growth: product differentiation, trusted store experience, integrated services, and seamless omni-channel experience [8][15] - The company is strategically shifting resources towards growth initiatives while maintaining a disciplined approach to expense management [22] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the progress made towards strengthening the economic model and improving profitability, with expectations for adjusted EBITDA to increase by approximately 18% year-over-year [21] - The impact of tariffs is expected to be more significant in Q4, but the company has managed to revise guidance upward despite these challenges [58] Other Important Information - The company is on track with its new membership program, which is expected to contribute to growth in 2026 [64] - Petco's cash balance at the end of the quarter was $237 million, with total liquidity of $733 million [21] Q&A Session Summary Question: Can you frame the mix of the business between wants and needs? - Management indicated that consumables are traditionally a needs business, but there are opportunities to create a perception of wants through new product offerings and merchandising strategies [26][27] Question: What is the realistic timeline for comparable sales stabilization? - Management refrained from providing specific timelines but indicated that all four pillars discussed are expected to contribute to comparable sales in 2026 [36][37] Question: How much of the Q3 working capital improvement is sustainable? - Management emphasized continuous improvement in cash flow generation, focusing on net earnings and inventory discipline as key levers [39] Question: Can you size the magnitude of potential investments necessary for top-line growth? - Management stated that while investments will be necessary, they do not anticipate substantial changes from current operational expenditures [45][46] Question: What impact did tariffs have during the quarter? - Management noted that Q3 was the first quarter where tariff impacts were felt in a meaningful way, primarily affecting private label supplies [58][59] Question: How do you see the integration of services and stores evolving? - Management highlighted that services are a key differentiator for Petco, and better integration with product offerings is expected to enhance customer engagement and sales [87][88]