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]

Financial Data and Key Metrics Changes - In Q2 2025, net sales decreased by 2.3% with comparable sales down 1.4% due to 25 net store closures in 2024 and an additional 10 closures year to date, bringing the U.S. store count to 1,388 [22][24] - Gross margin expanded by over 120 basis points to 39.3%, driven by a disciplined approach to average unit cost and average unit retail [24][26] - Operating profit increased by $41 million year over year to $43 million, with adjusted EBITDA rising by $30 million to $114 million, expanding nearly 220 basis points to 7.6% as a percentage of sales [26][28] Business Line Data and Key Metrics Changes - The company is focusing on improving store performance, which has shown positive results, while e-commerce has been deprioritized temporarily to enhance profitability [16][60] - The relaunch of the loyalty program is aimed at strengthening long-term customer relationships, with personalized rewards being a key feature [14][15] Market Data and Key Metrics Changes - The pet industry is currently experiencing flat growth, but the company is maintaining its market share while improving profitability [78] - Customer sentiment has improved, as indicated by sequential increases in the Net Promoter Score (NPS) since the end of the previous year [9][66] Company Strategy and Development Direction - The company is in Phase two of its transformation, focusing on operational improvements and preparing for Phase three, which aims for a return to profitable sales growth [6][18] - Key pillars for future growth include enhancing store experiences, delivering services at scale, merchandising differentiation, and winning with omnichannel strategies [55] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ability to deliver improvements and raised the adjusted EBITDA outlook for 2025 to between $385 million and $395 million, reflecting a 16% increase at the midpoint [28] - The company anticipates that the impacts of tariffs will become more significant in the second half of the year, which may affect gross margins [42][90] Other Important Information - Free cash flow for the quarter was over $50 million, with a cash balance of $190 million and total liquidity of $684 million [27] - The company is committed to continuous improvement in inventory management, achieving a 9.5% reduction in ending inventory while maintaining higher in-stock levels for customers [27][63] Q&A Session Summary Question: When can the firm be held accountable for generating a positive comp? - Management indicated that results for a positive comp are expected to show up in 2026, as the third quarter is the hardest compare of the year [33] Question: Were gross margin gains primarily from online promotions? - Management clarified that the focus has been on improving store performance, which represents the majority of sales, while e-commerce has been more focused on profitability [34][36] Question: How did gross margin perform relative to expectations? - Management noted that gross margin expansion was a significant focus, with minimal tariff impact in Q2, but expected tariffs to have a more meaningful impact in the back half of the year [40][42] Question: What is the status of e-commerce and inventory projects? - Management stated that e-commerce improvements are ongoing, with a new leader making an impact, while inventory management has been successful with a focus on continuous improvement [60][63] Question: What are the biggest remaining execution gaps? - Management emphasized that the focus is now on the progress made and the confidence to invest back into the business, rather than identifying gaps [72] Question: What is the outlook for the fourth quarter adjusted EBITDA? - Management indicated that tariffs will have the most significant negative impact in Q4, but strong performance in the first half allows for selective investments in the second half [90]

Core Insights - Petco Health and Wellness reported a 2.3% year-over-year decline in net sales for Q1 2025, with comparable sales down 1.3%, but gross margin improved by 30 basis points to 38.2% [1] - Adjusted EBITDA increased by $13.8 million to $89.4 million, representing 6% of sales, indicating profitability improvements despite sales challenges [1] Sales and Margin Performance - The store count reached 1,393 after 30 net closures over the last six quarters, with gross margin improvement driven by average unit cost discipline and markdown optimization [2] - SG&A discipline resulted in over 180 basis points of expense leverage, approximately 60 basis points when excluding last year's disposition costs, reflecting operational efficiency amid weak demand [2][3] Strategic Initiatives - Petco is implementing targeted resets in pet consumables, increasing shelf capacity in dog food by over 10% to address out-of-stocks and labor inefficiencies [4] - The merchandising reset aims to enhance customer satisfaction and improve in-stock availability, directly addressing lost sales drivers [5] Cost Management and Profitability - Management emphasizes that cost containment is a permanent strategy, focusing on leveraging SG&A as sales recover rather than relying on temporary expense reductions [6][8] - The goal is to manage SG&A effectively to support operating margin expansion as sales grow, rather than solely focusing on cost-cutting [7] Future Outlook - For full-year 2025, Petco expects net sales to decline in the low single digits, with adjusted EBITDA projected between $375 million and $390 million, and 20-30 net store closures [9] - Q2 FY2025 adjusted EBITDA is anticipated to be $92 million to $94 million, reflecting an approximate 11% increase at the midpoint [9]