Petco Health and Wellness pany(WOOF) - 2026 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For Q1 2025, comparable sales decreased by 1.3% and net sales declined by 2.3%, attributed to 25 net store closures in 2024 and an additional five closures in Q1, resulting in a total store count of 1,393 [24] - Gross margin rate increased by over 30 basis points to 38.2%, with improvements across both product and service segments [25] - Operating profit rose to $16.4 million, an increase of $33 million compared to the previous year, while adjusted EBITDA increased by $13.8 million to $89.4 million, representing 6% of sales [27][28] - Free cash flow was negative $44 million, primarily due to incentive payouts during the quarter [28] Business Line Data and Key Metrics Changes - Services, the fastest-growing segment, continues to show positive growth, with productivity improvements in both veterinary and grooming operations supporting gross margin expansion [16] - The company is optimizing product assortment to align more closely with consumer demand, focusing on higher productivity brands and SKUs [10] - The cat category product reset was completed in May, and the dog category reset was initiated, aimed at increasing shelf capacity and improving customer experience [11][12] Market Data and Key Metrics Changes - The company noted stable pet adoption trends, indicating that it is not relying on external factors for financial improvements in 2025 [34] - The overall pet market remains resilient, with consumable categories driving business due to their needs-based nature [60] Company Strategy and Development Direction - The company is focused on a multi-phased approach to improve its operating model and restore retail fundamentals, with Phase I completed and Phase II underway [5][6] - A new membership program is being designed to enhance customer loyalty, expected to launch in 2026 [20] - The company aims to improve its marketing message to be more solutions-oriented and to enhance customer engagement through data-driven strategies [21][40] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's strategy and the team's ability to unlock Petco's full potential, despite navigating a challenging trade environment [22][23] - The leadership team is aligned on the goal of returning Petco to an industry-leading position, emphasizing the importance of improving retail fundamentals and financial performance [22][23] Other Important Information - The company reiterated its full-year outlook for 2025, expecting net sales to decline in the low single digits and adjusted EBITDA to be between $375 million and $390 million [30] - The company is actively managing tariff exposure, with owned brand inventory purchases from impacted countries representing about 7% of total merchandise costs [29][30] Q&A Session Summary Question: What are you seeing in pet adoption trends and how do these trends impact your full year outlook? - Management noted stable pet adoption trends and emphasized that 2025 is a self-help story for Petco, not reliant on external factors for financial improvements [34][35] Question: How are you ensuring guardrails to take permanent costs out while keeping the customer experience intact? - Management highlighted a change in mindset towards cost management, focusing on leveraging SG&A rather than just cutting costs [36][39] Question: Can you provide insights on the top line journey and the repositioning efforts? - Management indicated that while external observers may see limited progress, internally, they are identifying growth levers and implementing strategies for improvement [42][44] Question: Can you discuss gross margin performance and expectations for the full year? - Management expressed satisfaction with the gross margin performance in Q1 and reiterated the goal of expanding gross margins for the year [51][52] Question: How is the mix of revenue indicating consumer behavior? - Management noted that services continue to lead the business, driven by needs-based categories, while consumables showed expected softness [60][67] Question: What is the outlook on inflation and pricing? - Management stated that while they are monitoring inflation, they have not seen significant spikes and are focused on balancing customer needs with business health [83][84] Question: Have you identified price gaps and how are you addressing them? - Management confirmed that they are analyzing pricing at the SKU level and have identified opportunities to adjust prices to improve competitiveness [86][87]