Petco Health and Wellness pany(WOOF) - 2026 Q2 - Earnings Call Transcript

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]