Petco Health and Wellness pany(WOOF) - 2026 Q3 - Earnings Call Transcript

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 [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] - 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 Q3 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 a focus on improving utilization and engagement through enhanced digital capabilities [10][11] - The company is shifting resources towards a return to growth, emphasizing product differentiation and a trusted store experience [7][8] Market Data and Key Metrics Changes - The overall pet industry has been stable with flattish growth, while Petco's services business is already growing [71] - Consumer behavior has shown caution due to tariffs and economic conditions, impacting overall market sentiment [71] Company Strategy and Development Direction - Petco is in phase two of its transformation, focusing on improving profitability and preparing for a return to growth [7][16] - The company outlined four pillars for growth: compelling product differentiation, trusted store experience, integrated services at scale, and seamless omni-channel integration [8][15] - The membership program is being piloted in Q4, with a full rollout planned for 2026, which is expected to drive growth [64][66] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the progress made towards strengthening the economic model and improving earnings profile, with plans to selectively invest in growth areas [22][49] - The impact of tariffs is expected to be more significant in Q4, but manageable within the overall strategy [58] Other Important Information - The company ended Q3 with a cash balance of $237 million and total liquidity of $733 million [21] - Petco is committed to its Petco Love Foundation, which has helped find homes for over 7 million pets [16] Q&A Session Summary Question: Can you frame the mix of the business between wants and needs? - Management indicated that consumables are primarily a needs business, but there are opportunities to create a wants-based perception through product innovation and merchandising [25][26] Question: What is the realistic timeline for comp stabilization? - Management refrained from providing specific timelines but indicated that all four growth pillars are expected to contribute to comp stabilization 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 [38][40] Question: Can Petco experience profitability improvement while reversing market share losses? - Management believes that focusing on profitable sales and lifetime customer value will lead to improved EBITDA market share despite declining sales [97][98] Question: What is the impact of tariffs during the quarter? - Management noted that Q3 was the first quarter where tariff impacts were significant, primarily affecting private label supplies [56][58] Question: What is the view on industry growth in 2026? - Management stated that the pet industry is stable, with expectations for growth in services and improvements in digital capabilities contributing to Petco's growth strategy [70][71]