Petco Health and Wellness Company, Inc.

Good morning and welcome to the Petco first quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. If you do not hear the tone after pressing star then 1, please hang up and dial back into the call. Please note this event is being recorded. I would now like to turn the conference over to Benjamin Thiel-Long, Chief ESG and Chief Communications Officer. Please go ahead.

Good morning, and thank you for joining Petco's first quarter 2024 earnings conference call. In addition to the earnings release, there is a presentation available to download on our website at ir.peco.com, summarizing our results. On the call with me today are Mike Mohan, PECO's Interim Chief Executive Officer, and Brian Burrows, PECO's Chief Financial Officer. Before they begin, I'd like to remind everyone that on this call, we will make certain forward-looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties include those set out in our earnings materials and SEC filings. In addition, on today's call, we will refer to certain non-GAAP financial measures. Reconciliations of these measures can be found in our earnings release, presentation, and SEC filings. And finally, during the Q&A portion of today's call, we ask that you please keep to one question and one follow-up. With that, let me turn it over to Mike.

Good morning, everyone, and thank you for joining us today. I'd also like to take this opportunity to welcome Glenn Murphy as our executive chairman. With over 30 years of retail experience, we're delighted to have him join our board. The entire leadership team will be working closely with him on the next stage of Petco's transformation. In Q1, we made meaningful progress against our strategy to reposition the business for sustainable and profitable growth. Although I've been a pet parent for many years and a member of Petco's board for over three years, The last 60 days have provided me with even greater insight into what makes Petco a special place to both work and shop. We operate in an attractive category with a track record for consistent growth, and Petco remains an iconic and trusted brand for millions of pet parents. Our store partners bring in a palpable energy for change, and I'm grateful for the incredible work they do. It's their enthusiasm that shapes how our leadership team focuses on both our mission and our potential as we look ahead. we need to address some big challenges by capitalizing on our strengths. Specifically, we must return to profitable growth and generate improved free cash flow, keeping an eye on the long-term opportunity to capture further market share and what remains a highly fragmented industry. In support of this, we have restructured Petco's executive leadership team. Consequently, we've simplified decision-making, aligned our focus on fewer and clearer priorities, and empowered the organization to move with greater speed and agility. The leadership team's priorities to improve profitability are clear. Return to retail fundamentals while executing on cost transformation and takeout. Retail fundamentals falls into the following distinct components. The first is store productivity. In our pet care centers, we've begun to roll out the new store operating model. This builds on the work started last year and it reinforces an owner's mindset. The model not only promotes prioritization and increases customer facing time, but also educates and empowers store partners to create a world-class customer experience and drive share of wallet. The second area is merchandising excellence. We are conducting an end-to-end review and rationalization of our pricing and assortment strategy across our merchandise mix. Designed to improve traffic, basket, and overall quality of sales, This review is focused on better aligning our in-store and online merchandising to meet the need of all pet parents while driving long-term profitable growth. This will be supported by the third component, which is increasing marketing effectiveness. As we plan now for the balance of the year, we are recalibrating our marketing efforts to deliver more effective lower funnel marketing and engaging actively with pet parents to drive traffic to our stores and online channels. We are partnering with vendors to increase top-of-funnel marketing reinforcing our unique ability to cater to every pet and pet parent's need. And finally, disciplined inventory management. We see ample opportunity to realign our omnichannel delivery model that balances both cost and capacity to better service our stores and direct-to-customer fulfillment centers, managing overall distribution costs. We see meaningful opportunities across the entire supply chain to deliver further efficiencies. While there is much more work ahead, I'm pleased with the actions we've taken in just 60 days, and we anticipate a fuller update on progress as plans finalize. Now, turning to cost transformation. We remain on track to unlock a target of $150 million in cost savings and productivity enhancements by the end of fiscal 2025, with $40 million to be achieved in year one. As we look more deeply into the business, we're working diligently to expedite and augment these savings including through the disposition or sunsetting of non-core assets. Specifically, we are being hypercritical on all areas of spend in reducing or pausing projects that are G&A intensive but have lower confidence in ROI, sequencing the highest priority drivers that have minimal or no impact on our relationship with customers. For example, in Q1, we completed the sale of our PupBox business, and we recently decided to pause non-critical updates to internal systems, thus allowing us to redirect investments in technology towards customer-focused enhancements. We also deferred this year's Store Leader Summit and are working with our vendors who support this event to focus instead on additional customer and revenue-generating activities. Deferring this event not only keeps our partners in stores to interact with customers, but also delivers tangible cost savings.