Petco Health and Wellness Company, Inc.

excellence remains at the forefront of our work. You've heard me talk about allocating more space to our higher productivity SKUs, adding capacity on shelf, and improving end cap displays, all of which just launched over the last few months and are contributing to improved store performance. We're also focused on bringing in product newness. For example, we launched our very first product category aimed at humans. Online and in stores selectively, in response to a customer survey where 90% of pet parents shared that they are interested in buying pet-themed products. Priced under $20, products are designed to be giftable, affordable, and impulse-worthy, celebrating the bond between pets and the people who love them. This is just one example of the merchandise overhaul we are making to reinvent Petco's overall product offering. Over time, you will begin to see newness throughout our entire assortment that will differentiate us from others and surprise our customers with unexpected ideas for their pets. Moving on to marketing, last quarter I spoke to you about the relaunch of our loyalty program, which is a great example of the work that is ongoing to implement a more sophisticated approach to customer segmentation. The new program will feature personalized rewards with a retention focus designed to strengthen long-term relationships throughout the pet life cycle. More to come in 2026, but I'm pleased with the strategic customer insights our teams are utilizing to guide the development of the program and the enhanced customer experience it will ultimately deliver. As we've talked, we do not expect progress to be linear. And it's also important to note that some of the early top-line progress is masked by areas where we still have opportunity for improvement or the need to further sunset prior behaviors and implement new PEPCO-defined go-forward operating principles. For example, in-store services growth is stronger than the total reported figure as we temporarily deprioritize our paid loyalty program ahead of the relaunch in 2026. Similarly, consumables performance in stores is stronger than the total reported figure as underlying improvements in stores is offset by the softness in e-comm as we retool that channel. And finally, as we look to Q3, it's important to remember we are lapping our toughest compare from a comparable sales perspective. Most importantly, we believe our stores, together with our comprehensive services offering, are Petco's differentiator in the market long-term, and this is where our initial transformation efforts have been concentrated and our success has been seen. That said, while we have intentionally concentrated our phase two efforts on improving our physical store fleet, Given they represent the vast majority of our sales, we have a tremendous opportunity to continue to enhance our omnichannel customer experience. We recently welcomed a new leader for our e-commerce channel, and he has already identified several opportunities. I look forward to spending more time personally with the digital team to eliminate barriers and drive improvements with the goal of delivering a seamless omni experience that our customers are excited about. And we can then increase our marketing efforts to invite new customers back to Petco.com. Before I wrap up my thoughts and turn to Sabrina to share our financial details, I want to specifically comment on phase three, growth. While our strategy thus far has been intentional to give up certain sales, these decisions are making us more profitable, which allows us to begin to invest back into the business. The speed at which everyone worked to get us to this point is gratifying. And the work I am seeing internally for the future is promising. Growing sustainable sales the right way takes time. And it also takes a company that has discipline, a positive attitude, a winning can-do mindset, and a commitment to merchandise differentiation. I've shared examples of each with you today. We have begun to order new merchandise and are working now to sell through our existing inventory. I'm confident you'll be excited about what is coming. And please know that while our merchandise overhaul is happening, all the wheels are in motion with our marketing, operations, services, and digital teams to move ahead with speed and rigor. While this is in motion, we expect the bottom line improvements to continue and further provide the necessary strengths to return Petco to growth. In closing, I'm incredibly proud of the work the teams have accomplished in my first year at Petco, while acknowledging at the same time more work is ahead. I'm looking forward to our national meeting next month and engaging directly with our store general managers, vet leadership teams, and leaders throughout our support centers. We are bringing everyone together to make sure the message is consistent, the focus is sharp, and the urgency is universal. We must be known as a company that celebrates amazing pet experiences, creates great strategies, and delivers on our promises both internally as well as externally. We'll accept nothing less. The initiatives planned for the back half will continue to move our transformation forward, and I look forward to sharing updates as we progress. With that, I'll hand the call over to Sabrina take you through the specifics of our strong second quarter results, and share the details of what we plan to accomplish over the balance of 2025. Sabrina?

Thank you, Joel. Good afternoon, everyone. I'm pleased to share our continued progress on strengthening our economic model. As we've discussed with you previously, and in line with our goals laid out at the start of the year, we are executing with intention to build a strong foundation from which to grow. This means expanding our gross margins and leveraging SG&A, resulting in improved profit, cash flow, and overall returns. Our teams are moving with urgency as we execute against this phase of our transformation, and our second quarter results reflect our continued progress. In line with our outlook, net sales were down 2.3%, with comparable sales down 1.4%. As a reminder, the difference between comp sales and net sales is driven by the 25 net store closures in 2024 and the additional 10 net closures year to date, bringing our U.S. store count at the end of the second quarter to 1,388. It's worth noting that On a two-year basis, comparable sales improved 130 basis points from Q1 to Q2, driven by improvement in our store performance. Our top-line results primarily reflect the decisions we are making to move away from unprofitable sales, shifting instead to disciplined promotional strategy, better retail execution, and enhanced customer experience. This work resulted in gross margin expansion of more than 120 basis points versus last year to 39.3%, with gross margin in both products and services expanding once again this quarter. Similar to Q1, gross margin expansion was driven by a more disciplined approach to both average unit cost and average unit retail, including stronger guardrails and the deployment more disciplined processes to effectively manage our pricing and promotional strategies. It's also worth noting that there was minimal tariff impact in the second quarter. Moving to SG&A. For the quarter, SG&A decreased $36 million below last year and leveraged more than 150 basis points. As we've discussed previously, our management of expenses is not simply a one-time cost-cutting exercise, but rather a fundamental shift in mindset around how we operate, and that new rigor is evident in our results. A little over a quarter of the $36 million improvement year over year came from employee benefits optimization work. Over the last several months, we conducted a comprehensive review that resulted in meaningfully improved actuarial results. We recognized the benefit of all this work as we trued up our reserves to the semi-annual actuarial report in the second quarter. More efficient store labor and operations expense, along with expense management across the board, drove the remainder of the improvement, though notably, marketing expenses were about flat on a year-over-year basis in the quarter. While there's more work ahead, we're pleased with the progress we've made to adopt a more disciplined mindset. Our expanded gross margin and expense leverage resulted in a $41 million increase year over year in operating profit to $43 million. Adjusted EBITDA increased $30 million to $114 million and expanded nearly 220 basis points to 7.6 as a percent of sales. Moving to the balance sheet and cash flow. Inventory continues to be well managed, with ending inventory 9.5% below last year, all while achieving higher in-stocks for our customers. Free cash flow for the quarter was over $50 million, and year-to-date was about $10 million. Both the quarter and year-to-date were well above the prior year. We ended the quarter with a cash balance of 190 million and total liquidity of 684 million, including the availability on our undrawn revolver. And now, turning to our outlook for the full year. We are raising our adjusted EBITDA outlook for 2025. We now expect adjusted EBITDA to be between 385 and 395 million. an increase of roughly 16% at the midpoint. For the full year, we continue to expect overall net sales to be down low single digits to last year, which includes the impacts of store closures in 2024 and 2025. It's important to note that the impacts of tariffs will become sequentially more meaningful as we move through the back half. Additionally, The significant progress we've made during the first half against strengthening our economic model and improving our earnings profile provides us the flexibility to selectively invest behind the business where it makes sense as part of our ongoing efforts to set the stage for phase three, a return to profitable sales growth. For the third quarter specifically, it's important to keep in mind that over the last five years, adjusted EBITDA in the third quarter has been sequentially lower than the second quarter. In line with that historical seasonality, we expect adjusted EBITDA to be between 92 and 94 million, up nearly 15% year over year at the midpoint. We expect net sales to be down low single digits versus the prior year. And as an important reminder, we are lapping the toughest sales compare of the year in the third quarter. With regards to other guidance items, for the full year, we expect depreciation to be about $200 million, net interest expense of approximately $130 million, about 25 net store closures, and approximately $125 to $130 million of capital expenditures with a greater focus on ROIC. In closing, Joel spoke about the energy inside the organization, and I wanted to also take a moment to thank all of our teams for the incredible work accomplished to date, the output of which is clearly evident in our strengthening bottom line results. With that, we welcome your questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster.

And the first question will come from Michael Lasser with UBS.

Please go ahead.

Good afternoon. Thank you so much for taking my question. So it sounds like you're moving closer to phase three. Joel, when is a reasonable expectation for us to hold the firm accountable for generating a positive comp? Is that by the fourth quarter of this year, or is that more likely a 2026 outcome?

Thanks, Michael. Um, You know, as I think both of us mentioned, you know, Tina went into detail... Sorry, Sabrina went into detail. You know, third quarter is our hardest compare of the year. And so, like I outlined earlier, we are smack in the middle of phase two, Michael. And while we are beginning to seed ideas and test and learn, as we like to call it, for phase three, the... Results will begin to show up in 2026 as it relates to a positive comp, but we will start to work on ideas right now, Michael.

Okay. My follow-up question is, it sounds like the gross margin gains came in part from eliminating some promotional and unproductive activities. Were those mostly online, and is that what drove the weakness in the online segment? And if you were to take away the online channel, would Petco have generated a positive comp in the stores business?

Yeah, Michael, I don't want to get into specific segments, but, you know, as you can tell from my remarks, we've really been focused on the stores. It is where the majority of our sales are. And so therefore it was intentional that that's where we start. We see it as the, biggest opportunity long-term for us, and we wanted to get that underway. So not only are we pleased in the results the stores are making, but the traction we're getting in e-com is working as well, but that's been more focused on the bottom line.

And just to add a little bit to that, Michael, I would say everything Joel said about the stores, ditto. Online last year did have much more promo and stacking that we needed to clean up. So we have, if you want to think about it between stores and e-comm, there was more cleanup to be done on the e-comm side to be helpful.

That's very helpful. Thank you very much and good luck. Thank you.

Thank you. The next question will come from Stephen Zicone with Citi. Please go ahead.

Good afternoon. Thanks very much for taking my question. I want to follow up on Michael's question on gross margin. So could you just take a little bit more detail there, how that performed relative to your own expectation, because it looks like a big beat. And then it sounds like there's some timing aspect with tariffs. So can you just elaborate on that a little bit more how we should think about gross margin rate in the back half of the year?

Yes, so we have been super focused. You know, from our first call together, we've talked about the economic model and how one of the most important tenets of that is expanding our growth margin on a year-over-year basis for the full year to get our business healthy so that when we do regrow sales, it has a nice flow-through on healthy margins. So we've been working every lever together AUR, AUC, within those, you know, every lever, promo, pricing, clearance, markdown, to deliver on that gross margin expansion. And we're really pleased how it came through on both merchandise and services in the second quarter. When you look forward those fees, for sure, tariffs start to impact. So we had almost no tariff impact. in Q2. There was some, but it's like, let's call it rounding. As we go to Q3, it becomes meaningful, and then it becomes even much more meaningful in the fourth quarter.

Okay, understood.

I guess the follow-up then on that is just how do we think about, you know, mitigation efforts, and maybe as it relates to the top line specifically, how did pricing perform in the second quarter, and what's your view on pricing as we get into the back half of the year?

Well, we've been doing pricing all year long, so maybe different than a lot of retailers who perhaps are reacting to the second half tariff. We have been using this vehicle as we came together as a new leadership team from the get-go. So really, there's less of a change in the second half, but will we be using that lever? Of course we will, but it'll be with a consumer-first lens. We are very focused on on delivering on a value proposition to our customer. So no change there, but yes, it will continue to be used.

Okay, understood. Thanks very much. Best of luck on the back half.

Thanks. The next question will come from Steve Forbes with Guggenheim. Please go ahead.

Hey, guys, this is Jake Neva, Sean for Steve. Thanks for the time. So two questions for me here. One, you know, I think you guys mentioned last time that you were working on some planogram resets and, you know, wanted to circle back to see if you could provide some updates on the work there and then have a follow-up.

Yeah, I think we were specifically talking about our dog and cat reset back then. And so think about my prepared remarks where I talked about on-shelf availability, better in stocks, making it easier for our store associates to fill the shelves, which therefore makes them more productive, which makes our stores more profitable. So it was very successful. We've completed those resets. You'll continue to see more of those as we move through this year and into next year in other categories. But it's just a great example of the diligence the teams are making to improve the profitability in the stores. improve on-shelf in-stock for our customers, and, you know, make our stores more customer-friendly.

Yeah, just to tag on to that, as you heard me say, part of our SG&A savings was store labor and operations, and that is exactly what Joel's talking about, that we got a lot of operational benefits that are flowing through in our expense savings.

You had a follow-up, Steve? Yes, perfect. Yeah, just a follow-up here, and I know... Yeah, Ben, you touched on this a little bit, but I'm curious if you guys can share some more detail around the North Star initiative that you guys have been working on. And maybe it's too early, but I'm curious if you have any updates there.

Yeah, I think we'll certainly give you a more detailed outlook on that as we get into the specifics of Phase 3 and growth. But I can tell you, as we think about Phase 3, there are really four main pillars to it. It's all about delivering amazing store experience. You know, our partners are pet first, and that's what sets us apart. It's delivering services at scale. You know, services aren't easy. And, you know, in many ways, I think of that as our moat, and that clearly showed up in our North Star work of how important our services were. You know, the ecosystem interacting between grooming, hospital, and center of store is is something Petco only can do. Third pillar, merchandising differentiation. I've alluded to that, gave you several examples in my prepared remarks, but you're going to see more newness out of us, more surprise and delight. We have to be relevant. No more of set it and forget it. Seasonal categories, pricing, that all comes into the merchandise differentiation. And then finally, number four is over time winning with Omnichannel. So those are kind of some of the pillars that are coming out of our North Star work that's going to drive our growth down the road. Thanks, Jake.

Perfect. Thank you very much, guys.

The next question will come from Kamal Garjawalo with Jefferies. Please go ahead.

Hi, everybody. I guess a couple of things. The first is just... you know, where we sort of are in the process of, you know, the e-commerce sort of pullback and eventual retool. Is that sort of complete? And exactly the same question, I guess, on the inventory side. Inventories came down nicely. And so are inventories where you sort of intend them to be now or is there still more work to do? But really, like, are those two projects kind of, you know, mission complete and time to move on or still more to get done?

Yeah, Kamal, let me take e-comm and then Sabrina, if you want to chime in on inventories. You know, look, as I said earlier, it was our intentional focus to start on the stores first. You know, in a unique way by us reducing sales and e-comm, our e-comm channel is actually more profitable today. But the work we've been doing is just getting started and is ongoing. We hired a new leader. He's already making a big impact. reducing friction. And quite honestly, we're just improving basic retail one-on-one operating principles like speed, page load time, appointment scheduling enhancements, improving repeat delivery. Our loyalty program will come in 26. We think we've got plenty of media buying optimization to do and really improve our targeting and personalization. So those are just several examples, but I would say we're in the phase on e-com of identifying, and now we'll focus on implementing. Sabrina, on inventory?

With regard to inventory, I mean, yes, we're so proud of the work the teams have done, even in the face of tariffs, to get the inventory dollars down so far. So we're big on continuous improvement. I believe there's always opportunity, but we don't want to push it too far. We pulled off as I said, a down nine and a half with improving in stocks at the same time. So our goal is to always have a tight relationship between sales and inventory. And inventory below sales, to me, is always a great thing as long as it's not hurting the customers. And that's what we'll be focused on continuing to deliver.

If I could ask about your commentary on the increasing NPS scores, post-mortem, what's behind that? Is it just the marketing? Is it what's happening in-store? It just feels, given the way you've laid out the phases, that it's something that you'd expect when you're much further along phase three than at this stage. So I'm just curious if there's anything behind that.

Well, nothing specific. It's a whole host of a lot of improvements. Joe Venezia, who leads our stores organizations, you know, the new leadership team has probably been here the longest. And, you know, he's made traction in many different areas. We've already had one leadership meeting with the leaders of the stores organization. We've got another one I talked about coming up next month with all our store general managers and above. And those are just examples of us reinvesting back in our people and and really putting effort into the store experience. And it's clearly beginning to resonate with our customers. It's showing up in the metrics I shared with you. And I really believe it's really important for Petco to have a great store experience. And so that's why we've really leaned in initially with our store partners.

Thank you. You bet.

The next question will come from Kendall Toscano with Bank of America. Please go ahead.

Hi, thanks for taking my question. First thing I wanted to ask was just on the comp, if you could comment on any of the transactions versus AUR trends that you saw during the quarter. Thanks.

Sure. Overall, we're pleased with UPT and Basket. Transactions is a place we are very focused on improving. So that's really the biggest opportunity for us. And you heard Joel talk about how we're starting these great efforts on events and making the store fun and doing much more marketing. So we're looking forward to improvement there, but that was the one that held us back in the quarter. Joel, do you want to?

No, I think, I think that really covers it nicely. And, and, you know, as, as we get towards growth, the real focus will be on starting to invite customers back into Petco and, and, We shared with you some examples of that with the store experiences.

Okay, that's helpful. And then the other question was just, it sounds like there's been a lot of progress in key areas like inventory and in-stocks. And curious just where the biggest remaining execution gaps are that you're working to address before you'd be more confident to shift fully into phase three?

Well, I think as I alluded to in my prepared remarks that our back half begins to contemplate reinvesting back in the business. So I think it's less about the gaps and it's more about how pleased we are with the progress we've made to date. And that progress gives us the confidence that we will continue to make progress. Sabrina talked about inventory. There's always opportunities there, but the, the, you know, the team's made such progress that we're beginning to invest. So it's now the shift starts to be, you know, talking about those four pillars of growth that I alluded to on a couple questions ago. That's where our focus is.

And just to elaborate on what Joel said, we just think there's such a nice runway here, even if you just think about margins alone. So We've been really focused, like we said, on AUC and AUR levers, including inventory management and pricing and promo and markdown and clearance. But what's kind of yet to come that we're in the early stages of is we think there's a lot of opportunity in sourcing. We think there's a lot of opportunity in expanding categories like pharmacy, in regrowing over time our supplies business. So we still have a lot of levers left in front of us, which, you know, makes us very excited.

Got it. That's really helpful. Thanks again. Thank you.

The next question will come from Simeon Gutman with Morgan Stanley. Please go ahead.

Hey, Joel. Hey, everyone. Can you talk about number of pet families? Can you talk about growing, declining? And then, Joel, what are you learning about the families as far as the departments they're shopping, the services they're using you for, anything that's surprising you from when you started?

Yeah, Simeon, good question. I would say our industry data is showing that the pet space is relatively flat right now. And, in fact, for us, as we've intentionally – focused on the bottom line rather than the top line, we're really pleased with our performance as we're not giving up that much market share and at the same time making significant improvement on the bottom line. As far as the observations we've made that I've seen, I've been surprised at how many one-time customers we have. And I think that's probably some areas where we were too bottom of the funnel focused on our e-commerce channel, as opposed to being more focused on omni customers, lifetime value of customers. So those are some of the changes we'll make. And we also have a significant amount of customers that shop us for our services only. And we've got an opportunity really there to grow that share wallet with our customer into some of our other categories. merchandise, improve our repeat delivery capabilities so they use us. So those are just a couple examples, Simeon, of things we've observed through all our North Star work.

Okay, and then you mentioned just toggling some inventory, bringing some new stuff in. Is there any, and I'm sorry if this was asked, is there any inventory movement, markdown risk associated with changing merchandise mix going forward?

Nothing significant, Simeon. I mean, obviously... when you change inventories, optimize inventory, you can tell, as Sabrina said, our inventory was nearly down double digits, and that didn't come with a huge inventory risk at all. So, look, we've got to be disciplined about it, Simeon, and go at it methodically, but I don't see any big inventory risk on the horizon.

And just to underscore that, the teams are really focused on improving inventory the governance and processes around inventory and buys. And we absolutely need more newness for our customers, and we're excited to bring it in. But those buys will be tight and well-controlled and seasonal and fast-turning. So we intend to manage it with, you know, a lot of good process and governance.

Thank you. Thanks, Simeon.

And the last question for today will come from Justin Kleber with Baird. Please go ahead.

Hey, everyone. Thanks for taking the questions. So first off, Joel, you've been talking about cleaning up these empty calorie promos for a handful of quarters. I'm curious if you could help us size the drag to the comp from this activity. You know, if we normalize for what you're doing, I mean, is the business comping up, kind of excluding the cleanup of these promotions?

Well, I don't know. That's a little probably too specific to get into. I think it's more important to look at it of where we're at with the progress. And, you know, both Sabrina and I commented that Q3 is the toughest compare. So, you know, what you can glean from that is we started in on this progress in Q4 of last year. We identified more in Q1 and so on. So, You know, as we continue to find opportunities where there were empty calorie sales, we are offsetting those with some of the growth initiatives that are starting to take place, but we still need to get through, especially this Q3 and in the beginning of the holiday season.

The only thing I'd add to that is what... Oh, I was just going to add, Justin, what Joel already said in his remarks, which is What we see under the covers is improvement in our store performance, and that's really important to us because that's the vast majority of our sales. So, just to reiterate, that was our first area of focus, and it's just great to see the improvement there. And e-comm is probably six months behind because new leader just started, and as Joel said, identification phase. We will get there because we know all the levers we need to work, but we're very pleased with what's happened in our stores.

Thank you for that helpful caller. And then just a follow-up on the implied fourth quarter adjusted EBITDA guide. It looks like at the midpoint, if you do the midpoint of your third quarter guidance, you'd be down 2% year over year. So just trying to understand what is driving the decline. Is it more about the tariff headwinds building or... more about your intentional investments back into the business as you set the stage for a return to growth?

Yeah, I mean, we gave ranges. So it kind of depends where you model it and end up. But what I will reiterate about the fourth quarter is definitely tariffs have the most meaningful negative impact in Q4. Secondly, we're excited because of our strong performance in the first half. We're excited that we get to keep some powder dry in the second half for areas of investment should we deem them, you know, worthy of investing. The only thing we have committed to, by the way, is the leadership summit that Joel talked about. But we want to keep that dry powder. And then, you know, finally, I think it's good to just protect against volatility because I don't think the macro is completely out of the woods. We live in a, you know... We live in times where there's big news cycles nearly every day. So we feel like we've taken a prudent approach to the back half.

Makes perfect sense. Thank you both for your perspective and just a lot.

Thank you, Justin.

Thank you. This will conclude our question and answer session. I would like to turn the conference back over to Ms. Tina Romani for any closing remarks. Please go ahead.

Perfect. Thank you so much, Joel and Sabrina, and thank you, everyone, for your time and your questions. We're looking forward to seeing many of you next week. And with that, that concludes our call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.