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.