Petco Health and Wellness Company, Inc.

Good day and welcome to Petco's first quarter 2026 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Today's earnings call will last 45 minutes, including remarks from management, followed by a Q&A session. We ask that you please limit yourself to one question and one follow-up. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star and then two. Please note this event is being recorded. I would now like to turn the conference over to Roxanne Meyer, Vice President, Investor Relations and Treasury. Please go ahead.

Good afternoon and welcome to PECO's first quarter fiscal 2026 earnings conference call. Joining me on the call today are Joel Anderson, PECO's Chief Executive Officer, and Sabrina Simmons, PECO's Chief Financial Officer. In addition to the earnings release, we've posted a slide presentation on our website at ir.peco.com. 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 filing. 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. With that, I'll turn the call over to Joel.

Thanks, Roxanne, and good afternoon, everyone. Thank you for joining us to discuss our first quarter results. Our strong Q1 results provide an encouraging early validation of our phase three Reach for the Sky strategy. We returned the business to a positive count for the quarter while expanding our profitability, performing better than our quarterly outlook for both top line and adjusted EBITDA. We were particularly pleased to see the improvement in our consumables business, while our differentiated services business once again delivered strong results and continues to be a growth engine for us. This solid start to the year gives us deep confidence that our growth initiatives are taking hold. It speaks directly to our innovation pipeline, rigorous execution, smarter marketing, and most importantly, the advantages of our wholly owned omnichannel ecosystem. In light of our solid first quarter, we are pleased to reaffirm our full year outlook and remain confident in our ability to drive consistent top line results. Sabrina will take you through our financial details shortly, but first, I want to spend some time updating you on the progress we've made across our strategic four pillars, which are positioning Petco for long-term profitable growth. Let's begin with our first pillar, compelling product. While we are still in the early innings of evolving our product mix and the flow of our merchandise, we've begun to introduce real newness to our aisles, and we are seeing evidence that it is resonating with pet parents. Specifically, you should now see several of our main dry vial end caps converted to new product and identified with a yellow new logo. From a top-line perspective, we saw outperformance in the cat category this quarter. We anticipated the recent spike in demand for cat products, and as a result, we invested to make Petco the destination for cat parents. It was a key contributor to the improved sequential trends we saw in consumables overall. You will see cat newness ramping up even further in Q2 with exciting additions in areas such as furniture, beds, and bowls, but also in novelty items such as cat trees. We also continue to lead in the fresh frozen space. During the quarter, We added significant incremental freezer capacity to support the momentum in this category. We hold a distinct advantage in this category, driven by the breadth of our offerings, our key brand partnerships, and a wide range of price points. We have positioned Petco as a premier destination for pet nutrition, which we believe will serve us well as the pet humanization trend continues to pick up speed. Our expertise and dedicated in-store teams offer a level and type of service that you simply cannot find at grocery stores, big box competitors, or online. As a reminder, those that buy fresh food from us make over four more trips per year and spend over 50% more annually than dry food only customers. Further, we experience strength in seasonal categories, specifically in flea and tick We saw our strongest start of the season in five years. While this was partially aided by weather patterns, for Petco, it's an ecosystem story. We capture over-the-counter sales, vet sales, and grooming through our flea and tick packages, all supported by a cohesive marketing push. In addition, as we previously announced, we launched our new Gardening with Your Pet earlier this quarter. This performed above expectations with live houseplants performing well. Looking ahead, we have an exciting pipeline for both Q2 and the back half of the year. In consumables, we are leaning into emerging customer trends like high-protein diets as well as new treats for dogs and cats. We've also recently launched several new supplements categories, such as for hip and joint care, liver health, and a holistic care line based on the growing trend of health and longevity in the pet space, which we see as an important extension of the humanization trend. In supplies, we are introducing newness across categories, including grooming, toys, and collars and leads. Within the grooming category, we relaunched our own brand, Well and Good, which was completed last week. This represents the beginnings of our investment in private label starting to show up in our stores. It includes new formulas without harsh chemicals, as well as fresh packaging for our shampoos, conditioners, and balms, all supported by marketing. And finally, in June, we'll be rolling out sports-inspired collections celebrating the World Cup and USA Soccer. Moving on to our second pillar, services at scale, simply put, services are an important growth engine of ours. They are a massive point of differentiation and a competitive advantage. Through our wholly owned services model, we own the entire pet journey. And it isn't just about our vet hospitals, which continue to see solid gains in sales productivity. It's also about our clinics, grooming, and training. Grooming is a strong annuity business for us, and continues to perform well. To build on that momentum, we expanded our care reminders directly into our app late in the first quarter. A highly effective and frankly obvious way to drive what is already a sticky repeat business even more frequently and consistently. Another call out was the puppy dog package. We began to offer in the first quarter. in which a significant number of the customers that came in were new. We'll continue to offer this throughout the year. In the second quarter, we are driving excitement with the rollout of our well and good grooming products I just referenced, as well as a new Disney Stitch grooming package, which includes scented shampoo and spritz, conditioner, teeth brushing, nail buffing, and a seasonal bandana. Together, these initiatives are intended to ensure that our salons, remain a premier destination for pet parents and a highly dependable driver of reoccurring foot traffic. On the vet hospital side, the strong performance we are driving today helps fuel our future expansion plans, which are on track to resume in 2027. We continue to see improving productivity across our footprint, and we are on track to optimize about 25 significantly underutilized hospitals this year. Crucial to this effort is our veterinary team, and we are pleased to share that doctor days, which is a combination of hiring additional doctors and adding hours per doctor, continues to improve. Because of our scale, depth of expertise, unique ecosystem, and the flexibility we offer, we believe Petco is an employer of choice for veterinarians and vet techs looking to build long-term careers. As we discussed last quarter, cross-selling continues to be a major and largely untapped opportunity between our clinics and the rest of the store. A great example of this clinical presence driving our broader business is our vet diet category, which performed extremely well this quarter. tying beautifully back into our veterinary ecosystem. Looking ahead, we believe we have several strong catalysts and opportunities in Q2 designed to drive ongoing traffic to our clinics. In mid-April, we launched the new Vetco Clinic packages, which offers bundles of services such as routine shots, which we're excited to see gaining early traction. Additionally, to drive traffic, and care during National Pet Month in May, we offered free microchips, with the number of pets getting microchips up 71% versus last year. Looking beyond these near-term drivers, we are incredibly optimistic about the long-term growth opportunity within our wholly-owned vet business and the immense value it brings to the Petco ecosystem. Our third pillar is our trusted store experience. The work is underway to build our basket size through better cross-selling and customer engagement. For example, we are now empowering our groomers with customer data to facilitate sales across the entire store. They can see a customer's last food purchase history. This allows our partners to have informed, personalized conversations that drive cross-category sales and, importantly, can help enhance customer satisfaction and loyalty over time. In terms of customer engagement, we feel in-store experiences are how we best appeal to our core customer, the passionate explorer. This quarter, we hosted popular events such as Pictures with the Easter Bunny. We continued that effort with weekly store events throughout May to celebrate National Pet Month, including Mother's Day photos and weekly brand tasting events. Finally, our fourth pillar, an integrated omni-channel model. We are pleased with the headway we've made in our ongoing work to improve retail fundamentals in our omni-channel model compared to last year. By removing friction from the online checkout process, we have been seeing improved digital traffic. We achieved sales growth in omni-channel even while lapping the non-productive, unprofitable sales We were still generating through 1Q last year. Looking ahead, we see ongoing opportunities to increase site speed and optimize shipping windows for our customers. The key call-out is BOPUS, which was up strongly year over year. This is our differentiation in action, building loyalty through e-commerce, but physically bringing the customer into our stores to experience our services, community, and the cross-selling opportunities our partners provide. Speaking of loyalty, I'm thrilled to share that we are relaunching our loyalty programs later this quarter, officially branded as Petco Perks. During our pilot phase, our biggest learnings was that simplifying, removing friction, and making the program distinctly customer-friendly had a massive impact. Petco Perks uniquely leverages our entire ecosystem, spanning both merchandise and services. The program will be heavily focused on personalized offers based on factors like shopping frequency and customer lifetime value, a strategy that successfully drove higher sales and stickiness during our pilot. In conclusion, the first quarter served as an initial proof point of our inflection to growth. While the broader macro environment remains dynamic we remain hyper-focused on controlling what we can control. And our results prove that our self-help strategy is successfully navigating this environment. We are executing on our phase three reach for the sky strategy. While we are pleased with these initial results, we are still in the early innings of what is a long, exciting journey. We have immense opportunity to deliver product newness, capitalize on cross-channel shopping, grow our differentiated services business, and provide the most personalized experience possible to the Passion Explorer and their pets. I want to take a moment to deeply thank our teams across the organization. Your hard work, adaptability, and passion for pets are what make these results possible. Our focus remains firmly on driving sustainable, longer-term top-line growth and on delivering shareholder value. As we look ahead, we are pleased with the momentum our initiatives are generating, positioning us to continue to deliver positive comps. I look forward to our second quarter call and sharing with you the continued progress we are making with our Reach for the Sky strategy. With that, I'll turn the call over to Sabrina to take you through the details.

Thank you, Joel. Good afternoon, everyone. As we've discussed, our primary goal is to build a stronger retail and financial foundation, which supports our focus on regrowing our top line in phase three and driving sustainable, profitable growth. As such, we're committed to delivering upon our economic model for the full year in 2026 and are pleased to report that we're off to a solid start. Turning to first quarter results. Net sales were up 0.2% to 1.5 billion. Importantly, the first quarter marked our return to positive comp sales, with a 0.7% comp, providing evidence that our initiatives across our four growth pillars are beginning to take hold. The spread between comp and net sales reflected the 16 next-door closures in 2025, and four net closures in Q1. We ended the quarter with 1,378 stores in the U.S. Moving on to margin results. First quarter gross profit dollars were 574.4 million, while our gross margin rate expanded 21 basis points to 38.4% as we executed with discipline. Moving on to expenses, for the quarter, SG&A was $549.8 million, or 36.7% of net sales, leveraging 34 basis points. The $3.8 million improvement in expenses year over year was driven by declines in G&A, despite investments in marketing to support our Omni-related initiatives. For Q1, our expanded gross margin and expense leverage resulted in operating profit of 24.6 million or a 50.5% improvement versus prior year. Operating margin rate improved 55 basis points year-over-year. Adjusted EBITDA increased 7.9 million or 8.8% year-over-year to $97.3 million and our adjusted EBIT balance sheet and cash flow. First quarter ending inventory was down 1.9% year-over-year on top of a 5.2% decline last year. It's worth noting that inventory dollars were down year over year, even with sales growth of 0.2%, reflecting our ongoing discipline and execution. Our first quarter ending cash balance was $167 million, an increase of approximately $33 million versus the first quarter last year. For the quarter, free cash flow was an outflow of $69 million. While our first quarter cash flow is historically our lowest, we wanted to call out two contributing factors. First, capital expenditures increased 10 million versus last year, but are in line with the full year guidance we've provided. Second, as planned, inventory investments increased to support our growth, but we are pleased overall that inventory levels remain well controlled. Moving on, total liquidity for the first quarter was $654.4 million, up versus the prior year. For the quarter, total debt was $1.48 billion, down over $100 million compared to Q1 last year. As many of you have heard me state, after completing our opportunistic debt refinancing, we have extended our maturities out to 2031 and achieved a more optimal mix of fixed to floating rate debt, which provides us with ample flexibility. Importantly, we remain laser focused on our goal of reducing our leverage ratio to two times. And now turning to our outlook. While the external environment continues to evolve, our solid foundation enables us to remain agile. and we are well positioned to deliver on our financial commitments this year. Therefore, we are reaffirming our full-year sales and adjusted EBITDA outlook. Specifically, we continue to expect net sales of FLAP to up 1.5% compared to last year as our growth initiatives take hold and build over the course of the year. We continue to expect adjusted EBITDA to be between 415 and 430 million. Looking out, we wanted to outline some updates to our underlying full-year assumptions. First, we now expect fuel prices to remain at approximately current levels for the remainder of the year. Recall that our prior full-year outlook assumed higher fuel prices through the first quarter only. Next, our outlook includes the benefit of a tariff refund received in May. The refund represents only a portion of the IEPA tariffs we paid through February 2026. Our full year guidance assumes no additional tariff refunds beyond what we've received to date. Further, our outlook also assumes that the current tariff policies remain for the balance of the year. With regard to other line items, the following assumptions remain unchanged for the full year. Net interest expense, about 125 million. Depreciation and amortization, about 200 million. Capital expenditures, about 140 million, with an ongoing focus on ROIC. Net store closures, between 15 and 20, weighted toward the back half of the year. And finally, we still expect the full year spread between total sales and comp sales to be about 50 basis points, though it will vary by quarter. Moving on to the second quarter, we are comfortable with current consensus estimates for net sales, implying growth of about 0.3% versus the prior year. We expect adjusted EBITDA to be between 110 and 112 million. As you think about your models, we wanted to flag some considerations to be helpful. First, recall last year's Q2 reflected peak adjusted EBITDA growth, including peak gross margin expansion. In last year's second quarter commentary, I flagged an approximate $9 million benefit in SG&A from a semiannual actuarial true-up. This was related to employee optimization work. This year, we do not expect to anniversary this benefit. Finally, on tariffs and higher fuel costs. A simple way to think about these factors is that the tariff refund roughly offsets incremental tariffs and higher fuel costs expected in the second quarter, thereby neutralizing one another in the quarter. In closing, I want to thank our teams for their dedication and discipline in executing on our transformation this quarter, including our return to positive comparable sales growth. We will now open up the call for your questions.

Thank you. We will now begin the question and answer session. We ask that you please limit yourself to one question and one follow-up. To ask a question, you may press star, then one 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 and then two. At this time, we'll pause momentarily to assemble the roster.

The first question will come from Michael Lasser with UBS.

Please go ahead.

Good evening. Thank you so much for taking my question. When you look across the different categories between consumables, hard goods, services, as well as the different species of animals that you serve, Where was there a change or an inflection in your market share versus what Petco had been experiencing last year? And how do you see those market share trends continuing to unfold? Thank you.

Thanks, Michael. I think as I reflect back on the quarter, I think less about market share a little bit, and I think more about the sequential improvements. And We saw improvements in all three of those categories, both consumables, you know, supplies and companion animals, and services. So, you know, I think those are all really good early indicators that the new strategy is taking hold and the customer is reacting positively to it. While we haven't yet started to gain on market share, which is part of, you know, lapping the last year, we are really seeing that the market share decline moderates significantly, and that's showing up in the sequential improvements in all three areas.

Understood. Thank you for that, Joel. My follow-up question is on the outlook. You exceeded at least the consensus forecast for the first quarter. You caught positive like you had anticipated. You are simply reiterating the full-year outlook. So is there something – that you're seeing currently in the business or have seen as of late that is influencing your conservatism or your decision not to flow through the upside from the first quarter to the full year?

Hey, Michael, it's Sabrina. And that's a great question. You know, to our own range, we are really pleased that in the first quarter, we beat a couple of million, 3 million at the high end. The environment has continued to evolve and there's a lot of different new cycles going on. We're super pleased that in the face of that, we are reaffirming our full year guidance. And in particular, one of the big changes from when we initially laid out that guidance is fuel, right? So we are actually absorbing that second half fuel within our reaffirmation of the full year. So, again, we're very pleased that we're able to do that through our discipline.

Understood. Thank you so much, and good luck. Thank you, Michael.

The next question will come from Kate McShane with Goldman Sachs. Please go ahead.

Hi. Good afternoon. Thanks for taking our questions. We wanted to ask just with regards any kind of behavior changes within the quarter, by the consumer, what you saw across income cohorts and any kind of consumer behavior with trading down?

Yeah, Kate, great question. And, you know, I think like every retailer, we're watching the consumer trends closely. You know, I would remind you and everyone on the call for that matter that, you know, Petco serves customer across all income demographics. We have a really nice offering from both value all the way to premium brands. And as we look back on the quarter, I would say there was nothing material amongst income demographics that performed differently. It was pretty consistent across all. So in total, we didn't see really any different change in behavior.

Thank you.

And then our follow-up question is just with regard to the pricing environment. I think you have a retailer out there that's talking about getting a little bit more aggressive on pricing. Just how does that influence anything in terms of your strategy or what you're thinking? And just kind of in conjunction with that, it sounds like you're going to get a fair amount of tariff refunds here. It'll be neutralizing in Q2 as you laid out, but could we see maybe tariff refunds be used for any kind of pricing investment as we get into the back half of the year?

Yeah, I'll start on the pricing piece, Kate, and just say similar to when we were faced with tariffs last year, we told you all we don't really react on our pricing to any one event. So we are always reviewing our pricing architecture. Our lens is always customer first. We're always, of course, reviewing the competition. We make adjustments as necessary, but we're not having plans to do anything in reaction to any event. And then with regard to the tariffs, we are not counting on any further refunds. I think you all know there's a date coming up here in a few days. where there can be some appealing of the whole refund process. So we thought it prudent not to count on any of that. So none of that is in our assumptions. Should it come, fantastic. We can update you on our next quarter call.

Thank you.

The next question will come from Kamil Gajrawala with Jefferies.

Please go ahead.

Hey, guys. Thank you for taking the question. I guess the first thing is, you know, your positive comps, your cost structure has changed quite a bit over the sort of recent years. What is the comp level that we should be looking for to allow it to sort of really lever itself down the P&L?

Yeah, great question, Camille. The beauty of our model is we don't really need super high comps. to make the economic model work. We're talking low single-digit comps to be able to nicely leverage our SG&A, maintain our healthy margins, and drive that operating profit growth. So we're really pleased that we've managed the expense structure such that we can deliver with that low single-digit profile.

Okay, got it. And then on these oil prices, and I guess not moving guidance because of the price of oil. By the way, not moving guidance is the right idea. Obviously, it's just been one quarter. But the idea of absorbing the cost of oil, is that because of increases from prices from your suppliers, or is it just a concern about things that are going to come your way over the course of the rest of the quarters?

Mostly, I'm addressing the direct cost to our transportation, to our supply chain. It'll impact us most directly from our inbound, which lags, by the way, through our P&L a bit because it first goes into inventory and shows up on the P&L as cost of goods sold when we sell it. The immediate impact of fuel to our transportation is to our outbound, So our DC to our stores and also our parcel business. So that's the piece that is most direct that we're looking at.

I got it. Thank you. Thank you.

The next question will come from Oliver Wintermantle with Evercore ISI. Please go ahead.

Yeah, thanks very much. Joel, what was the biggest contributor to pushing comps from negative to positive this quarter? Is it improved transactions? Is it mix? Or is it price AUR? If you could give us a little bit more detail on what actually drove the comps positive this quarter.

Yeah. I'd rather talk about it first from the strategy side, and then, you know, Sabrina, you can go into the specifics on the mix side of it. Because what's really important to remind everybody is, and I called this out in last quarter, this is largely a self-help year for PEDCO. And, you know, what really, let's just call Q1 a trifecta, right? We deliver positive comps. We improve profitability. while um outperforming on the outlook and so what really drove that is the execution against all four of the pillars and so we saw strengths in all of those and and it's resonating with the customer and and given we're in the early eight uh innings of that you know i kind of line of sight to the future and i'm pretty excited about what's still to come with the rest of our strategy yeah and from a comp lever perspective i just point out that upt was

quite strong. Basket actually improved. And the trend in transactions improved. But I would call out that that remains a really good opportunity for us.

Got it. And on the gross margin side, A similar question there. Could you maybe give us a little bit more details what drove the gross margins? Was it mixed? Was it merged margin? Something like that. And then, as you mentioned, the second quarter is a little bit tougher compares, but I think the third quarter as well. So maybe a gross margin outlook for the year, how you see it. Thank you very much.

Of course, we don't guide forward to gross margin in particular. I did try to be helpful on the second quarter outlook just to remind that the entire second quarter last year was a bit unusual for the reasons I outlined. With regard to the first quarter, I would say, you know, we continue to use every lever at our disposal. So it's back to phase two never ends, retail fundamentals. So negotiating with our vendors, making sure we're getting good costing, watching our promotions, our clearance, our markdowns, All of those levels sort of across the board culminate in delivering on our margin.

Got it. Thanks very much, and good luck.

Thank you.

The next question will come from Steven Zaccone with Citi. Please go ahead. Great.

Good afternoon. Thanks very much for taking my question. Joel, you talked about efforts underway to build the basket size with cross-selling and customer engagement. Curious if you could talk a bit about timing there. Is this something that can build over the next couple of quarters? Is this a multi-year initiative just to get better cross-selling within the store?

Yeah. I mean, we are just getting started on that, Stephen. So it clearly has got, you know, tailwinds in front of us. And the biggest reason I called it out, and I think I talked about it, you know, a couple calls before, you know, we used to run services in center of the store as, separate organizations. And really, as we've dissected the business and looked for areas of opportunity, the integration between our services and our center of store teams is a real opportunity for us. And cross-selling is one example. And prior in the example I used is our grooming associates didn't have access or couldn't see a customers consumables purchases as an example. Why is that important? Well, a groomer would notice their hair and, you know, skin and might see that, you know, they should be recommending sensitive skin consumables if that's not what they're using today. And the fact that they couldn't see it, our groomers couldn't be helpful to the customer. So giving them access to that is just one great example of certainly a cross-selling opportunity for us. but a way to be really helpful for our customer and the health of their pet. So real opportunity going forward for us. Okay, great.

The fault I had is just on the industry overall. I mean, we're only one quarter into the year, but there has been, you know, mixed commentary across the pet landscape. As you think about industry growth forecasts for 26, you know, how do you think things are playing out versus expectation? You talked about cat outperforming and fresh and frozen doing well, but How do you think the year is kind of shaping out relative to expectations from an industry perspective?

Yeah, look, you know, clearly, you know, we're not seeing adoption trends growing at this point, with the exception of CAT. But I think it's, you know, I reminded earlier on this call, this is a self-help year for Petco. So we aren't beholden to the the industry growing to achieve our objectives for this year. We'll take the tailwinds if they come, but right now we're really driving, you know, our pillars, our reach for the sky strategy to make a difference on that.

Okay. Thanks for the detail. Best of luck. Thank you.

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

Good afternoon. Joel Sabrina. Joel, I appreciate the comments around optimizing the services business, but curious if we can maybe just take a step back and have you expand on what you're exactly doing in the 25 underutilized hospitals today, what you're seeing, what the customer posts, sort of those changes. And if there's any way to sort of size up how you see or contextualize the opportunity ahead based on sort of the number of customers today engaging in services, relative to the total pool of customers engaging in the product?

Yeah, a lot to unpack there, Steve, so I'll try and answer your question completely, and if I miss anything, come back at me. Look, I think earlier in our vet growth, we were in a phase where we were just trying to hit the number of openings, and the focus and opportunity I saw when I got here was really more on optimization and driving productivity before we start the growth up. Having said that, we're in a much different position today, nearly 300 hospitals. We have 1400 clinics, meaning we're in all our other stores with vaccination clinics. And so I think it's an asset I didn't fully appreciate before I joined. And we're really now operating at scale, Steven. But having said that, we've got the opportunity have more flexible schedules. So we've been really good at opening up the schedule. So if a customer needs a vet appointment, we can't make them wait two weeks or they'll go somewhere else. So teams have done a really good job changing that, optimizing doctor days, being more flexible with that, opening up more days in the week. And so all those are really driving the productivity. And with that, you know, that'll just serve us better as we start to open up new hospitals, which are still on track for 2027, but really excited about the phase we're in right now for hospitals. Did I capture everything you were asking?

Yeah, I mean, we obviously can explore for a while, but as we think about the return to vet hospital growth in 2027, you know, most of us have, you know, sort of the prior maturation expectations of the vet hospitals. I'd be curious, just based on sort of the initiatives underway and sort of what you're seeing, if there has been a directional improvement and if we can think about a better ROI or a shorter payback period or just any sort of initial thoughts on the conviction behind returning to vet hospital growth.

You know, I'll chime in there a little bit and just add that the improvement we've seen in these later year cohorts is significant. So we've learned lessons the tough way when we expanded very quickly in the early 2020s, and we've been honing the model ever since. So it's absolutely true that we are improving and shortening that maturity curve in the recent cohorts. I'll also add, though, I just keep emphasizing to everyone, we have a great opportunity with this existing fleet to keep improving the return on those assets, to keep optimizing the fleet. That continues to be a terrific opportunity in addition to future growth. It's not just that we have these 25, which we are super focused on, and we're done. we keep improving the entire fleet. And so that's a really important opportunity.

I think that's a great call, Sabrina. And I think all those learnings on both optimizing existing, how to improve the productivity of the 25 we're concentrating, all those learnings are going into shortening the ROI curve or improving the ROI curve, I should say, as we start to open new hospitals next year.

Thank you. Yep, thanks, Stephen.

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

Hi, this is Skyler Tennant on for Simeon Gutman. Thank you for taking our question. So your outlook looks to contemplate a slightly stronger earnings profile in the second half of the year. Can you touch on how much of the progression is driven by initiatives you've already outlined contributing versus potentially some incremental margin opportunities that haven't yet been fully realized? Thank you.

Sure. If you think about our Q1 actual at 97 and the midpoint of our Q2 at 111, and our midpoint for our full year adjusted EBITDA guide, the hams sort of break out 49% to 51%, which honestly from a historical perspective is very much in line. So what we've guided to is not unusual. And I'm actually very happy to say that because I always like to pull forward as much as we can, the earnings into the first half, so you're not looking at a big hockey stick. So with this guide so far, we've already in some ways de-risked because we're looking at, even with all of our initiatives coming in, we're looking at a very balanced year in terms of first half, second half profitability.

Okay, great, thank you. And you highlighted some stronger performance in the CAT category and suggested the demand pickup was largely expected. Could you just unpack the underlying drivers there a bit, please?

Yeah, when I mean expected, it's we saw this trend really improving last year. So the merchants jumped on this already last year and really got after it in Q1 with newness. And so that really played well with the strong year-over-year sales growth. And as I said in my prepared remarks, we're actually leaning in further with other categories in CAT, as we haven't seen this trend go the other way at all. So we're really excited about CAT. And specifically, I just show it to you that we're just getting better at being trend right as merchants, and they're doing a really good job identifying where we can differentiate, where we should drive newness, and Kat was a great example.

Great, thank you.

Thank you, and I think, operator, that concludes our call today, and appreciate everyone getting on. As you can tell from Sabrina and I, we are really excited about the early results of our Reach for the Sky strategy and returning back to positive comps while still improving our productivity. Look forward to seeing you all on our Q2 call. Thank you very much and have a great night.

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