Petco Health and Wellness Company, Inc.

Good day and welcome to Petco's second quarter 2026 earnings conference call. All participants will be in 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 then 2. Please note this event is being recorded. I would now like to turn the conference over to Roxanne Meyer, Vice President of Investor Relations and Treasury. Please go ahead.

Roxanne Meyer Good afternoon and welcome to PECO's second 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 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. With that, I'll turn the call over to Joel.

Thank you, Roxanne, and good afternoon, everyone. Thank you for joining us to discuss our second quarter results. Our focus this quarter was on accelerating progress across our phase three Reach for the Sky strategy. The team successfully gained traction across all four of our strategic pillars, and we delivered solid profitability relative to our financial outlook. For the quarter, we delivered positive comps for the second quarter in a row. Sales were 1.5 billion and adjusted EBITDA was 122 million, which included a net tariff refund of 6.8 million. As noted in our earnings release today, we voluntarily prepaid an additional 75 million in debt on September 1st given our solid results, healthy cash generation, and importantly, our confidence as we head into the second half, which Sabrina will discuss shortly. Before reviewing our second quarter accomplishments and strategic initiatives, I want to spend a few moments on our top line results. During the quarter, we hit a major milestone in our phase three strategy by relaunching our customer membership program, Petco Perks. This relaunch made point redemption significantly easier for our members, removing the friction that limited their prior engagement. As I noted last quarter, this change was exceptionally well received in our pilot. Following the national rollout in late June, customer point redemption volumes far exceeded our initial projections. While this demonstrated incredible customer engagement, it also had a negative impact on our Q2 net sales. particularly in our services business. To give you some context of our underlying momentum, prior to the nationwide membership rollout, our sales and comp run rates were ahead of our Q2 outlook. We acted swiftly to deploy post-launch guardrails on redemption velocity, peak redemptions now behind us. With a clear path for progress, we can now focus on unlocking the program's most powerful component over the coming quarters, Personalization, and Loyalty. We expect our new membership program to serve as a key catalyst that supports our long-term growth, and we are encouraged by early personalized offer tests. Balance of the Year will be focused on these capabilities, and we expect a positive impact to emerge in 2027. Now, turning to our initiatives. At the half-year mark, we are holding true to our commitments. We are successfully adding newness and innovation, and Michelle D'Amato. Our commitment to newness and anticipating trends is actively fueling our growth engine, and second, we are beginning to demonstrate the unique power of the ecosystem we've built. First, on newness, cat continues to be a standout growth category. We remain ahead of the curve by looking far beyond basic nutrition to serve cat parents. Recent industry data shows kitten-owning households surpass puppy households starting in spring 2026. This demographic shift creates a massive opportunity for us to capture market share by serving these cat parents holistically across consumables, supplies, vet care, and in grooming products. In the second quarter, we introduced new high-impact brands that resonate strongly with cat parents generating nice gains across consumables, supplements, bedding, and furniture. A key highlight was cat treats. Strong performance was powered by a significant number of new SKUs with high brand awareness. We also launched our private label, Candy Shop, for cat treats. Not only was a huge success, but demonstrated the opportunity behind our own brands. As we look ahead, We are optimistic about the possibilities to grow our share in the cat category and expect momentum to only build in the second half, which I will elaborate on shortly. In addition, companion animal is a highly differentiated category where our physical store provides a distinct competitive advantage that uniquely sets us apart from online-only and big-box peers while diversifying our animal exposure. In the second quarter, We saw a particular strength in live reptiles, which in turn fueled gains in reptile food and supplies. We also continue to see growth in the gardening with your pets category, driven by potted houseplants and pet-friendly garden seeds. Beyond driving top-line growth, companion animals are at the center of our experiential merchandising strategy. They allow us to engage customers during important cultural moments, like the World Cup. An example of this is the Piggy Cup, We held in the majority of our stores in July, featuring guinea pigs competing in soccer matches. This is a perfect bridge to the second area I want to highlight, the power of our fully integrated omni-channel ecosystem. As a reminder, our multi-channel customers, meaning those who shop us online, in stores, and utilize our services, generate a five times higher end SPAC than single-channel customers. Consequently, we are laser-focused on initiatives that deepen these multi-channel relationships across our ecosystems. First, I'm pleased to share that we have officially rolled out our auto-ship sign-up capabilities across our physical store locations. It's been amazing to me as I traveled stores how few of our regular customers were aware of our ability to provide this service to them. Just the rebranding alone has made a meaningful improvement in awareness. Online, AutoShip is already a successful and sticky business where it accounts for roughly half of our digital sales. These digital customers typically spend two to three times more than non-AutoShip customers. While we are still in the very early innings of this deployment, bringing this capability into stores represents a massive long-term opportunity for us to grow and SPAC with our large population of infrequent store shoppers. We look forward to leveraging it to encourage behaviors like focus and unlocking auto-ship for grooming customers who don't use Petco for their daily food needs. Ultimately, this should strengthen the most predictable recurring parts of our business, support our future growth while making it easier for our customers to interact with Petco.