Petco Health and Wellness Company, Inc. Q1 FY2026 earnings call

- Strategic Progress: Q1 2026 results provided early validation of Petco's Phase III 'Reach for the Sky' 4-pillar growth strategy, returning the business to positive comparable sales while expanding profitability, exceeding quarterly outlook for both top line and adjusted EBITDA. The company is still in the early stages of strategy execution. - Pillar 1: Compelling Product: Petco is evolving its product mix, adding new merchandise across categories. It proactively invested to capture growing cat product demand, which drove improved consumables trends, and will expand cat product newness further in Q2. It added incremental freezer capacity to grow its leading fresh frozen pet nutrition offering, where customers make 4+ more trips annually and spend 50% more annually than dry food-only customers. It has launched new supplement categories aligned with the pet health and humanization trend, relaunched its private label Well+Good grooming product line, and plans a sports-inspired World Cup collection launch in June. Seasonal categories including flea and tick and Gardening With Your Pet performed above expectations. - Pillar 2: Services at Scale: Services remain a key differentiated growth engine, with wholly owned services covering the entire customer pet journey. Grooming, a stable repeat annuity business, performed strongly; added in-app care reminders and a successful new puppy package (which drew many new customers) in Q1, with a new themed Disney Stitch grooming package launching in Q2. Vet hospital productivity continues to improve, with 25 significantly underutilized hospitals targeted for optimization in 2026; new hospital expansion is on track to resume in 2027. Doctor staffing (doctor days) continues to improve, and Vetco Clinic new service bundles and a National Pet Month free microchip promotion (up 71% year-over-year) drove strong clinic traffic. Cross-selling between vet services and in-store merchandise (exemplified by strong vet diet category performance in Q1) remains a large untapped opportunity. - Pillar 3: Trusted In-Store Experience: Initiatives are underway to increase basket size via improved cross-selling and customer engagement: groomers now have access to customer purchase history to enable personalized, informed cross-selling recommendations. The company also hosts regular in-store events to drive engagement. - Pillar 4: Integrated Omnichannel Model: The company removed friction from the online checkout process, driving improved digital traffic and omnichannel sales growth, even against a tough comparison to last year's unprofitable nonproductive sales. BOPIS sales grew strongly year-over-year, bringing customers into stores for cross-selling and service engagement. A relaunched simplified customer-centric loyalty program, Petco Perks, will launch later this quarter; the pilot drove higher sales and stickiness by leveraging Petco's full merchandise and service ecosystem with personalized offers. - Financial Operational Highlights: Gross profit expanded 21 basis points to 38.4%, SG&A leveraged 34 basis points, operating profit grew 50.5% year-over-year to $24.6 million, adjusted EBITDA grew 8.8% year-over-year to $97.3 million. Inventory was down 1.9% year-over-year (following a 5.2% decline last year) despite slight sales growth, reflecting disciplined inventory management. Total debt was reduced by over $100 million year-over-year to $1.48 billion, following opportunistic refinancing that extended maturities to 2031.

The transcript does not provide separate absolute revenue figures or revenue contribution percentages for individual product/service segments. It notes overall net sales increased 0.2% year-over-year to $1.5 billion, with positive comp sales of 0.7%. Key segment performance highlights include: outperformance in the cat product category, strong momentum in the fresh frozen pet nutrition category, the strongest start to the flea and tick seasonal category in 5 years, strong continued growth in the differentiated services segment (including grooming, vet hospitals, and clinics), and strong year-over-year sales growth in BOPIS (buy online, pick up in-store) omnichannel sales.

- Management reaffirms the full year 2026 financial outlook, maintaining the prior range after a strong Q1 that beat consensus estimates. Net sales are expected to be flat to up 1.5% year-over-year, and adjusted EBITDA is expected to be between $415 million and $430 million. - Updated full year assumptions include: fuel prices will remain at current levels for the remainder of the year (prior guidance assumed higher fuel prices only through Q1), guidance includes the benefit of a tariff refund received in May 2026 (for a portion of AEFA tariffs paid through February 2026), and no additional tariff refunds are assumed in guidance, with current tariff policies expected to remain in place for the rest of the year. - Unchanged full year assumptions: net interest expense of ~$125 million, depreciation and amortization of ~$200 million, capital expenditures of ~$140 million (focused on ROIC), 15-20 net store closures weighted to the back half of the year, and a ~50 basis point spread between total sales growth and comp sales growth. - For the second quarter of 2026, management expects net sales growth of ~0.3% year-over-year (in line with consensus), and adjusted EBITDA between $110 million and $112 million. The tariff refund received roughly offsets incremental fuel and tariff costs expected in Q2, neutralizing the impact of both factors, and Q2 2026 does not include the $9 million SG&A benefit from a 2025 semiannual actuarial true-up, creating a tougher year-over-year comparison. - The full year 2026 profitability outlook is balanced between the first and second half of the year, consistent with historical trends, with no large 'hockey stick' expected in the second half profitability.

- Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations, with key risks outlined in the company's SEC filings and earnings materials. - The broader macroeconomic environment remains dynamic, with evolving consumer and market conditions. - Ongoing fuel price volatility creates supply chain and transportation cost uncertainty. - The status of future additional tariff refunds is uncertain, with no additional refunds assumed in current guidance. - The U.S. pet industry is not seeing broad adoption growth, outside of the cat category, limiting top-line industry tailwinds.

Q: Where did Petco see market share inflections across categories versus last year, and how do you expect these trends to progress? / A: Management notes sequential improvements across consumables, supplies, and services, which are early positive indicators the new strategy is resonating with customers. While Petco has not yet returned to overall market share gains, market share decline has moderated significantly across all three categories.

Q: After beating Q1 consensus and returning to positive comps, why are you only reaffirming rather than raising full year guidance? Is there something driving your cautious outlook? / A: Management notes Q1 only beat the high end of the prior guidance range by $3 million, and the external environment continues to evolve. The company is absorbing higher second half fuel costs within the existing reaffirmed guidance, and is still comfortable with the existing full year outlook through disciplined cost management.

Q: What comp sales level does Petco need to leverage SG&A and drive operating profit growth long-term? / A: Management notes the restructured cost model does not require high comp growth to deliver strong profitability. Low single-digit comp growth is sufficient to leverage SG&A, maintain healthy margins, and deliver operating profit growth.

Q: What drove the return to positive comps this quarter, specifically whether it was transactions, mix, or price? / A: Management attributes the positive comp to strong execution across all four strategic pillars of the Phase III growth strategy, which has resonated with customers. From a metric perspective, units per transaction (UPT) was particularly strong, with improving basket size and transaction trends; improving transactions remain a key ongoing opportunity for the business.

Q: Can you expand on the optimization work for 25 underperforming vet hospitals, and how will this impact future hospital growth ROI? / A: Optimization work focuses on improving productivity via more flexible scheduling, shorter wait times for appointments, and improved doctor staffing to drive higher utilization. Management notes that learnings from early rapid expansion have refined the vet hospital model, shortening the maturity curve and improving ROI for recent hospital cohorts. All optimization learnings will be applied to new hospitals opening from 2027 onward, improving their ROI profile.