Petco Health & Wellness Company, Inc. Q3 FY2024 earnings call

Key managerial messages include: Three critical initiatives - merchandising (optimizing assortment, improving pricing, launching Welcome to the Family Program), servicing customers (improving store consistency, labor model, leveraging automation in online fulfillment), and driving efficiencies (renegotiating contracts, optimizing supply chain, professionalizing procurement). New executives hired: Joe Venezia as Chief Revenue Officer and Dan Calista as Chief Strategy and Transformation Officer. Witnessed passion of teammates and organization rallying behind plans to drive operational and financial performance improvement.

Revenue was $1.51 billion, up 1%, driven by consumables and services. Supplies and companion animal were down 3% but improved 200 basis points sequentially. Services and Other, which includes services, wholesale, and recently disposed noncore businesses, delivered 5% growth, with services specifically up 9%. Gross profit was $576 million, up 5% from prior year. Gross margin for the quarter was 38.1%, up nearly 130 basis points from prior year, driven by progress on product cost management and improvements in services gross margin. Adjusted EBITDA was $81.2 million with an adjusted EBITDA margin rate of 5.4%, up almost 60 basis points year-over-year.

For the fourth quarter of fiscal 2024, expected revenue is approximately $1.55 billion, adjusted EBITDA between $90 million to $95 million (inclusive of a minimum of $10 million in third-party consulting fees associated with transformation effort), and adjusted EPS between $0.00 and $0.02. Full-year expectations include net interest expense of approximately $140 million, 273 million weighted average fully diluted shares, and $130 million of capital expenditures. Structured improvement throughout the business sets up a solid finish to 2024 and momentum into 2025.

Potential tariffs on goods imported from China, Mexico and Canada. However, there are immaterial vendors where sourced from Mexico and Canada with no negative impact. Petco Mexico has limited exposure to imported products from China as it sources primarily from the U.S. with select products from Asia or Mexico.

Q: Kaumil Gajrawala asked about target same-store sales figure where they can start levering off the newer cost base.

A: Joel said focus is on permanent cost cuts currently and Brian added about SG&A labor investments for improved customer experience.

Q: Steven Shemesh asked about supplies and companion animals segment.

A: Joel said consumables focus on in-stock with new inventory system, and discretionary on innovation for improved sequential performance.

Q: Matt McCartney asked about pricing impact in the quarter.

A: Brian said pricing environment is rational.

Q: Michael Lasser asked about cost savings opportunity and reinvestment for same-store sales growth.

A: Joel said current focus is on permanent cost cuts, not immediate reinvestment for growth.

Q: Sara asked about 4Q trend.

A: Joel said pleased with start of the quarter and tracking to guidance.

Q: Julia Marquez asked about hospital efficiency enhancements.

A: Joel said progress in hospitals with Stephen's team and ongoing merchandising improvements for hospitals.

Q: David Lane asked about gross margin glide path and Q4 outside lapping inventory write-down.

A: Brian said encouraged by Q3 drivers but not guiding on future gross margin specifics.

Q: Lauren Ng asked about consumables improvement.

A: Joel said new inventory system, shelf utilization, and pricing contributing to consumables growth.

Q: Kendall Toscano asked about vendor response and vet hospital timeline.

A: Joel said positive vendor response and Brian added balance sheet focus for vet hospital growth planning.