Petco Health and Wellness Company, Inc. Q2 FY2025 earnings call

• Transformation journey: Continuing Phase 2 of transformation, with progress in strengthening retail fundamentals, improving profitability, and raising earnings outlook. - Marketing: Reintroduced 'Where the Pets Go' tagline and launched related campaigns, hosted in-store events like Free Pet Food Tasting and Feed the Sharks, seeing positive customer sentiment and NPS increases. - Operations: Simplified and optimized processes for inventory accuracy, 4-wall in-stock, and on-shelf in-stock. Improved inventory per store and sales per square foot. - Merchandising: Allocated more space to higher productivity SKUs, added capacity on shelf, improved endcap displays, and launched first pet theme human product category priced under $20. - Culture and leadership: Focus on company culture centered around pets first, with leadership summit planned to launch updated values and align on reimagined Petco.

In the second quarter, net sales were down 2.3% with comparable sales down 1.4%. Gross margin expanded by more than 120 basis points versus last year to 39.3%. Operating profit increased $41 million year-over-year to $43 million. Adjusted EBITDA increased $30 million to $114 million, expanding nearly 220 basis points to 7.6% as a percent of sales. Free cash flow for the quarter was over $50 million. Ending inventory was 9.5% below last year while achieving higher in-stocks for customers.

• Adjusted EBITDA outlook for 2025 raised to between $385 million and $395 million. - Full year net sales expected to be down low single digits. - Third quarter adjusted EBITDA expected to be between $92 million and $94 million. - Full year expects about $200 million in depreciation, approximately $130 million in net interest expense, about 25 net store closures, and approximately $125 million to $130 million of capital expenditures.

• Tariffs will become sequentially more meaningful in the back half. - Macro-economic uncertainties could impact results.

Q: When is a reasonable expectation for Petco to generate a positive comp?

A: Joel said results will begin to show up in 2026 as it relates to a positive comp, but they are working on ideas now.

Q: How did gross margin perform relative to expectation and how to think about gross margin rate in the back half?

A: Sabrina said they've been focused on expanding gross margin and tariffs will impact more in the back half.

Q: Update on planogram resets and North Star initiative?

A: Joel said dog and cat resets were successful and more to come in other categories; North Star has pillars like amazing store experience, delivering services at scale, merchandising differentiation, and winning with omnichannel.

Q: What's behind increasing NPS scores?

A: Joel said it's due to a host of improvements including reinvesting in people and improving store experience.

Q: Implied fourth quarter adjusted EBITDA guide and driving factors?

A: Sabrina said tariffs have most meaningful negative impact in Q4, and they want to keep dry powder for potential investments while being prudent.