Petco Health and Wellness Company, Inc. Q3 FY2025 earnings call

• Strengthened operating model and improved profitability, with operating income increasing over 25,000,000, adjusted EBITDA $99,000,000, and free cash flow over 60,000,000 in Q3.
• Focus on culture, reinstilling retail fundamental discipline and creating a culture playing to win. Currently in phase two of transformation centered on improving profitability and strengthening foundation, shifting to phase three for return to growth.
• Four pillars for growth: compelling product (improved shoppability, newness in discretionary items, expanded My Human product line), trusted store experience (store simplification, revenue driving KPIs), services at scale (fastest growing category, ahead of vet doctor hiring goals, improving utilization and integration), seamless omni integration (enhanced digital, membership pilot, better media buying).

Net sales were down 3.1% with comp sales down 2.2%. Gross margin expanded approximately 75 basis points to 38.9%. SG&A decreased $32,000,000 below last year. Adjusted EBITDA increased 21% or $17,000,000 to $99,000,000. Free cash flow for the quarter was $61,000,000. Year to date cash flow from operations has nearly doubled versus the prior year to $161,000,000.

• Raised adjusted EBITDA outlook for 2025 to between $395 and $397,000,000, an increase of roughly 18% year over year at the midpoint.
• Narrowed net sales range for full year to down between 2.5% and 2.8%.
• Expect Q4 net sales to be down low single digits, adjusted EBITDA between $93 and $95,000,000.
• Mentioned potential to selectively invest behind the business as part of phase three return to profitable sales growth.

• Tariffs beginning to more meaningfully impact cost of goods sold.
• Consumer caution due to economic factors like tariffs, political tensions, and high interest rates.
• Need to continue managing inventory and expenses responsibly to maintain cash generation.

Q: Can you talk about the mix of wants versus needs in the business?

A: Consumables has elements of wants now, with changes in merchandising to introduce newness and discovery. The whole business has opportunity to create more exploration.

Q: What is the realistic timeline for comp stabilization?

A: Will outline timing in March call, with all four pillars contributing to comp in 2026.

Q: How much of Q3 working capital improvement is sustainable?

A: View cash flow as continuous improvement, focusing on net earnings, inventory discipline, and other levers.

Q: What is the magnitude of potential investments?

A: Investments necessary, with options in marketing, labor, promos, and will be managed responsibly to deliver full year goals.

Q: Impact of tariffs during the quarter?

A: Tariffs became more meaningful in 3Q, with more impact in Q4, mostly in private label supplies area.

Q: Tailwind from membership program relaunch?

A: Membership program in live testing, with nice progress and important for growth in 2026.

Q: View on industry digestion and growth?

A: Pet industry stable, services business growing, digital improvements promising.

Q: Prioritizing cash usage?

A: First priority to invest in business, with vet hospitals already on books ramping up, and focus on debt pay down.

Q: Impact of moving away from less profitable sales?

A: Growing pet EBITDA market share, with sales down but EBITDA up.

Q: Broader category performance and sales growth in 2026?

A: Expect return to growth in consumables and supplies, fewer net store closures in 2026 than 2025.