WOOF

Strategic Execution:

• Accelerating 'Reach for the Sky' Phase 3 strategy across four pillars.
• Successfully relaunched 'Petco Perks' membership program nationwide in late June, significantly improving point redemption ease.
• Positive comps achieved for the second consecutive quarter (+0.6%).

Membership Program Impact:

• Point redemption volumes exceeded projections, causing temporary friction and negative impact on Q2 net sales (estimated mid-single-digit millions impact).
• Post-launch guardrails deployed to manage redemption velocity.
• Future focus shifts to personalization and loyalty features, with expected positive financial impact emerging in 2027.

Product & Category Initiatives:

• Cat Category: Capitalizing on demographic shift where kitten households surpass puppy households. Launched private label 'Candy Shop' cat treats and high-impact brands.
• Fresh/Frozen: Partnering with Hills Pet Nutrition for 'Science Diet Single Protein Dog Food' launch in Q3. Adding in-store chillers to support premium offerings.
• Newness: Continuous monthly product resets and optimization of assortments by store.

Operational & Store Enhancements:

• Omni-channel Ecosystem: Rolled out AutoShip sign-up capabilities in physical stores to drive cross-channel engagement (multi-channel customers have 5x higher NSPAC).
• Store Prototype: Launched new store format in a seven-store market test. Results show lift in new/reactivated customers, transaction counts, basket sizes, margins, and NPS.
• Veterinary Hospitals: Double-digit growth in doctor days and pet visits. Wholly-owned model allows integrated ecosystem synergies (e.g., vets recommending prescription nutrition). Expansion planned for 2027.

Financial Discipline:

• Voluntary prepaid $75 million in debt on September 1st.
• Total paydown over last nine months equates to $170 million.
• Expense discipline maintained despite lapping prior year actuarial benefits.

Brand & Community:

• Leveraging physical footprint for community events (e.g., 'Piggy Cup', Clear the Shelters, Catco Month) to drive traffic and engagement.

• Full-Year Net Sales: Affirmed outlook of flat to up 1.5% compared to last year.
• Full-Year Adjusted EBITDA: Affirmed range of $415 million to $430 million.
• Third Quarter Net Sales: Expected growth of 0.4% to 1.0% year-over-year.
• Third Quarter Adjusted EBITDA: Expected range of $100 million to $103 million.
• Other Line Items:
  • Net Interest Expense: ~$122 million (down from $125 million estimate due to $75 million debt repayment).
  • Depreciation & Amortization: ~$200 million.
  • Capital Expenditures: ~$140 million.
  • Net Store Closures: Between 15 and 20 for the full year.

Total Net Sales: $1.5 billion (up slightly year-over-year). Adjusted EBITDA: $122 million (8.2% of net sales, including a $6.8 million net tariff refund; normalized Adjusted EBITDA was $115 million). Gross Margin: Expanded 37 basis points to 39.7%, largely driven by the tariff refund benefit. Operating Profit: $48 million (3.2% of net sales). Key Segment Trends:

• Consumables: Delivered positive comparable store sales (comp), marking a stabilization after previous declines. Growth driven by newness and improved in-stock positions.
• Services: Strong performance with double-digit growth in total pet visits at veterinary hospitals. Vet diet sales for dogs and cats also grew double digits.
• Supplies & Companion Animals: Slower-turning categories showing moderation in declines. Cat category is a standout growth driver, outperforming the market. Dog business remains soft due to lower adoptions but is expected to rebound in 2027.

• Tariff Headwinds: While refunds were received, ongoing supply chain pressures (fuel costs, Middle East conflict impacts) remain manageable but present headwinds for H2.
• Membership Program Friction: Initial rollout caused significant redemption volume spikes, negatively impacting Q2 sales until guardrails were implemented.
• Dog Business Softness: Continued decline in dog adoptions affects the dog consumables segment, though mitigated by diversification into cats and services.
• Execution Risk: New store remodels and product assortment transitions require careful execution to avoid false positives/negatives and ensure margin protection.

Q: Analyst asked if customer count is inflecting upward and how the membership points transition will impact future loyalty economics. / A: CEO confirmed slight growth in total customer base, signaling a bottom. However, he emphasized that the larger opportunity lies in migrating existing customers across digital, stores, and services to increase NSPAC. CFO estimated the membership launch had a mid-single-digit million dollar negative impact on Q2 sales due to redemption friction, but noted underlying comp was tracking above guidance pre-launch. The focus now shifts to personalized offers to drive long-term loyalty in 2027.

Q: Analyst asked about pricing competition regarding tariff-free funds and the strategy behind the new seven-store prototype. / A: CEO stated pricing has remained relatively stable and while they monitor it weekly, Petco differentiates via experience, newness, and services rather than just price. Regarding the store prototype, CEO explained they are still testing to avoid false positives, fast-forwarding more remodels this year. CFO added that learnings may lead to low/no-capital adjustments across the fleet, not necessarily full remodels everywhere.

Q: Analyst asked about the profitability trajectory of vet hospitals and whether the P&L profile has improved since throttling back expansion previously. / A: CEO confirmed plans to open new hospitals in 2027 indicate confidence in improved productivity and profitability profiles compared to older vintages. He noted hospitals are no longer reported separately because their value is realized through overall box productivity and cross-functional synergy with store operations. CFO added they are actively shortening maturity curves for newer hospital openings.

Q: Analyst asked about gross margin puts/takes for H2 given rising freight costs and the reinvestment of tariff refunds. / A: CFO described supply chain headwinds as manageable, primarily driven by fuel costs related to geopolitical conflicts. She clarified that tariff refunds were reinvested to expedite moving legacy inventory (via clearance/write-offs) to make room for new assortment strategies. The company aims to deliver healthy full-year margins by leveraging own-brand improvements and absorbing some headwinds while maintaining flexibility for growth investments.

Q: Analyst asked about the penetration of multi-channel shoppers and expectations for e-commerce performance. / A: CEO revealed that the percentage of customers shopping across all three channels (digital, store, services) remains very small, representing a massive untapped opportunity. The strategy is to migrate single-channel users to multi-channel to boost NSPAC. CFO confirmed e-commerce returned to positive growth with strong margins, reversing last year's cleanup of unprofitable sales, indicating the channel is recovering healthily.