Petco Margin Grows Despite Sales Drop

Petco Health and Wellness (NASDAQ:WOOF) reported first quarter 2025 earnings on June 5, with net sales declining 2.3% year over year and comparable sales down 1.3%, while gross margin expanded 30 basis points year over year to 38.2%. Adjusted EBITDA rose $13.8 million for the quarter to $89.4 million (6% of sales), demonstrating material profitability improvement despite continued top-line headwinds and active cost management initiatives.

Petco Managed Margin Expansion Despite Sales Decline

Store count totaled 1,393 after 30 net closures over the last six quarters, with average unit cost (AUC) discipline and markdown optimization driving a 30 basis point gross margin improvement. SG&A discipline yielded more than 180 basis points of expense leverage, or approximately 60 basis points excluding last year's disposition costs, indicating operational streamlining amidst tepid demand.

"As an organization, we're focused on improving all levers within margin, including a more robust approach to average unit cost and average unit retail management. ... It's through the same focus on discipline that we delivered more than 180 basis points of expense leverage during the quarter. Excluding last year's one-time disposition costs, we leveraged approximately 60 basis points."
— Sabrina Simmons, Chief Financial Officer

The demonstrable margin improvement (gross margin rate expanded to 38.2%) amid lower net sales (down 2.3%) reflects effective operational execution and provides evidence that structural cost and margin initiatives are contributing to earnings durability, even as revenue remains challenged.

Petco's Strategic Merchandise Reset Targets Consumable Productivity

Pet consumables, which experienced a Q1 sales decline, are seeing targeted resets in both the cat and dog categories, with shelf capacity in dog food increased over 10% by redesigning store layouts, with the reset executed earlier in the year. Category resets, completed or underway earlier in the year, aim to address both out-of-stocks and labor inefficiency, ultimately supporting higher customer satisfaction in the consumables category.

"Operationally, we are reducing lost sales from on-shelf stockouts and improving labor productivity by eliminating constant or continuous shelf replenishment between truck replenishments. From the customer perspective, we are improving shoppability with higher in-stock availability."
— Joel Anderson, Chief Executive Officer

This early and methodical merchandising reset is designed to reduce lost sales and improve in-stock availability, directly attacking drivers of lost sales and positioning the business for an eventual topline rebound as inventory availability and in-store experience improve.

Permanent SG&A Discipline Anchors Petco's Profitability Roadmap

Partially due to deliberate deemphasis of the Vital Care membership business ahead of a planned major relaunch in 2026, management stresses that cost containment is not episodic but embedded in the company's operational philosophy, shifting focus to leveraging SG&A as sales recover rather than relying on transient expense reductions.

"Our goal is not just about cost cutting. Our goal is to leverage SG&A. So we're very much setting the stage, building the strong foundation right now this year. But as we grow sales, we can manage SG&A well and leverage that will help operating margin expansion. So it's not all about cutting and cutting. It's about managing it well to get high return and help drive our business growth going forward."
— Sabrina Simmons, Chief Financial Officer

This transition toward sustainable SG&A leverage, rather than short-term cuts, establishes a framework for long-term operating margin expansion and signals management’s intent to capture incremental margin as sales growth resumes, rather than see costs reflate proportionally.

Looking Ahead

For full-year 2025, Petco management reiterated guidance for net sales to decline in the low single digits, adjusted EBITDA of $375 million–$390 million, 20–30 net store closures, and Q2 FY2025 adjusted EBITDA of $92 million–$94 million (up approximately 11% at the midpoint). Capital expenditures are slated for $125 million–$130 million with depreciation near $200 million. Net interest expense is expected to be approximately $130 million, and there will be a continued focus on free cash flow and leverage improvement. No additional quantitative guidance or milestone dates beyond 2025 were provided, with the new membership program expected in 2026, with key North Star strategic work to be completed in the back half of 2025.

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This article was created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.