Petco (WOOF) Q1 2026 Earnings Call Transcript

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Date

Wednesday, June 3, 2026 at 4:15 p.m. ET

Call participants

• Chief Executive Officer — Joel D. Anderson
• Chief Financial Officer — Sabrina Louise Simmons

Takeaways

• Net Sales -- $1.5 billion, representing a 0.2% increase as the company returned to topline growth.
• Comparable Sales -- Positive 0.7% comp, reversing recent negative trends and indicating improving business momentum.
• Gross Profit -- $574.4 million with a gross margin rate of 38.4%, up 21 basis points, due to disciplined execution.
• SG&A Expenses -- $549.8 million, or 36.7% of net sales, representing 34 basis points of leverage driven by lowered G&A despite higher marketing spend.
• Operating Profit -- $24.6 million, a 50.5% year-over-year improvement, yielding a 55 basis point margin expansion.
• Adjusted EBITDA -- $97.3 million, increasing $7.9 million or 8.8% year over year, reflecting early progress on growth initiatives.
• Inventory -- Ending inventory declined 1.9% on top of a 5.2% reduction last year, with sales slightly up and discipline maintained.
• Free Cash Flow -- Outflow of $69 million for the quarter, attributed to $10 million higher capital expenditures and planned inventory investments, but overall inventory levels tracked well.
• Cash Balance and Liquidity -- Ending cash was $167 million, up $33 million year over year; total liquidity reached $654.4 million, both improving versus the previous year.
• Total Debt -- $1.48 billion, reduced by more than $100 million from the prior year, with maturities extended to 2031 after refinancing.
• Store Count -- Ended at 1,380 U.S. stores after four net closures; full-year net closures projected at 15-20, mostly in the second half.
• Guidance Reaffirmed -- Full-year net sales expected to be flat to up 1.5%; full-year adjusted EBITDA targeted at $415 million to $430 million.
• Q2 Outlook -- Net sales growth projected at approximately 0.3%; adjusted EBITDA guided to $110 million to $112 million.
• Tariff Refund Impact -- Benefit from a May tariff refund included in current-year guidance, but no further refunds assumed.
• Omnichannel Performance -- Omnichannel sales grew, with “Buy Online, Pick Up In Store” (BOPIS) strength specifically cited as a driver for increased loyalty and in-store traffic.
• Service Revenue Drivers -- Increases in grooming, veterinary productivity, and the launch of bundled preventive care packages demonstrated service as a growth engine.
• Cat Category -- Cat product outperformance drove sequential improvement in consumables, propelled by anticipated demand and targeted inventory investments.
• Expense Management -- Cost structure improvements enabled profitability growth with only low-single-digit comp sales required for operating leverage.
• Loyalty Program Refresh -- The Petco Perks relaunch, focused on personalized offers, expected to further increase customer frequency and lifetime value.

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Risks

• Chief Financial Officer Sabrina Louise Simmons highlighted, "free cash flow was an outflow of $69 million," with elevated capital expenditures and inventory investments pressuring near-term cash generation.
• Management cited ongoing macroeconomic uncertainty and noted, "The environment has continued to evolve," maintaining a cautious approach to guidance despite a Q1 upside.
• Unchanged assumption by management that "current tariff policies remain for the balance of the year," while no further tariff refunds are included, potentially limiting upside will if refund appeals are unsuccessful.

Summary

The call confirmed that Petco Health and Wellness Company (NASDAQ:WOOF) delivered positive comparable sales and year-over-year profitability gains for the quarter, reversing previous declines across key performance metrics. Executive commentary emphasized successful execution of the "Phase III reach for the sky" strategy, improved category performance—particularly in consumables and services—and effective expense control, leading to margin expansion and an improved balance sheet. Strategic investments in cat products, fresh frozen offerings, and service innovations were specifically called out for driving growth, with a loyalty program revamp expected to add further momentum. The company reaffirmed full-year outlooks for both sales and adjusted EBITDA, anchoring its guidance on current macro conditions, with no changes expected from announced tariff or fuel cost dynamics.

• Chief Financial Officer Sabrina Louise Simmons clarified that Q2 guidance for adjusted EBITDA neutralizes expected incremental tariffs and higher fuel costs against the benefit of the one-time tariff refund already received.
• Initiatives to cross-sell between services and product categories were described as early-stage, with management citing new data visibility for groomers and a multiyear opportunity to drive average customer spend.
• Management asserted that improved productivity in the veterinary hospital fleet is shortening the return-on-investment curve, with further optimization of underutilized hospitals underway before resuming expansion in 2027.
• No material changes in consumer trade-down behavior were observed across income demographics, with trends described as stable despite dynamic macro conditions.

Industry glossary

• BOPIS (Buy Online, Pick Up In Store): Omnichannel retail strategy allowing customers to order online and collect purchases at a physical store location.
• Adjusted EBITDA: Earnings before interest, tax, depreciation, amortization, and certain adjustments, used to assess operating performance.
• Doctor Days: Measure combining the number of veterinary doctors and their working hours, used to indicate capacity and service availability in veterinary clinics.
• AEFA Tariffs: Import duties applied to certain goods under the Section 301 tariffs imposed on products from China, referenced in connection with company refunds.

Full Conference Call Transcript

Joel D. Anderson: Thanks, Roxanne, and good afternoon, everyone. Thank you for joining us to discuss our first quarter results. Our strong Q1 results provide an encouraging early validation of our Phase III reach for the sky strategy. We returned the business to a positive comp for the quarter while expanding our profitability, performing better than our quarterly outlook for both top line and adjusted EBITDA. We were particularly pleased to see the improvement in our consumables business while our differentiated services business once again delivered strong results and continues to be a growth engine for us. This solid start to the year gives us deep confidence that our growth initiatives are taking hold.

It speaks directly to our innovation pipeline, rigorous execution, smarter marketing, and most importantly, the advantages of our wholly owned omnichannel ecosystem. In light of our solid first quarter, we are pleased to reaffirm our full year outlook and remain confident in our ability to drive consistent, top line results. Sabrina will take you through our financial details shortly, But first, I want to spend some time updating you on the progress we have made across our strategic 4 pillars, which are positioning Petco for long term profitable growth. Let's begin with our first pillar. Compelling product.

While we are still in the early innings of evolving our product mix, and the flow of our merchandise, we have begun to introduce real newness to our aisles. And we are seeing evidence that it is resonating with pet parents. Specifically, you should now see several of our main drive aisle end caps converted to new product and identified with a yellow new logo. From a top line perspective, we saw outperformance in the cat category this quarter. We anticipated the recent spike in demand for cat products, And as a result, we invested to make Petco the destination for cat parents. It was a key contributor to the improved sequential trends we saw in consumables overall.

You will see cat newness ramping up even further in Q2 with exciting additions in areas such as furniture, beds, and bowls, but also in novelty items such as cat trees. We also continue to lead the fresh frozen space. During the quarter, we added significant incremental freezer capacity to support the momentum in this category. We hold a distinct advantage in this category driven by the breadth of our offerings, our key brand partnerships and a wide range of price points. We have positioned Petco as a premier destination for pet nutrition, which we believe will serve us well as the pet humanization trend continues to pick up speed.

Our expertise and dedicated in store teams offer a level and type of service that you simply cannot find at grocery stores, big box competitors, or online. As a reminder, those that buy fresh food from us make over 4 more trips per year and spend over 50% more annually than dry food only customers. Further, we experienced strength in seasonal categories. Specifically in flea and tick, we saw our strongest start of the season in 5 years. While this was partially aided by weather patterns, for Petco, it is an ecosystem story. We capture over the counter sales, vet sales, and grooming through our flea and tick packages all supported by a cohesive marketing push.

In addition, as we previously announced, we launched our new Gardening With Your Pet, earlier this quarter. This performed above expectations with live house plants performing well. Looking ahead, we have an exciting pipeline for both Q2 and the back half of the year. In consumables, we are leaning into emerging customer trends like high protein diets as well as new treats for dogs and cats. We have also recently launched several new supplements categories. Such as for hip and joint care, liver health, and a holistic care line based on the growing trend of health and longevity in the pet space. Which we see as an important extension of the humanization trend.

In supplies, we are introducing newness across categories including grooming, toys, and collars and leads. Within the grooming category, we relaunched our own brand Well+Good, which was completed last week. This represents the beginnings of our investment in private label, starting to show up in our stores. It includes new formulas without harsh chemicals as well as fresh packaging for our shampoos, conditioners, and balms all supported by marketing. And finally, in June, we will be rolling out sports inspired collections celebrating the World Cup and USA Soccer. Moving on to our second pillar, services at scale, Simply put, services are an important growth engine of ours. They are a massive point of differentiation and a competitive advantage.

Through our wholly owned services model, we own the entire pet journey. It is not just about our vet hospitals, which continue to see solid gains in sales per productivity. it is also about our clinics, grooming, and training. Grooming is a strong annuity business for us, and continues to perform well. To build on that momentum, we expanded our care reminders directly into our app late in the first quarter. A highly effective and frankly obvious way to drive what is already a sticky repeat business even more frequently and consistently. Another callout was the puppy dog package. We began to offer in the first quarter. Which a significant number of the customers that came in were new.

We will continue to offer this throughout the year. In the second quarter, we are driving excitement with the rollout of our Well+Good grooming products I just referenced, as well as a new Disney stitch grooming package. Which includes scented shampoo and spritz, conditioner, teeth brushing, nail buffing, and a seasonal bandana. Together, these initiatives are intended to ensure that our salons, remain a premier destination for pet parents and a highly dependable driver of reoccurring foot traffic. On the vet hospital side, the strong performance we are driving today helps fuel our future expansion plans which are on track to resume in 2027.

We continue to see improving productivity across our footprint, and we are on track to optimize about 25 significantly underutilized hospitals this year. Crucial to this effort is our veterinary team. And we are pleased to share that doctor days which is a combination of hiring additional doctors and adding hours per doctor continues to improve. Because of our scale, depth of expertise, unique ecosystem, the flexibility we offer we believe Petco is an employer of choice for veterinarians and vet techs looking to build long term careers. As we discussed last quarter, cross-selling continues to be a major and largely untapped opportunity between our clinics, and the rest of the store.

A great example of this clinical presence driving our broader business is our vet diet category. Performed extremely well this quarter. Tying beautifully back into our veterinary ecosystem. Looking ahead, we believe we have several strong catalysts and opportunities in Q2 designed to drive ongoing traffic to our clinics. In mid April, we launched the new Vetco Clinic packages, which offers bundles of services such as routine shots, which we are excited to see gaining early traction. Additionally, to drive traffic and care during National Pet Month in May, we offered free Microchips. With the number of pets getting microchips up 71% versus last year.

Looking beyond these near term drivers, we are incredibly optimistic about the long term growth opportunity within our wholly owned vet business and the immense value it brings to the Petco ecosystem. Our third pillar our trusted store experience. The work is underway to build our basket size through better cross selling and customer engagement. For example, we are now empowering our groomers with customer data to facilitate sales across the entire store. They can see a customer's last food purchase history. This allows our partners to have informed personalized conversations that drive cross category sales and importantly can help enhance customer satisfaction and loyalty over time.

In terms of customer engagement, we feel in store experiences are how we best appeal to our core customer the passionate explorer. This quarter, we hosted popular events such as pictures with the Easter bunny, We continued that effort with weekly store events throughout May to celebrate National Pet Month. Including Mother's Day photos and weekly brand tasting events. Finally, our fourth pillar, an integrated omnichannel model. We are pleased with the headway we have made and our ongoing work to improve retail fundamentals in our omnichannel model compared to last year. By removing friction from the online checkout process, we have been seeing improved digital traffic.

We achieved sales growth in omnichannel even while lapping the nonproductive unprofitable sales we were still generating in 1Q last year. Looking ahead, we see ongoing opportunities to increase site speed, and optimize shipping windows for our customers. The key call out is BOPIS, which was up strongly year over year. This is our differentiation in action. Building loyalty through ecommerce, but physically bringing the customer into stores to experience our services. Community and the cross selling opportunities our partners provide. Speaking of loyalty, I am thrilled to share that we are relaunching our loyalty programs later this quarter, officially branded as Petco Perks.

During our pilot phase, our biggest learning was that simplifying, removing friction, and making the program distinctly customer friendly at a massive impact. Petco Perks uniquely leverages our entire ecosystem spanning both merchandise and services. The program will be heavily focused on personalized offers based on factors like shopping frequency, customer lifetime value, a strategy that successfully drove higher sales and stickiness during our pilot. In conclusion, the first quarter served as an initial proof point of our inflection to growth. While the broader macro environment remains dynamic, we remain hyper focused on controlling what we can control. And our results prove that our self help strategy is successfully navigating this environment.

We are executing on our phase 3 reach for the sky strategy. While we are pleased with these initial results, we are still in the early innings of what is a long exciting journey. We have immense opportunity to deliver product newness, capitalize on cross channel shopping, grow our differentiated services business, and provide the most personalized experience possible to the Passion Explorer and their pets. I wanna take a moment to deeply thank our teams across the organization. Your hard work, adaptability, compassion for pets are what make these results possible. Our focus remains firmly on driving sustainable, longer term top line growth and on delivering shareholder value.

As we look ahead, we are pleased with the momentum our initiatives are generating. Positioning us to continue to deliver positive comps. I look forward to our second quarter call and sharing with you the continued progress we are making with our reach for the sky strategy. With that, I will turn the call over to Sabrina to take you through the details.

Sabrina Louise Simmons: Thank you, Joel. Good afternoon, everyone. As we have discussed, our primary goal is to build a stronger retail and financial foundation, which supports our focus on regrowing our top line in phase 3 and driving sustainable profitable growth. As such, we are committed to delivering upon our economic model for the full year in 2026 and are pleased to report that we are off to a solid start. Turning to first quarter results. Net sales were up 0.2% to $1.5 billion Importantly, the first quarter marked our return to positive comp sales. With a 0.7% comp providing evidence that our initiatives across our 4 growth pillars are beginning to take hold.

The spread between comp and net sales reflected the 16 net store closures in 2025 and 4 net closures in Q1. We ended the quarter with 1.38 thousand stores in The US. Moving on to margin results. First quarter gross profit dollars were $574.4 million while our gross margin rate expanded 21 basis points to 38.4% as we executed with discipline. Moving on to expenses. For the quarter, SG&A was $549.8 million or 36.7% of net sales. Leveraging 34 basis points. The $3.8 million improvement in expenses year over year was driven by declines in G&A despite investments in marketing to support our omni related initiative.

For Q1, our expanded gross margin and expense leverage resulted in operating profit of $24.6 million or a 50.5% improvement versus prior year. Operating margin rate improved 55 basis points year over year. Adjusted EBITDA increased $7.9 million or 8.8% year over year to $97.3 million and our adjusted EBITDA Balance sheet and cash flow. First quarter ending inventory was down 1.9% year over year on top of a 5.2% decline last year. it is worth noting that inventory dollars were down year over year even with sales growth of point 2%, reflecting our ongoing discipline and execution. Our first quarter ending cash balance was $167 million an increase of approximately $33 million versus the first quarter last year.

For the quarter, free cash flow was an outflow of $69 million While our first quarter cash flow is historically our lowest, we wanted to call out 2 contributing factors. First, capital expenditures $10 million versus last year but are in line with the full year guidance we have provided. Second, as planned inventory investments increased to support our growth but we are pleased overall that inventory levels remain well controlled. Moving on, total liquidity for the first quarter was $654.4 million up versus the prior year. For the quarter, total debt was $1.48 billion down over $100 million compared to Q1 last year.

As many of you have heard me state, after completing our opportunistic debt refinancing, we have extended our maturities out to 2031 and achieved a more optimal mix of fixed to floating rate debt which provides us with ample flexibility. Importantly, we remain laser focused on our goal of reducing our leverage ratio to 2x. And now turning to our outlook. While the external environment continues to evolve, our solid foundation enables us to remain agile and we are well positioned to deliver on our financial commitments this year. Therefore, we are reaffirming our full year sales and adjusted EBITDA outlook.

Specifically, we continue to expect net sales of flat to up 1.5% compared to last year as our growth initiatives take hold and build over the course of the year. We continue to expect adjusted EBITDA to be between $415 million and $430 million Looking out, we wanted to outline some updates to our underlying full year assumptions. First, we now expect fuel prices to remain at approximately current levels for the remainder of the year. Recall that our prior full year outlook assumed higher fuel prices through the first quarter only. Next, our outlook includes the benefit of a tariff refund received in May. The refund represents only a portion of the AEFA tariffs we paid through February 2026.

Our full year guidance assumes no additional tariff refunds beyond what we have received to date. Further, our outlook also assumes that the current tariff policies remain for the balance of the year. With regard to other line items, the following assumptions remain unchanged for the full year. Net interest expense, about $125 million Depreciation and amortization, about $200 million, capital expenditures, about $140 million with an ongoing focus on ROIC, net store closures, between 15 and 20 weighted toward the back half of the year. And finally, we still expect the full year spread between total sales and comp sales to be about 50 basis points though it will vary by quarter. Moving on to the second quarter.

We are comfortable with current consensus estimates for net sales implying growth of about 0.3% versus the prior year. We expect adjusted EBITDA to be between $110 million and $112 million As you think about your models, we wanted to flag some considerations to be helpful. First, recall last year's Q2 reflected peak adjusted EBITDA growth including peak gross margin expansion. In last year's second quarter commentary, I flagged an approximate $9 million benefit in SG&A from a semiannual actuarial true up. This was related to employee optimization work. This year, we do not expect to anniversary this benefit. Finally, on tariffs and higher fuel costs.

A simple way to think about these factors is that the tariff refund roughly offsets incremental tariff and higher fuel cost expected in the second quarter. Thereby neutralizing 1 another in the quarter. In closing, I want to thank our teams for their dedication and discipline in executing on our transformation this quarter. Including our return to positive comparable sales growth. We will now open up the call for your questions.

Operator: Thank you. We will now begin the question and answer session. We ask that you please limit yourself to 1 question and 1 follow-up. If you are using a speakerphone, please pick up your handset before pressing the keys. and then 2. At this time, we will pause momentarily to assemble the roster. The first question will come from Michael Lasser with UBS. Please go ahead.

Analyst (Michael Lasser): Good evening. Thank you so much for taking my question. When you look across the different categories between consumables, hard goods, services, as well as the different species of animals that you serve. Where was there a change or an inflection in your market share versus what Petco had been experiencing last year. And how do you see those market share trends continuing to unfold?

Joel D. Anderson: Thanks, Michael. I think as you as I reflect back on the quarter, I think less about market share a little bit, and I think more about the sequential improvements. And we saw improvements in all 3 of those categories, both consumables, you know, supplies and companion animals, and services. So I think those are all really good early indicators that the new strategy is taking hold and the customer's reacting positively to it. While we have not yet started to gain on market share, which is part of lapping the last year. We are really seeing that the market share decline moderate significantly, and that is showing up in the sequential improvements in all 3 areas.

Analyst (Michael Lasser): Understood. Right? And then thanks for that, Joel. Follow-up question is on the outlook. You exceeded at least the consensus forecast for the first quarter. You comped positive, like you had anticipated. You are simply reiterating the full year outlook. So is there something that you are seeing currently in the business or have seen as of late that is influencing your conservatism or your decision not to flow through the upside from the first quarter to the full year?

Sabrina Louise Simmons: Hey, Michael. it is Sabrina. And that is a great question. To our own range, we are really pleased that in the first quarter, we beat a couple of million, $3 million at the high end. The environment has continued to evolve, and there is a lot of different new cycles going on. We are super pleased that in the face of that, we are reaffirming our full year guidance. And in particular, 1 of the big changes from when we initially laid out that guidance is fuel. Right? So we are actually absorbing that second half fuel within our reaffirmation of the full year. So, again, we are very pleased that we are able to do that.

Through our discipline. Understood.

Analyst (Michael Lasser): Thank you so much, and good luck.

Joel D. Anderson: Thank you, Michael.

Operator: The next question will come from Katharine McShane with Goldman Sachs. Please go ahead.

Analyst (Katharine McShane): Hi, good afternoon. Thanks for taking our questions. We wanted to ask just with regards any kind of behavior changes within the quarter by the consumer, what you saw across income cohorts and any kind of consumer behavior with trading down Yeah.

Joel D. Anderson: Katharine, great question. And I think, like, every retailer, we are watching the consumer trends closely. You know, I would remind you and everyone on the call for that matter that you know, Petco serves customer across all income demographics. We have a really nice offering from both value all the way to premium brands. And, you know, as we look back on the quarter, I would say there was nothing material amongst income demographics that, performed differently. It was pretty consistent across all. So in total, we did not see really any different change in behavior.

Analyst (Katharine McShane): And then our follow-up question is just with regards to the pricing environment. I think you have you know, a retailer out there that is talking about getting a little bit more aggressive on pricing just how does that influence anything in terms of your strategy or what you are thinking? Just kind of in conjunction with that, you know, it sounds like you are going to get a fair amount of tariff refunds here. It will be neutralizing in Q2 as you laid out. Could we see maybe the tariff refunds be used for any kind of pricing investment as we get into the back half of the year.

Sabrina Louise Simmons: Yeah. I will start on the pricing piece Katharine, and just say similar to when we were faced with tariffs last year, we told you all we do not really react on our pricing to any 1 event. So we are always reviewing our pricing architecture Our lens is always customer first. We are always, of course, reviewing the competition. We make adjustments as necessary but we are not going to-- we are not having plans to do anything in reaction to any events. And then with regard to the tariff, we are not counting on any further refunds.

I think you all know there is a date coming up here in a few days where there can be some appealing of the whole refund process. So we thought it prudent not to count on any of that. So none of that is in our assumptions. Should it come, fantastic. We can update you on our next quarter call.

Analyst (Katharine McShane): Thank you.

Operator: The next question will come from Kaumil Gajrawala with Jefferies. Please go ahead.

Analyst (Kaumil Gajrawala): I guess the first thing is your positive comps, your cost structure has changed. Quite a bit over the sort of recent years. What is the comp level that we should be looking for to allow it to sort of really leverage itself down the P&L?

Sabrina Louise Simmons: Yeah. that is a great question, Kaumil. The beauty of our model is we do not really need super high comps to make the economic model work. We are talking low single digit comps. To be able to nicely leverage our SG&A maintain our healthy margins, and drive that operating profit growth. So we are really pleased that we have managed the expense structure such that we can deliver with that low single digit profile.

Analyst (Kaumil Gajrawala): Okay. Got it. And then on these oil prices and, I guess, not moving guidance because of the price of oil. By the way, not moving guidance is the right idea. Obviously, it is just-- it is just been 1 quarter, but the idea of absorbing the cost of oil is that because of increases from prices from your suppliers, or is it just concern about things that are gonna come your way over the course of the rest of the quarters?

Sabrina Louise Simmons: Yeah. Mostly, I am addressing the direct cost to our transportation. To our supply chain. So it will impact us most directly from our inbound which lags, by the way, through our P&L a bit. Because it first goes into inventory and shows up on the P&L as cost of goods sold when we sell it. But the immediate impact of fuel to our transportation is to our outbound so our DC to our stores, and also our parcel business. So that is that is the piece that is most direct that we are looking at.

Analyst (Kaumil Gajrawala): I got it. Thank you.

Joel D. Anderson: Thank you.

Operator: The next question will come from Oliver Wintermantel with Evercore ISI. Please go ahead.

Analyst (Oliver Wintermantel): Yeah. Thanks very much. Joel, what was the biggest contributor to pushing comps from negative to positive this quarter? Is it improved transactions? Is it mix or is it price or AUR? If you could just give us some little more detail on what actually drove the comps positive this quarter.

Joel D. Anderson: Yeah. I would rather talk about it first from the strategy side. And then, you know, Sabrina, you can go into the specifics on the on the mix side of it because what is really important to remind everybody is and I called this out in last quarter. This is largely a self help year for Petco. And, you know, what really let's just call Q1 a trifecta. Right? We delivered positive comps. We improved profitability. we, while outperforming on the outlook. And so what really drove that is the execution against all 4 of the pillars. And so we saw strength in all of those. And it is resonating with the customer.

And given we are in the early innings of that, you know, I kinda have line of sight to the future, and I am pretty excited about what is still to come with the rest of our strategy.

Sabrina Louise Simmons: Yeah. And from a comp lever perspective, I just point out that UPT was quite strong. Basket actually improved and the trend in transactions improved. But I would call out that is that remains a really good opportunity for us.

Analyst (Oliver Wintermantel): Got it. And on the gross margin side, a similar question there. Could you maybe give us a little bit more details what drove the gross margins Was it mix? Was it merch margin, something like that? And then as you mentioned, the second quarter is a little bit tougher compares, but I think the third quarter as well. So maybe a gross margin outlook for the year, how we see it. Thank you very much.

Sabrina Louise Simmons: Of course. We do not guide, forward to gross margin in particular. I did try to be helpful on the second quarter outlook just to remind that the entire second quarter last year was a bit unusual for the reasons I outlined. With regard to the first quarter, I would say, you know, we continue to use every lever at our disposal. So it is back to phase 2 never ends retail fundamentals. So negotiating with our vendors making sure we are getting good costing, watching our promotions, our clearance, our markdowns, all of those levels sort of across the board. Culminate in delivering on our margin.

Analyst (Oliver Wintermantel): Got it. Thanks very much, and good luck.

Joel D. Anderson: Thank you.

Operator: The next question will come from Steven Emanuel Zaccone with Citi. Please go ahead.

Analyst (Steven Emanuel Zaccone): Great. Good afternoon. Thanks very much for taking my question. Joel, you talked about efforts underway to build the basket size with cross selling and customer engagement. Curious if you could talk a bit about timing there. Is this something that can build over the next couple of quarters? Is this a multiyear initiative just to get better cross selling within the store?

Joel D. Anderson: Yeah. I mean, we are just getting started on that, Steve. So it clearly has got you know, tailwinds in front of us. And the biggest reason I called it out, and I think I talked about it, you know, a couple calls before, You know, we used to run services in center of the store. it is separate organizations. And really, as we have dissected the business and look for areas of opportunity, the integration between our services and our center of store teams, is a real opportunity for us.

And cross selling is 1 example, and, you know, prior and the example I used is our grooming associates did not have access or could not see a customer's consumables purchases as an example. Why is that important? Well, a groomer would notice, their hair and, you know, skin and might see that, you know, they should be recommending a sensitive skin consumables if that is not what they are using today. And the fact that they could not see it our groomers could not be helpful to the customer.

So giving them access to that is just 1 great example of a certainly, a cross selling opportunity for us but a way to be really helpful for our customer and the health of their pet. So real opportunity going forward for us.

Analyst (Steven Emanuel Zaccone): Okay. Great. The follow-up I had is just on the industry. Overall. I mean, we are only 1 quarter into the year, but there has been mixed commentary across the pet landscape. As you think about industry growth forecasts for 2026, how do you think things are playing out versus expectation? You talked about cat outperforming and fresh and frozen doing well, but how do you think the year is kind of shaping out relative to expectations from an industry perspective?

Joel D. Anderson: Yeah. Look, you know, clearly, we are not seeing adoption trends growing at this point. With the exception of cat. But I think, you know, I reminded earlier on the call, this is self help year for Petco. So we are not beholden to the industry growing to achieve our objectives for this year. We will take the tailwinds if they come. But right now, we are really driving, our pillars, our reach for the sky strategy, to make a difference on that.

Analyst (Steven Emanuel Zaccone): Okay. Thanks for the detail. Best of luck.

Joel D. Anderson: Thank you.

Operator: The next question will come from Steven Forbes with Guggenheim Securities.

Analyst (Steven Forbes): Good afternoon, Joel and Sabrina. Joel, appreciate the comments around optimizing the services business, but curious if we can maybe just take a step back and have you expand on what you are exactly doing in the 25 underutilized hospitals today, you know, what you are seeing, what the customer posts sort of those changes. If there is any way to sort of size up how you see or contextualize the opportunity ahead, you know, based on sort of the number of customers today engaging in services, relative to the percent yeah. The total pool of customers engaging in the product.

Joel D. Anderson: Yeah. A lot to unpack there, Steve. So I will try and answer your question completely. And if I miss anything, come back at me. Look, I think earlier in our vet growth, we were in a phase where we were just trying to hit the number of openings. The focus and opportunity I saw when I got here was really more on optimization and driving productivity before we start the growth up. Having said that, we are in a much different position today Nearly 300 hospitals, We have 1.4 thousand clinics, meaning we are in all our other stores with vaccination clinics. And so I think it is an asset I did not fully appreciate before I joined.

And we are really now operating at scale. Steve. But having said that, we have got the opportunity to have more flexible schedules. So we have been really good at opening up the schedule. So a customer needs a vet appointment, we cannot make them wait 2 weeks or they will go somewhere else. So teams have done a really good job changing that, optimizing doctor days, being more flexible with that. Opening up more days in the week. And so all those are really driving the productivity And with that, you know, that will just serve us better as we start to open up new hospitals, which are still on track for 2027.

But really excited about the phase we are in right now for hospitals.

Analyst (Steven Forbes): That captures everything in mask I mean, we obviously can explore for a while. But, yeah, as we think about the return to vet hospital growth in 2027, you know, most of us have sort of the your prior maturation expectations of the vet hospitals. I would be curious just based on sort of the initiatives underway and sort of what you are seeing if there has been a directional improvement and if we can think about a better ROI or a shorter payback period or just any sort of initial thoughts on the conviction behind returning to that hospital growth?

Sabrina Louise Simmons: You know, I will chime in there a little bit and just add that the improvement we have seen in these later year cohorts is significant. So we have learned lessons the tough way when we expanded very quickly in the early 20 twenties. And we have been honing the model ever since. So it is absolutely true. That we are improving and shortening that maturity curve in the recent cohorts. I will also add, though, I just keep emphasizing to everyone, we have a great opportunity with this existing fleet to keep improving the return on those assets. To keep optimizing the fleet.

That continues to be a terrific opportunity in addition to future growth. it is not-- it is not just that, like, we have these 25, which we are super focused on, and we are done. We keep improving the entire fleet. And so that is a really important opportunity.

Joel D. Anderson: Yeah. I think that is a great callout, Sabrina. And I think all those learnings on both optimizing existing how to improve the productivity of the 25 we are concentrating on, all those learnings are going into shortening the ROI curve or improving the ROI curve, I should say, when we start to open new hospitals next year.

Analyst (Steven Forbes): Thank you. Yep.

Joel D. Anderson: Thanks, Steve.

Operator: The final question will come from Simeon Gutman with Morgan Stanley. Please go ahead.

Analyst (Simeon Gutman): This is Lauren Ng on for Simeon Gutman. Thank you for taking our question. So your outlook looks to contemplate a slightly stronger earnings profile in the second half of the year. Can you touch on how much of the progression is driven by initiatives you have already outlined contributing versus potentially some incremental margin opportunities that have not yet been fully realized? Thank you.

Sabrina Louise Simmons: Sure. If you think about our Q1 actual at 2097 and the midpoint of our Q2 at $111 million, and our midpoint for our full year adjusted EBITDA guide, they sort of break out 49% to 2051 which, honestly, from a historical perspective, is, you know, very much in line So what we have guided to is not unusual and I am and I am actually very happy to say that because I always like to pull forward as much as we can the earnings into the first half, so you are not looking at a big hockey stick.

So with this guide so far, we have already in some ways, derisked because we are looking at even with all of our initiatives coming in, we are looking at a very balanced year in terms of first half, second half, profitability.

Analyst (Simeon Gutman): Okay. Great. Thank you. And you highlighted some stronger performance in the cat category and suggested the demand pickup was largely expected Could you just unpack the underlying drivers there a bit, please?

Joel D. Anderson: Yeah. When I mean expected, it is we saw this trend really improving last year. So the merchants jumped on this already last year. And really got after it in Q1 with newness. And so that really played well with the, you know, strong year over year sales growth. And we as I said in my prepared remarks, we are actually leaning in further with other categories in cat. As we have not seen this trend go the other way at all. So we are really excited about cat, and I specifically, I just show it to you that we are just getting better at being trend right as merchants, and they are doing a really good job.

Identifying we can differentiate, where we should drive newness, and cat was a great example.

Analyst (Simeon Gutman): Great. Thank you.

Joel D. Anderson: Thank you. And I think, operator, that concludes our call today. And appreciate everyone getting on. As you can tell from Sabrina and I, we are.

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