Petco (WOOF) Q1 2025 Earnings Call Transcript

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DATE

• Thursday, June 5, 2025, at 4:30 p.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Joel Anderson
• Chief Financial Officer — Sabrina Simmons
• Investor Relations — Tina Romani

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RISKS

• Comparable sales declined 1.3% in Q1 FY2025, and net sales decreased 2.3%, driven by decreased transactions and net store closures.
• Simmons disclosed that free cash flow was negative $44 million for Q1 2025, primarily due to incentive payout, which may constrain flexibility.
• Simmons explained that Vital Care membership was a drag within the Services segment.

TAKEAWAYS

• Comparable Sales: Comparable sales were down 1.3% for Q1 2025, with net sales down 2.3%, reflecting pressures from store closures and softer transactions.
• Gross Margin Rate: Expanded over 30 basis points to 38.2% in the first quarter, attributed to improved product and services margins.
• Expense Leverage: Delivered more than 180 basis points of expense leverage in Q1 2025; 60 basis points excluding last year's disposition costs.
• Adjusted EBITDA: Adjusted EBITDA increased $13.8 million year over year to $89.4 million for Q1. Adjusted EBITDA was 6% of sales, and adjusted EBITDA margin expanded 105 basis points.
• Store Footprint: Ended the quarter with 1,393 stores, following five additional closures in Q1 and 25 closures in 2024.
• Inventory: Inventory levels were 5% below last year.
• Cash Position: Quarter-end cash balance of $139 million, an improvement of $48 million versus last year.
• Full-Year Guidance: Reiterated outlook for net sales to decline low single digits for FY2025 and adjusted EBITDA to range from $375 million to $390 million, incorporating 20-30 net store closures.
• Tariff Exposure: Direct exposure in owned brands now approximately 7% of total cost of goods sold, an increase from about 5% to about 7% due to a revised country list, with indirect exposure in national brands being mitigated through supplier partnerships.
• Q2 Guidance: Expects net sales (GAAP) to be down low single digits for FY2025 and adjusted EBITDA of $92 million to $94 million for Q2, indicating roughly 11% year-over-year growth at the midpoint of FY2025.
• Operational Initiatives: Completed cat category reset in May and began dog category reset, both executed earlier in the year than prior cycles to support growth in the back half.
• Services: This remains the fastest-growing business segment with ongoing software upgrades enabling over 40% of grooming appointments to be made online, improving customer availability and labor productivity.
• Expense Controls: Simmons emphasized the shift to a disciplined mindset on cost control, leveraging SG&A with a focus on sustainable efficiency rather than one-time cuts.
• Gross Margin Drivers: Improvements were driven by average unit cost and average unit retail management and data-driven pricing and markdown processes.
• Future Initiatives: Developing a new personalized membership program targeting a 2026 launch, with North Star customer segmentation analysis expected to guide growth strategy in the back half.

SUMMARY

When discussing Petco Health & Wellness (NASDAQ:WOOF), Simmons confirmed operating profit reached $16.4 million for Q1 2025, a $33 million improvement in operating profit from last year when including disposition costs, aided by expense leverage and margin expansion. Anderson detailed that strategic resets in product assortment, such as raising dog food shelves to increase capacity by more than 10%, commenced ahead of last year, supporting both operational efficiency and customer experience improvements. Simmons reiterated Petco's ability to maintain its full-year outlook even while absorbing current tariff levels, highlighting progress in both direct and indirect cost containment. Anderson noted that services have outpaced supplies, citing the ongoing positive impact of needs-based categories and service software enhancements on in-store traffic and retention. The company is prioritizing transaction growth as its main traffic driver by evolving its marketing message and completing assortment and operational resets.

• Simmons said, free cash flow was negative $44 million, primarily driven by incentive payout during the quarter.
• Anderson indicated that early signs from the May cat reset are "very promising" but the financial benefit from category resets is expected in future quarters, not immediately.
• A new membership program is being developed, with a full launch expected in 2026 and a potential soft relaunch in the back half of 2025.
• The company continues to target an improvement in its leverage ratio to below two times, as stated by management, with profitability recognized as the most important step toward this objective.

INDUSTRY GLOSSARY

• SKU: Stock Keeping Unit; a unique identifier for each distinct product and service available for sale, used to track inventory and sales performance at item level.
• UPT: Units Per Transaction; a metric indicating the average number of units sold per customer transaction, useful for assessing changes in basket size and transaction behavior.
• AUC: Average Unit Cost; the average direct cost to the company of goods sold, used as a lever for margin management.
• SG&A: Selling, General, and Administrative expenses; operating costs not directly tied to production, monitored for efficiency and leverage.
• COGS: Cost of Goods Sold; the direct costs attributable to the goods sold in a given period, including materials and direct labor.
• Disposition Costs: One-time charges associated with closing or disposing of assets, such as store closures.
• Vital Care: Petco’s proprietary membership and wellness program offering bundled pet care services, currently under strategic redesign.

Full Conference Call Transcript

Joel Anderson: And thank you for joining us today. As I discussed with you at the start of the year, we have a unique opportunity to reinvent our iconic brand for the future and position the business to regain share in the large, highly fragmented, and resilient pet market. We are taking a multiphased approach to this work through improving our operating model, giving our stores a voice, and restoring retail fundamentals. Our first quarter performance reflects these ongoing efforts as we delivered top-line results in line with expectations, but most importantly, over-delivered on our profitability goals.

This is a great testament to how our teams across the organization are coalescing around our overarching goal of delivering profitable sales growth while operating with discipline. I'm proud of our team's dedication, agility, and execution in delivering on our commitments. During the quarter, I had the opportunity to spend time with our district managers and our service leaders at our field leadership team meeting.

When we brought our stores and service leaders together for the first time ever, I saw firsthand the energy that was created by connecting as one Petco Health and Wellness Company, Inc. team and was motivated by the work underway to simplify our operations, strengthen our retail and services foundation, and get back to our roots. Our first quarter results bolster my confidence that we have the right strategy in place and a reenergized team that shares a collective commitment to unlocking Petco Health and Wellness Company, Inc.'s full potential. With phase one complete and a highly experienced leadership team in place, our full attention has quickly turned to phase two.

This phase is all about implementing and executing the multiple work streams we identified in phase one to improve our overall retail fundamentals and financial performance. Said another way, we are putting our work into action and seeing our customer respond and react in real time. The examples I will share with you today all represent foundational building blocks that will support us when we transition to phase three, focused on growth. Before getting into the progress against Phase II, I'd like to spend some time on sourcing, and the progress we've made to preserve maximum flexibility in the face of tariff uncertainties.

Our cross-functional teams across merchandising, assortment planning, supply chain, finance, and operations have mobilized together to identify various contingency plans and mitigation strategies. We are leaning into our long-standing scale vendor relationship, and we truly appreciate their partnership as we navigate ongoing fluid dynamics and uncertainty. The current environment has served as a catalyst to accelerate work that was already underway as we strengthen our operating fundamentals. We are working towards building best-in-class product cost management, pricing capabilities, and centralized operating principles to our product import process just to name a few.

I'm proud of the work the teams have accomplished to date and pleased to see them harnessing the energy that comes from seeing their work positively impact our results. Our ability to reiterate our full-year outlook despite absorbing the impact of tariffs currently in place illustrates the meaningful progress we've made. Now turning back to phase two, which is all about implementing and executing. Merchandise excellence is at the forefront of this work. As I discussed last quarter, we are optimizing our product assortment to more closely align with consumer demand. We are allocating more shelf space to higher productivity brands and SKUs.

Let me give you a couple examples the teams executed on since our last call, and then you can already see in our stores. First, we completed our cat category product reset at the May. Second, we kicked off our dog category reset this week. Both are being executed earlier in the year than we had done previously. While there are many elements that go into a planogram reset, key focus for this year centered around adding capacity for top-selling SKUs through both lower productivity SKU rationalization and increased shelf space. Let me give you one simple but powerful example. As we complete the dog food reset, you will see our shelves move about six inches higher.

While this may not seem material, it allows us to remove a lot of airspace throughout our dog consumable department and increases shelf capacity by more than 10%. This example demonstrates how detailed the teams are in fixing every part of our business. Increased capacity drives both operational improvements and customer experience enhancements. 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. When you put all this together, it reinforces Petco Health and Wellness Company, Inc. as a reliable destination for all our customers' pet care needs.

Another example you will begin to see in stores this quarter with a continued rollout throughout the year is a more strategic approach to end cap displays. Historically, our end cap displays were more transactional agreements with our vendors without a customer lens. Today, we are implementing a more strategic sales-focused approach that is mutually beneficial to Petco Health and Wellness Company, Inc., our vendor partners, and most importantly, our customers. We will leverage end cap displays to highlight newness, spotlight innovation, feature seasonal offerings, and promote value. I encourage all our vendors to bring forth ideas of newness and innovation that can create a physical spotlight for our customers' needs to better serve their pets.

Next, services, the fastest-growing area of the pet category. In my view, our services offering is what fortifies our competitive moat. We have an established leadership position and a differentiated model of owned grooming and vet locations at scale. During phase one, we identified several opportunities for improved productivity and have already implemented several of them. For example, our grooming software has been upgraded to allow more flexibility for online appointments. With over 40% of our appointments made online, it is important our pet parents constantly see multiple open time slots so they don't consider an alternative grooming solution. On the vet side, we've made several software enhancements to our vet scheduling system to ensure we have better coverage.

I believe our industry-leading services offering once optimized, will be a key driver of in-store customer traffic, customer retention, and loyalty over time. Our aim is to provide a comprehensive ecosystem that embodies our mission to improve the lives of pets and pet parents. Services remain our fastest-growing business and continue to deliver positive growth. Additionally, we are pleased with the productivity improvements seen in both hospitals and grooming operations supporting gross margin expansion in the quarter. With respect to operational efficiencies, as you've heard me talk for several quarters now, we are instilling an owner's mindset when it comes to cost discipline.

Though we've made some great progress in areas like marketing, store expenses, and supply chain, we have more opportunity ahead and are leaving no stone unturned across the organization. In light of a more uncertain macro environment, this work is paramount. I'm impressed with how our teams have come together working cross-functionally, and in a more coordinated fashion with everyone driving towards the same objective. Specifically, the operations team led by Joe Venizi, our Chief Revenue Officer, is working on three areas of improvement: store simplification, retail excellence around leveraging the One Petco Health and Wellness Company, Inc. way, and customer engagement. All three of these work streams were kicked off at the field leadership meeting I discussed earlier.

Since joining last year, Joy has quickly assessed the opportunities and is unifying both the services and operations team to make quick and lasting operational efficiencies. As we enter the second quarter, and move into the back half, we remain focused on positioning the business for a return to offense. But it is important to remind you that improving our retail fundamentals and delivering better financial performance is our first priority. We will continue driving productivity, while beginning to seed and test revenue growth initiatives across product innovation, marketing, and store experience. Finally, let me conclude our phase two progress from a customer lens. The Petco Health and Wellness Company, Inc. brand marks the 60th anniversary this year.

This is an amazing milestone not many retailers reach. With our rich heritage, we have an obligation to serve our customers a robust assortment of solutions-based and trend-right product with a compelling value proposition and we see significant opportunity to continue to improve on this front. Let me give you some specific examples of customer-facing areas you should expect to see change. Number one, our stores over time, will feature increased newness and more fun product with the convenient weekly consumable items they count on always being in stock. Number two, our marketing message will be evolving, to a more solutions-oriented framework showcasing our comprehensive offerings.

And number three, a new membership program is being designed to create a more personalized long-term loyalty experience an expected launch in 2026. In addition, our North Star work which we expect to complete in the back half of 2025, has helped us better understand the customer segments we can own. We are in the midst of conducting both qualitative and quantitative analysis that will inform both our strategy and our customer engagement going forward. Results of this work will be foundational to informing our phase three, a return to growth.

These examples demonstrate that while we are moving fast to productivity, and deliver better financial performance, we're equally now focused on identifying areas to grow and how to better communicate with our customers. We will be unified in our message, to include both online and in-store and utilize a test and learn approach. To ensure these changes truly resonate with our customers. We look forward to sharing more as this evolves on future calls this year. So in summary, 2025 is a year of transformation for Petco Health and Wellness Company, Inc. I'm incredibly pleased with the work accomplished to date which you can see in our Q1 results.

This is especially gratifying as it's all been done while we navigate today's evolving trade environment. Our leadership team and our board are aligned to the same goal of returning Petco Health and Wellness Company, Inc. to an industry-leading destination for pets, and pet parents. I want to thank our nearly 30,000 Petco Health and Wellness Company, Inc. partners for leaning into our transformation while simultaneously delivering customers the service and experience they look to Petco Health and Wellness Company, Inc. for. Acknowledging there is work ahead I'm confident in the detailed multiphased approach currently in place.

I'm pleased with the progress to date and optimistic in Petco Health and Wellness Company, Inc.'s ability to reach its full potential over time. With that, I'd like to turn the call over to Sabrina. Who will review the financials in more detail.

Sabrina Simmons: Thank you, Joel, and good afternoon, everyone. We entered the year with the number one financial priority being to restore the health of our economic model through three key pillars: gross margin expansion, SG&A leverage, and ROIC improvement. I'm very pleased we delivered against all three of these pillars in the first quarter. For the first quarter, comparable sales were down 1.3% with net sales down 2.3%. The difference between the comp and sales decline was driven by the 25 net store closures in 2024 and the additional five closures we had in Q1, bringing our ending store count to 1,393.

We expanded gross margin rate by over 30 basis points versus last year to 38.2% with expansion across both our product and services businesses. 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. We established stronger guardrails, implemented more robust reviews of our pricing gaps, and deployed more data-driven processes to better manage markdowns and promotions. All of this work exemplifies our focus on executing the retail fundamentals well with greater attention to detail and higher levels of accountability with the goal of expanding our margins.

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. As we've spoken about previously, this work is not a one-time cost-cutting exercise but rather a shift in mindset, resulting in greater efficiency, agility, and increased productivity. Given the turbulent environment, we are especially proud of how our teams have mobilized quickly to accelerate several efficiency initiatives such as optimization of marketing spend, and implementation of operational improvements in our store labor model.

We're pleased with the progress to date and our teams continue to identify further savings opportunities as we adopt this more disciplined mindset in our day-to-day operations. Operating profit was $16.4 million, an increase of $33 million or approximately $29 million when excluding disposition costs last year. Adjusted EBITDA increased $13.8 million to $89.4 million and expanded 105 basis points to 6% of sales. We're pleased that in the first quarter, we delivered on the framework we laid out at the start of the year to expand our gross margin rate and to leverage SG&A driving improvement in profitability. Moving to the balance sheet and cash flow.

We ended the quarter with a cash balance of $139 million, an improvement of $48 million versus last year. Inventory continues to be managed well with ending inventory 5% below last year. Free cash flow was negative $44 million primarily driven by incentive payout during the quarter. Now turning to our outlook. Let me start with an update on our tariff exposure. As a reminder, our most direct tariff exposure sits within our owned brands. On our fourth quarter call, we shared that our owned brand inventory purchases from China, Canada, and Mexico were about 5% of our total merchandise cost of goods sold.

When updating for the revised and expanded list of countries currently impacted, our exposure is only slightly higher at about 7%. Our indirect exposure sits primarily within our national brands. For many of these suppliers, we have long-standing relationships at scale, and we are partnering together to navigate fluid dynamics and deploy mitigation efforts. With that, for the full year, we are reiterating our full-year outlook for 2025. As a reminder, our outlook at the beginning of the year excluded any potential impact of tariffs. Assuming tariffs remain at today's current level and no higher, we believe we can still deliver on the outlook we provided at the start of the year.

For the full year, we continue to expect overall net sales to be down low single digits to last year which includes the impact of 20 to 30 net store closures in 2025. We continue to expect adjusted EBITDA to be between $375 million and $390 million. With regard to other guidance items, for the full year, we expect depreciation to be approximately $200 million, net interest expense of approximately $130 million, and approximately $125 to $130 million of capital expenditures with a greater focus on ROIC.

For the second quarter specifically, we expect net sales to be down low single digits versus the prior year and adjusted EBITDA to be between $92 million and $94 million, up approximately 11% year over year at the midpoint. In closing, I want to thank our teams across the organization for moving with urgency as we execute against the phases of our transformation while also mobilizing quickly and taking action to prioritize profitability in light of a fast-changing operating environment. We are pleased with the progress we've made as demonstrated in our first quarter results and guidance for the remainder of the year. With that, we welcome your questions.

Operator: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then 2. Limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. And your first question today will come from Michael Lasser with UBS. Please go ahead.

Sachin Verma: Good evening. Thank you for taking my question. This is Sachin Verma on for Michael Lasser. I'd like to start with what are you seeing in pet adoption trends and how do these trends impact your full-year outlook?

Joel Anderson: Yeah. Hey. Thanks for the call. You know, we're seeing it's pretty stable. Not much change from the last call we had. And as far as the full year goes, I said this last quarter as well, 2025 is really a self-help story for Petco Health and Wellness Company, Inc. So we're not relying on any tailwinds from the category, like pet adoption, to increase in order for us to deliver on the financial improvements that we talked about on this call and the last call. So we feel really good about the progress we've made, and I think Q1 is a great indicator of how strong the year is playing out. Thank you.

Sachin Verma: My follow-up question is, as you're focused on improving your profitability and not focused on one-time cost out, how are you ensuring guardrails to take permanent costs out while keeping the customer experience intact? In other words, what kind of ways are you looking to take permanent costs out while still maintaining your top line and adjusted EBITDA? Thank you.

Joel Anderson: Yes. It's a good question. And maybe I'll turn it over to Sabrina for some specifics. But I can tell you, Sabrina's been here about ninety days now. And the discipline, you know, she's brought to the entire organization on cost controls has been a great focus for all of us, and you know, Sabrina, maybe you want to talk about a couple of the findings you found and, you know, how we're not focused on one-time.

Sabrina Simmons: And I'll start at the highest level. You know, I talked about last quarter and again this quarter. That we're really working on a change in mindset. That's the most important thing. Also, as I've articulated, 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.

Sachin Verma: Thank you, and good luck.

Operator: And your next question today will come from Simeon Gutman with Morgan Stanley. Please go ahead.

Simeon Gutman: Good afternoon, everyone. Hi, Joel. Hi, Sabrina. Hey, Joel, the top line journey, I realize Phase three is still a ways away, return to growth. As far as the pieces that you're putting in place now, can you go to the baseball analogy? Are you in the beginning innings, or you still haven't even started in terms of the repositioning, brand, product assortment, anything, you know, front-end customer-facing?

Joel Anderson: Yeah. Look, Simeon, great question. I think to answer the baseball analogy, it depends on how you're looking at it. You know, from your guys' perspective on the outside, you would say, you know, we haven't even started. You haven't seen it. But I'll tell you, inside, you know, we're already beginning to identify several levers of growth. We gotta get better at, you know, one voice to our customer. We're an omnichannel retailer. And I think that's real opportunities are our marketing being more solutions-oriented. You know, we're starting to look at a lot of product innovation, which brings newness and differentiation. The North Star project work is underway.

And so all those put together are really starting to bubble up a lot of ideas on the organization. And just like in phase one on the cost cutting, we started with, you know, really looking at all the opportunities, and phase two has been about implementing and executing. We're doing the same on the growth side, Simeon. Right now, we're gathering the ideas, looking at all of them, and then we're gonna put them through a lens of both test and learn backed up with data and analytics to ensure they really produce, you know, profitable growth for us. So the work is starting.

You just won't see it yet until we get to the back half and into 2026.

Simeon Gutman: Thanks, Simeon.

Simeon Gutman: Thanks. I don't know if I can do a follow-up. But I wanted to ask when Sabrina was mentioning think pricing gaps, looking at some things. I don't know if that was in reference to markdowns or actual price gaps that you have versus competitors. Today. So I wanted to ask what you learned, and are there any things that you learned through this sounds like deep dive on the merchandising and product side. Where there's some opportunities either to drive top line or actually take out cost.

Sabrina Simmons: Yeah. Maybe I'll start with that since those were my words and explain and clarify what I meant. So we, as you know, in 2023, started to shift and broaden our assortment to make sure we had enough value for our customers. So that was really important work strategically. Execute was a bit choppy. We're working through that now. So we're looking at our full assortment how we're offering value to our customer, at sort of every level of target. And unlike I would say, importantly, unlike maybe some other retailers we were already in progress on using all our levers, including pricing as a tool for our margin expansion goals, long before tariffs in the current macro situation.

So that's sort of how we think about it. We're always balancing what the customer needs with, you know, driving the health of our own business. And, certainly, none of this is a one fits all approach. We're doing work very surgically down to the SKU level, and using a lot of good data and analytics now.

Simeon Gutman: Thanks. Good luck.

Simeon Gutman: Thanks. Your next question today will come from Steven Zaccone with Citi. Please go ahead.

Steven Zaccone: Great. Afternoon. Thanks very much for taking my question. I was gonna focus on margins. So, Sabrina, could you just talk about gross margin a bit, how that versus your own expectations? And then in light of some of the new news and the guide, should we still expect gross margin to expand for the full year?

Sabrina Simmons: Yeah. So I will start with the quarter. We're pleased with where we came out. We actually, I think I said in my remarks last quarter that we would start modestly initially on this journey of expanding our margins. So pleased where they came out. AUC was a powerful lever this quarter, but, of course, we're using every lever in the margin mix as we move forward. And it's very much still our goal to deliver gross margin expansion for the year. We feel given our starting point, given all our work with all our levers, including not just the AUC side, but, of course, promo markdown clearance, assortment mix, pricing, that is a very, very important goal for us.

Steven Zaccone: Okay. And then maybe a sales question to follow up because it sounds like you did a bit of a planogram reset here in the month of May. You know, as you think about that as an impact to sales, could this be a bit of a helper in the near term, or you know, the phase three to kinda return to growth is probably gonna take a little bit longer?

Joel Anderson: Yeah. No. Look. I think the cat and dog reset that I spoke to on my prepared remarks was really more to show you a specific example of how we're making progress. And the fact that we pulled that up into the year earlier is certainly will show up as we get into the back half of the year. You know, it's remember, every time you do these resets, they're very disruptive, so you don't see an improvement immediately. But you know, early signs of the cat reset look very promising and we gotta get through the dog reset next week.

But we wouldn't have brought these forward if we didn't think they wouldn't be a contributor to, you know, getting back to growth in the back half of the year. But you shouldn't see it in Q2 as much as you'll see it in future quarters.

Steven Zaccone: Okay. Thanks for the detail.

Joel Anderson: You bet.

Operator: Again, if you have a question, please press star and then 1. And your next question today will come from Kaumil Gajrawala with Jefferies. Please go ahead.

Kaumil Gajrawala: Hey, everyone. Can we maybe just talk a little bit about sort of services versus supplies, different sort of divisions if you're seeing anything in today's consumer environment that's maybe suggesting that maybe they're fine, which is what we hear from some, or that things are weaker and maybe they're delaying pet purchases or maybe they're backing off of discretionary. I'm just curious if you look at the mix of your revenue, if it tells you anything about where the consumer is.

Joel Anderson: Yeah. I mean, look, services know, has continued to lead our business. And I think it's leading for a couple reasons. But most importantly, it's leading because, you know, as I said, this is a self-help story year, and we saw significant opportunities for us to increase productivity. I gave you a couple examples in my prepared remarks, and, you know, I'll reiterate the grooming one. We've made several upgrades to the software so that our pet parents are always seeing openings in our grooming calendar. Almost 50% of our customers schedule a grooming appointment online.

And if they don't see openings or they have to wait a week or two, they're gonna consider somebody else besides Petco Health and Wellness Company, Inc. So that change has been very, very positive for us. You know, grooming is something that probably is more needs-based than, say, supplies. And so we continue to see our more needs-based categories driving our business. And I think that's a testament to how resilient the overall pet category is. And two out of the three of our pet categories are consumable in nature or needs-based in nature. So that'll continue to drive the business for us.

Kaumil Gajrawala: Got it. Thank you.

Joel Anderson: You bet.

Operator: And your next question today will come from Kendall Toscano with Bank of America. Please go ahead.

Kendall Toscano: Hi. Thanks for taking my question. I was curious if another kind of follow-up on the category growth. Just given that services, it looks like the growth slowed a little bit just plus 1% year over year. Curious within services if there's any callouts in terms of businesses that are still seeing stronger growth versus maybe any that were a little bit softer in the quarter? Thanks.

Sabrina Simmons: Yes. You want me to start on that, Joel? I would say within services, we have our Vital Care membership business. And as Joel talked about, we're super excited about relaunching that. We're doing a lot of work in the back half, and we'll have the bigger relaunch in '26. We might have some soft relaunch in the back half. But because we have been deemphasizing that, while we work, to relaunch it, that is within services and others. And that's actually been a bit of a drag. Our core service business without that is actually quite healthy.

Joel Anderson: Yeah. And continues to get stronger as we make the changes that I just gave an example from the previous question.

Kendall Toscano: Got it. Okay. That's helpful. And then another question on category sales was just for consumables. With that inflecting negatively during the quarter. Curious if that was in line with expectations and what kind of contributed to the softness there?

Joel Anderson: Yeah. No. That was certainly in line with expectations. And you know, of the reason we pull forward the reset is we can see the advantages that'll have for us on having a bigger impact later in the year. But as we continue to, you know, clean up promotions that I like to call empty calorie, that is kind of self-induced. But we're really pleased with the margin profile and how we're continuing to get that business back on track.

Kendall Toscano: Thank you.

Joel Anderson: You're welcome.

Operator: And your next question today will come from Steve Forbes with Guggenheim. Please go ahead.

Jake Nevauch: Hey, guys. This is Jake Nevauch on for Steve. Yeah. Quick question on, you know, I guess, thinking through your wallet share opportunities here. So you know, help us frame maybe help us frame up, you know, I guess, what are your most loyal customer cohorts looking for here? You know, it sounds like you guys have a lot of you know, done a lot of work on, and then some exciting opportunities up ahead here. But maybe know, help us frame, you know, what, you know, maybe in order of magnitude, you know, what the you know, what your loyal cohorts are looking for here. Thank you very much.

Joel Anderson: Yeah. Look. I think you'll hear more about that from us as we complete our North Star work. We're right in the middle right now of really understanding the customer segments that we believe we cannot only win but grow. And so the stage we're in with our North Star work is really doing some qualitative and quantitative analysis of that. And, you know, with that'll really inform everything we do as we focus on growth in the back half of the year, but it's too early yet here to, you know, give you some specifics on the segmentation piece of it.

Jake Nevauch: Got it. Thank you.

Joel Anderson: You're welcome.

Operator: And your next question today will come from Oliver Wintermantel with Evercore. Please go ahead.

Oliver Wintermantel: I had a question on your leverage ratio. In your deck, you said that you wanna achieve below two times. Can you give us a little bit more details on the timing and what you expect the free cash flow to look like this year?

Sabrina Simmons: Yes. So that is a very important goal that will take some time, and the first step forward is to focus on profitability that we've articulated. So as we increase profit, that will clearly bring the ratio back into a better position where we want it. The advantage of driving to this profitability goal is also that it improves free cash flow, obviously. So we're very focused on both. But the profitability is the most important piece of achieving our goals both on bringing down the leverage ratio and expanding our cash flow over time.

Oliver Wintermantel: Got it. And then on the comp, can you maybe talk a little bit about what the drivers were? Was it mostly transactions? Or was there some AUR offsets? Just to level test here. Thank you.

Sabrina Simmons: Yep. The strongest driver in the comp quarter was UPTs. And the drag, the offset was mostly in transactions. So that's where we'll be really focused as we evolve the marketing message that Joel was talking about. In driving traffic back into the store once we have this new setup. Add new assortment, then roll out more exciting marketing, that's the big lever that we wanna see improve is transactions.

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

Operator: And your final question today will come from Peter Benedict with Baird. Please go ahead.

Peter Benedict: Hey. Hey, guys. Thanks for taking the question. Curious just your view on inflation and pricing. What the view is over the balance of this year, what's kind of baked whether it be on the commodity front, the food front, or I know you have kind of tariff exposure, but just on those items, what's the outlook in terms of pricing? Thank you.

Joel Anderson: Look. You heard our forecast, and that forecast includes us embedding the tariff impact. And, you know, I think the tariff aside, it's been relatively stable, and it's something we're watching consistently. But we haven't seen any, you know, strong spikes in inflation year to date. But we're certainly watching that piece and seeing where tariffs lay out.

Sabrina Simmons: Yeah. And just to reiterate a little bit what I said, our approach and strategy around pricing started long before any of the choppiness and the noise in the macro. So we are always going to balance what is best for our customer with what is best for our business. And any action we take in pricing, whether up or at times down, is gonna be surgical and focused on hitting that balance for both our customers and our business.

Peter Benedict: Okay. That's helpful. Then maybe just a follow-up I think, some of may have asked about price maps. You mentioned that earlier. I was a little unclear. Have you identified price gaps, places where maybe you were off size or have you addressed those? Just curious maybe expand a little more on the price cap comment that you had earlier.

Joel Anderson: Yeah. No. Look. I think Sabrina said it in her comment. We're down looking at the SKU level and not just at the category level. And so we've identified opportunities where we took price down. We've identified opportunities where we think there was an opportunity to take some price up. But, you know, as Sabrina said, reiterate, you know, this has been part of our holistic look at improving the retail fundamentals of the business more than it just being a tariff exercise. But we feel really good about the progress we've made on price and making sure we're able to still deliver value for our customers. It was a really good quarter for us.

We feel really good on the long-term strategy. The progress we made with leadership team, with a phased approach is really working, and I think the Q1 results are a great example of that.

Peter Benedict: Yep. Understood. Thank you. Good luck.

Joel Anderson: Thank you. Thank you.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Tina Romani for any closing remarks.

Tina Romani: Fantastic. Thank you, Joel and Sabrina, and thank you, everyone, for your time and questions. As always, feel free to reach out to the IR team for any follow-ups. And that concludes today's call.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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