Petco Confirms 2025 EBITDA Goal of $375M-$390M Amid Ongoing Transformation

Earnings Call Insights: Petco Health and Wellness Company, Inc. (WOOF) Q1 2025

Management View

• CEO Joel D. Anderson highlighted a multi-phased approach to reinventing the Petco brand and restoring retail fundamentals, stating, "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." Anderson emphasized the completion of Phase 1 and the transition to Phase 2, which focuses on implementing work streams to improve retail fundamentals and financial performance. He described actions such as product assortment optimization, SKU rationalization, and enhancing shelf capacity, noting, "As we complete the dog food reset, you will see our shelves move about 6 inches higher... increases shelf capacity by more than 10%."
• The CEO stressed the importance of operational improvements, such as cost discipline and store simplification, and spotlighted services as "the fastest-growing area of the pet category" and a foundation for competitive differentiation.
• CFO Sabrina Louise Simmons stated, "We entered the year with the #1 financial priority being to restore the health of our economic model through 3 key pillars, gross margin expansion, SG&A leverage and ROIC improvement." Simmons reported a gross margin rate of 38.2% for the quarter, expanded by over 30 basis points, and highlighted expense leverage of more than 180 basis points.

Outlook

• The company reiterated its full-year 2025 outlook, expecting overall net sales to be down low single digits from the previous year, including the impact of 20 to 30 net store closures. Adjusted EBITDA is projected between $375 million and $390 million.
• For the second quarter, net sales are expected to be down low single digits versus the prior year, with adjusted EBITDA between $92 million and $94 million. Simmons stated, "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."
• The company expects depreciation of approximately $200 million, net interest expense of $130 million, and capital expenditures of $125 million to $130 million, focusing on return on invested capital.

Financial Results

• Comparable sales declined 1.3%, and net sales fell 2.3%, attributed to store closures. Gross margin rate expanded to 38.2%.
• Operating profit was $16.4 million, an increase of $33 million compared to last year. Adjusted EBITDA rose to $89.4 million, expanding 105 basis points to 6% of sales.
• Cash balance at quarter end was $139 million, an improvement of $48 million year-over-year. Inventory was managed 5% below last year. Free cash flow was negative $44 million, primarily due to incentive payouts.

Q&A

• Sachin Verma, UBS, asked about pet adoption trends and their impact on the outlook. Anderson responded that trends are stable and reiterated, "2025 is really a self-help story for Petco. So we're not relying on any tailwinds from the category like pet adoption increase."
• Verma followed up on permanent cost reduction. Simmons explained, "We're really working on a change in mindset... Our goal is not just about cost cutting. Our goal is to leverage SG&A."
• Simeon Gutman, Morgan Stanley, asked about the timing of growth initiatives. Anderson replied, "From your guy's perspective on the outside, I would say we haven't even started, you haven't seen it. But... inside we're already beginning to identify several levers of growth."
• Steven Zaccone, Citi, inquired about gross margin performance and expectations. Simmons stated, "We actually... would start modestly initially on this journey of expanding our margins. So pleased where they came out. AUC was a powerful lever this quarter."
• Kaumil Gajrawala, Jefferies, asked about the consumer environment and category mix. Anderson said, "Services has continued to lead our business... Grooming is something that probably is more needs-based than, say, supplies."
• Kendall Toscano, BofA, asked about the slower growth in services. Simmons cited the Vital Care membership business relaunch as a temporary drag, adding, "Our core service business without that is actually quite healthy."
• Oliver Wintermantel, Evercore, questioned the leverage ratio goal. Simmons emphasized, "The first step forward is the focus on profitability... as we increase profit that will fairly bring the ratio back into a better position."
• Peter Benedict, Baird, asked about inflation and pricing. Anderson said, "We haven't seen any strong spikes in inflation year-to-date."

Sentiment Analysis

• Analysts displayed a neutral to slightly cautious tone, probing for details on growth timing, cost reductions, margin expansion, and category performance, with several questions focused on ongoing transformation execution and the pace of returning to growth.
• Management maintained a confident and optimistic tone, stressing discipline and the multi-phased transformation, with frequent references to "profitable growth," "cost discipline," and the "right strategy." Quotes such as "I'm confident in the detailed multi-phased approach currently in place" reflected this.
• Compared to the previous quarter, analyst questions were more focused on timing for growth and the impact of operational changes, while management continued to emphasize foundational improvements and margin expansion.

Quarter-over-Quarter Comparison

• The company maintained guidance for full-year net sales and adjusted EBITDA, reiterating the same EBITDA target of $375 million to $390 million.
• Strategic focus continues to shift from cost controls and operational discipline (Phase 1) to execution of productivity and assortment changes (Phase 2), with growth initiatives (Phase 3) set for later in 2025 and into 2026.
• Analysts in both quarters emphasized timing and sustainability of improvements, but the current quarter saw more questions on the pace of in-store resets and the impact of service business adjustments.
• Management tone remained confident, with increased specificity around operational improvements and a greater emphasis on recent execution and early signs of productivity gains.

Risks and Concerns

• Tariff uncertainty remains a challenge, with management noting, "Our cross-functional teams... have mobilized together to identify various contingency plans and mitigation strategies."
• The company cited a "more uncertain macro environment" and the need for "cost discipline" across operations.
• Analysts expressed concerns about the timing and impact of service business adjustments, category performance, and maintaining customer experience during cost reductions.

Final Takeaway

Petco’s leadership reaffirmed its commitment to a disciplined, multi-phased transformation with a focus on restoring retail fundamentals, expanding gross margins, and leveraging SG&A. The company maintained its full-year outlook despite ongoing tariff headwinds, highlighted operational improvements in services and product assortment, and signaled that foundational changes are paving the way for future growth, with new loyalty and marketing initiatives expected to emerge in 2026.

Read the full Earnings Call Transcript

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