Petco’s Earnings Call: Profitability Amid Challenges

Petco Health And Wellness Company Inc ((WOOF)) has held its Q1 earnings call. Read on for the main highlights of the call.

Petco’s Earnings Call: A Cautiously Optimistic Outlook

Petco Health and Wellness Company Inc. recently held its earnings call, showcasing a strong sentiment of profitability growth and operational efficiency. Despite facing challenges such as declining sales and tariff exposure, the company is focusing on enhancing its retail fundamentals and leveraging operational efficiencies, particularly in its services segment. The overall outlook remains cautiously optimistic as Petco transitions towards growth initiatives.

Profitability Overperformance

Petco delivered top-line results that aligned with expectations while surpassing profitability goals. The company reported an increase in adjusted EBITDA by $13.8 million, reaching $89.4 million, and expanding 105 basis points to 6% of sales. This highlights Petco’s ability to maintain strong profitability even amidst sales challenges.

Gross Margin Expansion

The earnings call revealed a gross margin rate expansion of over 30 basis points, reaching 38.2%. This improvement was seen across both the product and services business, indicating a robust performance in managing costs and enhancing profitability.

Operational Efficiencies

Petco achieved more than 180 basis points of expense leverage, excluding last year’s one-time costs, and leveraged approximately 160 basis points. This demonstrates the company’s commitment to operational efficiencies, which are crucial in offsetting sales declines.

Service Segment Growth

The services segment remains the fastest-growing area for Petco, contributing significantly to gross margin expansion. Improvements in grooming and veterinary operations have bolstered this segment, showcasing its potential as a key driver of future growth.

Strong Cash Position

Petco ended the quarter with a cash balance of $139 million, marking an improvement of $48 million compared to the previous year. This strong cash position provides the company with the flexibility to invest in growth initiatives and navigate economic uncertainties.

Decline in Comparable Sales

The company reported a 1.3% decline in comparable sales and a 2.3% decrease in net sales, primarily driven by net store closures in 2024 and Q1 2025. While this decline is a concern, it was anticipated and factored into the company’s strategic planning.

Impact of Tariffs

Petco’s exposure to tariffs increased slightly from 5% to about 7% due to expanded lists of impacted countries. This presents a challenge, but the company is working to mitigate the impact through strategic sourcing and cost management.

Consumables Sales Decline

The earnings call highlighted a decline in consumables sales, contributing to the overall sales downturn. However, this trend was in line with expectations, and the company is actively working on strategies to address this issue.

Forward-Looking Guidance

Petco’s leadership emphasized their successful execution of profitability goals, despite a top-line performance in line with expectations. The company forecasts a decline in net sales by low-single digits for the full year, with adjusted EBITDA expected to range between $375 million to $390 million. Capital expenditures are projected to be approximately $125 million to $130 million. Petco is implementing strategies for merchandise optimization and operational efficiencies to sustain profitability, with plans for a new membership program in 2026 to enhance customer engagement and loyalty.

In conclusion, Petco’s earnings call reflected a cautiously optimistic sentiment, with strong profitability and operational efficiency despite sales challenges. The company is strategically focusing on growth initiatives and operational improvements to navigate the current economic landscape and drive future success.