Petco Health and Wellness Q1 2026 Earnings Report

Petco Health and Wellness EPS Results

• Actual EPS: -$0.04
• Consensus EPS: -$0.01
• Beat/Miss: Missed by -$0.03
• One Year Ago EPS: -$0.04

Petco Health and Wellness Revenue Results

• Actual Revenue: $1.49 billion
• Expected Revenue: $1.50 billion
• Beat/Miss: Missed by -$7.57 million
• YoY Revenue Growth: -2.30%

Petco Health and Wellness Announcement Details

• Quarter: Q1 2026
• Date: 6/5/2025
• Time: After Market Closes
• Conference Call Date: Thursday, June 5, 2025
• Conference Call Time: 4:30PM ET

Petco Health and Wellness (NASDAQ:WOOF), operates as a health and wellness company, focuses on enhancing the lives of pets, pet parents, and its Petco partners in the United States, Mexico, and Puerto Rico. The company provides veterinary care, grooming, training, tele-health, and Vital Care and pet health insurance services, as well as veterinary services through Vetco mobile clinics. It also offers pet consumables, supplies, and services through its petco.com, petcoach.co, petinsurancequotes.com, and pupbox.com websites. The company offers its products under the WholeHearted, Reddy, and Well & Good brands. Petco Health and Wellness Company, Inc. was founded in 1965 and is headquartered in San Diego, California.

Petco Health and Wellness Q1 2026 Earnings Call Transcript

Key Takeaways

• Comparable sales fell 1.3% and net sales declined 2.3% in Q1 (driven by 30 net store closures), yet gross margin expanded 30 bps to 38.2% and EBITDA margin rose 105 bps to 6% with 180 bps of SG&A leverage.
• In Phase II of its transformation, Petco accelerated cat and dog category planogram resets, increasing shelf capacity by over 10% to boost in-stock availability and reduce labor for replenishment.
• Service businesses—grooming and vet—saw productivity gains after software upgrades improved online appointment flexibility and scheduling coverage, contributing to gross margin expansion.
• Cross-functional teams deployed tariff mitigation strategies with vendor partners to manage ~7% owned-brand exposure, allowing Petco to reaffirm full-year guidance of low-single-digit sales declines and $375M–$390M in adjusted EBITDA.
• An owner’s mindset on cost discipline produced permanent SG&A savings through store simplification, marketing optimization, and supply chain efficiencies, supporting long-term operating profit and ROIC improvement goals.

Presentation

[Operator]

afternoon, and welcome to the Petco First Quarter twenty twenty five Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Tina Romani, Head of Investor Relations and Treasury. Please go ahead.

[Tina Romani, Head of Investor Relations at Petco Health and Wellness Company]

Good afternoon, and thank you for joining Petco's First Quarter twenty twenty five Earnings Conference Call. In addition to the earnings release, there is a presentation available to download on our website at ir.pepco.com. On the call with me today are Joel Anderson, PEPCO's Chief Executive Officer and Sabrina Simmons, Petco's Chief Financial Officer. Before we begin, I'd like to remind everyone that on this call, we will make certain forward looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties include those set out in our earnings materials and SEC filings.

[Tina Romani, Head of Investor Relations at Petco Health and Wellness Company]

In addition, on today's call, we will refer to certain non GAAP financial measures. Reconciliations of these measures can be found in our earnings release, presentation, and SEC filings. With that, I'll turn it over to Joel.

[Joel Anderson, CEO at Petco Health and Wellness Company]

Good afternoon, everyone, 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 multi phased 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.

[Joel Anderson, CEO at Petco Health and Wellness Company]

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 bought our stores and service leaders together for the first time ever, I saw firsthand the energy that was created by connecting as one Petco 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 re energized team that shares a collective commitment to unlocking Petco's full potential. With Phase I complete and a highly experienced leadership team in place, our full attention has quickly turned to Phase II.

[Joel Anderson, CEO at Petco Health and Wellness Company]

This phase is all about implementing 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 two, 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.

[Joel Anderson, CEO at Petco Health and Wellness Company]

We are leaning into our long standing, scaled 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, 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 have made.

[Joel Anderson, CEO at Petco Health and Wellness Company]

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, and we are allocating more shelf space to higher productivity brands and SKUs. Let me give you a couple of examples the teams executed on since our last call and that you can already see in our stores. First, we completed our cat category product reset at the May.

[Joel Anderson, CEO at Petco Health and Wellness Company]

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.

[Joel Anderson, CEO at Petco Health and Wellness Company]

While this may not seem material, it allows us to remove a lot of air space 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 stock outs and improving labor productivity by eliminating constant or continuous shelf replenishment between truck replenishments. From the customer perspective, we are improving shopability with higher in stock availability.

[Joel Anderson, CEO at Petco Health and Wellness Company]

When you put all this together, it reinforces Petco 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, 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.

[Joel Anderson, CEO at Petco Health and Wellness Company]

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.

[Joel Anderson, CEO at Petco Health and Wellness Company]

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.

[Joel Anderson, CEO at Petco Health and Wellness Company]

Services remains our fastest growing business and continues 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.

[Joel Anderson, CEO at Petco Health and Wellness Company]

I am 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 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, Joe 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.

[Joel Anderson, CEO at Petco Health and Wellness Company]

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 II progress from a customer lens. The Petco brand marks the sixtieth anniversary this year. This is an amazing milestone not many retailers reach.

[Joel Anderson, CEO at Petco Health and Wellness Company]

With our rich heritage, we have an obligation to serve our customers a robust assortment of solutions based and trend right products 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 with an expected launch in 2026.

[Joel Anderson, CEO at Petco Health and Wellness Company]

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 and quantitative analysis that will inform both our strategy and our customer engagement going forward. The 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 improve productivity and deliver better financial performance, we are 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.

[Joel Anderson, CEO at Petco Health and Wellness Company]

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. 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 to an industry leading destination for pets and pet parents.

[Joel Anderson, CEO at Petco Health and Wellness Company]

I want to thank our nearly 30,000 Petco partners for leaning into our transformation, while simultaneously delivering customers the service and experience they look to Petco for. Acknowledging there is work ahead, I am confident in the detailed, multi phased approach currently in place. I'm pleased with the progress to date and optimistic in Petco'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, CFO at Petco Health and Wellness Company]

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 and 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 thirteen ninety three.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

We expanded gross margin rate by over 30 basis points versus last year to 38.2% with expansion across both our products 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 a goal of expanding our margins. It's through the same focus on disciplined execution that we delivered more than 180 basis points of expense leverage during the quarter.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

Excluding last year's one time disposition costs, we leveraged approximately 160 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 $16,400,000 an increase of $33,000,000 or approximately 29,000,000 when excluding disposition costs last year.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

Adjusted EBITDA increased $13,800,000 to $89,400,000 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 and A driving improvement in profitability. Moving to the balance sheet and cash flow. We ended the quarter with a cash balance of $139,000,000 an improvement of $48,000,000 versus last year. Inventory continues to be managed well with ending inventory 5% below last year.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

Free cash flow was negative $44,000,000 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.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

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 longstanding 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.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

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 $375,000,000 and $390,000,000 With regard to other guidance items, for the full year, we expect depreciation to be approximately $200,000,000 net interest expense of approximately $130,000,000 and approximately 125,000,000 to $130,000,000 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 92,000,000 and $94,000,000 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.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

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 one 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. And your first question today will come from Michael Lasser with UBS. Please go ahead.

[Sachin Verma, Equity Research Associate Director at UBS Group]

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, CEO at Petco Health and Wellness Company]

Yeah. Hey, thanks for the call. You know, we're seeing it's it's it's pretty stable, not not much change from the last call we had. And as far as the full year goes, and I said this last quarter as well, the 2025 is really a self help story for Petco. 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.

[Joel Anderson, CEO at Petco Health and Wellness Company]

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.

[Sachin Verma, Equity Research Associate Director at UBS Group]

Thank you. My follow-up question is, as you're focused on improving your profitability and not focusing on onetime 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, CEO at Petco Health and Wellness Company]

Yes. It's 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 she's brought to the entire organization on cost controls has been a great focus for all of us. And maybe you wanna talk about a couple of the findings you found and how we're not focused on one time.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

Yeah. And I'll 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.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

Our goal is to leverage SG and 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 and A well and still deliver 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 returns and help drive our business growth going forward.

[Sachin Verma, Equity Research Associate Director at UBS Group]

Thank you, and good luck.

[Operator]

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

[Simeon Gutman, Analyst at Morgan Stanley]

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?

[Simeon Gutman, Analyst at Morgan Stanley]

Are you in the beginning innings? Or you still haven't even started in terms of the repositioning, brand, product assortment, anything front end customer facing?

[Joel Anderson, CEO at Petco Health and Wellness Company]

Yeah. Look, Simeon, great question. I think to answer the baseball analogy, it depends on how you're looking at it. From your guys' perspective on the outside, you would say, we haven't even started, you haven't seen it. But I'll tell you, inside, we're already beginning to identify several levers of growth.

[Joel Anderson, CEO at Petco Health and Wellness Company]

We got to get better at one voice to our customer. We're an omnichannel retailer, and I think that's real opportunities. Our marketing being more solutions oriented, 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.

[Joel Anderson, CEO at Petco Health and Wellness Company]

And just like in phase one on the cost cutting, we started with 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 going to put them through a lens of both test and learn backed up with data and analytics to ensure they really produce 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 'twenty six. Thanks, Simeon.

[Simeon Gutman, Analyst at Morgan Stanley]

Thanks. I don't know if I can do a follow-up, but I wanted to ask when Sabrina was mentioning, I think pricing gaps, looking at some things. I 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, It sounds like deep dive on the merchandising and product side, where there's some opportunities either to drive top line or actually take out costs.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

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. The execution was a bit choppy. We're working through that now.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

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, you know, 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.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

We're doing work very surgically down to the SKU level and using a lot of good data and analytics now.

[Joel Anderson, CEO at Petco Health and Wellness Company]

Thanks. Good luck. Thanks.

[Operator]

Your next question today will come from Steven Zaccone with Citi. Please go ahead.

[Steven Zaccone, Director, Equity Research, Hardlines Retail at Citi]

Great. Good 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 performed versus your own expectations?

[Steven Zaccone, Director, Equity Research, Hardlines Retail at Citi]

And then in light of some of the new news in the guide should we still expect gross margin to expand for the the full year?

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

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. Pleased where they came out.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

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, Director, Equity Research, Hardlines Retail at Citi]

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. 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 kind of return to growth is probably going take a little bit longer?

[Joel Anderson, CEO at Petco Health and Wellness Company]

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. 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, Director, Equity Research, Hardlines Retail at Citi]

Okay. Thanks for the detail.

[Operator]

And your next question today will come from Kamil Gajrawala with Jefferies. Please go ahead.

[Kaumil Gajrawala, Managing Director at Jefferies Financial Group]

Hey, everyone. Can we maybe just talk a little bit about sort of services versus supplies and then 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, CEO at Petco Health and Wellness Company]

Yeah, I mean, look, services has continued to lead our business, and I think it's leading for a couple reasons. But most importantly, it's leading because, as I said, this is 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 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 going to consider somebody else besides Petco.

[Joel Anderson, CEO at Petco Health and Wellness Company]

So that change has been very positive for us. 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, Managing Director at Jefferies Financial Group]

Got it. Thank you.

[Joel Anderson, CEO at Petco Health and Wellness Company]

You bet.

[Operator]

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

[Kendall Toscano, Analyst at Bank of America]

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. Now, I was 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.

[Tina Romani, Head of Investor Relations at Petco Health and Wellness Company]

Yeah, you want me to start on that Joel?

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

Yeah, I would say within services, 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.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

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, CEO at Petco Health and Wellness Company]

Yeah, and continues to get stronger as we make the changes that I just gave an example from the previous question.

[Kendall Toscano, Analyst at Bank of America]

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, CEO at Petco Health and Wellness Company]

Yeah, no, that was certainly in line with expectations. Part of the reason we pulled 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 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, Analyst at Bank of America]

Thank you.

[Joel Anderson, CEO at Petco Health and Wellness Company]

You're welcome.

[Operator]

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

[Jacob Nivasch, Consumer & Retail Equity Research Associate at Guggenheim Securities]

Hey, guys. This is Jake Neibosh on for Steve. Yeah. A 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?

[Jacob Nivasch, Consumer & Retail Equity Research Associate at Guggenheim Securities]

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, you know, help us frame maybe in order of magnitude what your loyal cohorts are looking for here. Thank you very much.

[Joel Anderson, CEO at Petco Health and Wellness Company]

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 can not 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 with that, that'll really inform everything we do as we focus on growth in the back half of the year, but too early yet here to give you some specifics on the segmentation piece of it.

[Jacob Nivasch, Consumer & Retail Equity Research Associate at Guggenheim Securities]

Got it. Thank you.

[Operator]

You're welcome. And your next question today will come from Oliver Wintermantel with Evercore. Please go ahead.

[Oliver Wintermantel, Analyst at Evercore]

Yes, thanks very much. I had a question on your leverage ratio. In your deck, you said that you want to 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, CFO at Petco Health and Wellness Company]

Yes. So that is a very important goal that will take some time. And the first step forward is the 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.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

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, Analyst at Evercore]

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 set us there. Thank you.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

Yep. The strongest driver in the comp this 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, Analyst at Evercore]

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, Senior Research Analyst at Baird]

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

[Joel Anderson, CEO at Petco Health and Wellness Company]

Look, you heard our forecast and that forecast includes us embedding the tariff impact. And 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 and seeing where tariffs lay out.

[Sabrina Simmons, CFO at Petco Health and Wellness Company]

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 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, Senior Research Analyst at Baird]

Okay. That's helpful. Then maybe just a follow-up on, I think some of may have asked about price gaps. You mentioned that earlier. Was a lot unclear.

[Peter Benedict, Senior Research Analyst at Baird]

Have you identified price gaps, places where maybe you were offsides? Or have you addressed those? Just curious to maybe expand a little more on the price gap comment that you had earlier. Thanks so much.

[Joel Anderson, CEO at Petco Health and Wellness Company]

Yeah. No. Look, we we I think Sabrina said 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.

[Joel Anderson, CEO at Petco Health and Wellness Company]

But as Sabrina said, reiterate, 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 really good quarter for us. We feel really good on the long term strategy. Progress we made with the leadership team, with phased approach is really working, I think the Q1 results are a great example of that.

[Peter Benedict, Senior Research Analyst at Baird]

Yep, understood. Thank you. Good luck.

[Joel Anderson, CEO at Petco Health and Wellness Company]

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, Head of Investor Relations at Petco Health and Wellness Company]

Fantastic. Thank you, Joel and Sabrina, and thank you, everyone, for your time and your 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.

Participants

Executives

• Tina Romani, Head of Investor Relations
• Joel Anderson, CEO
• Sabrina Simmons, CFO

Analysts

• Sachin Verma, Equity Research Associate Director at UBS Group
• Simeon Gutman, Analyst at Morgan Stanley
• Steven Zaccone, Director, Equity Research, Hardlines Retail at Citi
• Kaumil Gajrawala, Managing Director at Jefferies Financial Group
• Kendall Toscano, Analyst at Bank of America
• Jacob Nivasch, Consumer & Retail Equity Research Associate at Guggenheim Securities
• Oliver Wintermantel, Analyst at Evercore
• Peter Benedict, Senior Research Analyst at Baird