Good afternoon, and welcome to the Petco First Quarter 2025 Earnings Conference Call. [Operator Instructions] 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.

Good afternoon, and thank you for joining Petco's First Quarter 2025 Earnings Conference Call. In addition to the earnings release, there is a presentation available to download on our website at ir.petco.com. On the call with me today are Joel Anderson, Petco'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. 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.

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. I'm proud of our team's dedication, agility and execution and 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, where we bought our stores and service leaders together for the first time ever. I saw firsthand the enter 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 reenergized team that shares a collective commitment to unlocking Petco's full potential. With Phase 1 complete, and a highly experienced leadership team in place, our full attention has quickly turned to Phase 2. This phase is all about implementing and executing the multiple work streams we identified in Phase 1 to improve our overall retail fundamentals and financial performance. Said another way, we are putting our work…

Thank you, Joel, and good afternoon, everyone. 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. I'm very pleased we delivered against all 3 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 25 net store closures in 2024 and the additional 5 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 products and services business. 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 disciplined execution that we delivered more than 180 basis points of expense leverage during the quarter. Excluding last year's onetime disposition costs, we leveraged approximately 160 basis points. As we've spoken about previously, this work is not a onetime 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…

[Operator Instructions] And your first question today will come from Michael Lasser with UBS.

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?

Yes. Thanks for the call. We're seeing -- it's pretty stable, 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, 2025 is really a self-help story for Petco. So we're not relying on any tailwinds from the category like pet adoption 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.

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 cost out while keeping the customer experience intact? In other words, what kind of ways are you looking to take permanent cost out while still maintaining your top line and adjusted EBITDA?

Yes, it's a good question, and maybe I'll turn it over to Sabrina for some specifics. But I can tell you that -- Sabrina has been here about 90 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 -- Sabrina, maybe you want to talk about a couple of the findings you found and how we're not focused on onetime?

Yes. And I'll start at the highest level. 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 -- but as we grow sales, we can manage SG&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.

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

Joel, the top line journey, I realize Phase 3 is still a ways away to 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 and product assortment, anything front-end customer facing?

Yes. Look, Simeon, great question. I think to answer the baseball analogy, it depends on how you're looking at it. From your guy's perspective on the outside, I 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. We got to get better at one voice to our customer. We're an omnichannel retailer. And I think that's a real opportunity. Our marketing being more solutions-oriented. We're starting to look at a lot of product innovation, which brings newness and 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 1 on the cost cutting, we started with really looking at all the opportunities and Phase 2 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 '26.

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 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 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?

Yes. 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. 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 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.

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

I was going to focus on margins. So Sabrina, could you just talk about gross margin a bit, how that performed versus your own expectations? And then in light of some of the new news in the guide, should we still expect gross margin to expand for the full year?

Yes. 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 for us.

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 the Phase 3 to kind of return to growth is probably going to take a little bit longer?

Yes. No, look, I think the cat and dog reset that I spoke to on my prepared remarks was really more to show you the -- 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 early signs of the cat reset look very promising, and we got to 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 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.

[Operator Instructions] And your next question today will be from Kaumil Gajrawala with Jefferies.

Can we maybe just talk a little bit about sort of services versus supplies and 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 as you look at the mix of your revenue, if it tells you anything about where the consumer is.

Yes. I mean, look, services has continued to lead our business. And I think it's leading for a couple of reasons. But most importantly, it's leading because, as I said, this is a self-help story here. And we saw significant opportunities for us to increase productivity. I gave you a couple of examples on -- 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 2. they're going to consider somebody else besides Petco. So that change has been very, 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 2 out of the 3 of our pet categories are consumable in nature or needs based in nature. So that will continue to drive the business for us.

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

I was curious, another kind of follow-up on the category growth. Just in net services, it looks like the growth slowed a little bit, just plus 1% year-over-year. Now curious within services, if there's any call outs in terms of businesses that are still seeing stronger growth versus maybe any that were a little bit softer in the quarter.

Yeah, want me to start on that, Joel. Yes. 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 that -- 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.

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

Got it. Okay. That's helpful. And then another question on category sales, which is 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?

Yes. No, that was certainly in line with expectations. And part of the reason we pulled forward the reset is we can see changes that will have for us on having a bigger impact later in the year. But as we continue to clean up promotions that I'd 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.

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

This is Jake on for Steve. A quick question on, I guess, thinking through your wallet share opportunities here. So help us frame -- maybe help us frame up, I guess, what are your most loyal customer cohorts looking for here? It sounds like you guys have a lot of -- have done a lot of work on and some exciting opportunities up ahead here. But maybe help us frame maybe in order of magnitude, what your loyal cohorts are looking for here?

Yes. 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 will really inform everything we do as we focus on growth in the back half of the year. But it's too early here to give you some specifics on the segmentation piece of it.

And your next question today will come from Oliver Wintermantel with Evercore.

I had a question on your leverage ratio. In your deck, you said that you want to achieve below 2x. Can you give us a little bit more details on the timing and what do you expect the free cash flow to look like this year?

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 fairly 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.

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 AUR offsets just to level set us there.

Yes. 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 assortments, then roll out more exciting marketing. That's the big lever that we want to see improve is transactions.

And your final question today will come from Peter Benedict with Baird.

Curious, just your view on inflation and pricing, what the view is over the balance of this year, what's kind of baked in, whether it be on the commodity front, the food front or I know it was kind of a tariff exposure, but just on those items, what's the outlook in terms of pricing?

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

Yes. 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 at pricing, whether up or at times down, is going to be surgical and focused on getting that balance for both our customers and our business.

Okay. That's helpful. And then maybe just a follow-up on -- I think Simon may have asked about price gaps. You mentioned that earlier. I was a lot clear. Have you rightly 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.

Yes. No, look, we -- I think Sabrina said it in her comments, we're now 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 identity opportunities where we think there was an opportunity to take some price up. 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 a really good quarter for us. We feel really good on the long- term strategy. The progress we made with the leadership team, with phased approach is really working. And I think the Q1 results are a great example of that.

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

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.

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