Good afternoon, and welcome to the Petco Health and Wellness Company, Inc. Fourth Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Roxanne Meyer, Investor Relations. Please go ahead.

Good afternoon, and welcome to Petco Health and Wellness Company, Inc.'s Fourth Quarter Fiscal 2025 Earnings Conference Call. Joining me on the call today are Joel Anderson, Petco Health and Wellness Company, Inc.'s Chief Executive Officer, and Sabrina Simmons, Petco Health and Wellness Company, Inc.'s Chief Financial Officer. In addition to the earnings release, we have posted a slide presentation on our website at ir.petco.com. I would 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 will turn the call over to Joel.

Thanks, Roxanne, and good afternoon, everyone. Thank you for joining us to discuss our fourth quarter and full year results. I am pleased to share that Q4 sales were in line with our outlook and we performed better than our adjusted EBITDA quarterly goal. Looking back on 2025, we successfully delivered on our robust agenda to strengthen our economic model and improve retail fundamentals, which resulted in significantly higher cash flow and profitability year over year. Specifically, the year, we achieved a 21% increase in adjusted EBITDA, a 77% increase in operating cash flow. Our healthier EBITDA and opportunistic debt paydown drove a meaningful reduction in our leverage ratio at year end, allowing us to start the year with greater financial flexibility. This was no small feat, and I am exceptionally proud of our team. We collaborated across the organization. We strengthened our culture. We communicated expectations, and we acted with urgency and decisiveness. It is important to note that the majority of our senior leadership team, which is exceptionally well tenured and talented, has only been together for about one year. We enter 2026 with a running start, something we did not have in 2025. Some of the most recent additions to the team include Sabrina Simmons, CFO, who many of you already know; Michael Romanco, Chief Customer and Product Officer; and Joe Venizia, Chief Revenue Officer. The entire team's work has been transformative, and yet we are just getting started. In addition to strengthening our financial foundation in 2025 and rebuilding the leadership team, we completed our Petco North Star strategy, including a comprehensive customer segmentation and needs analysis. This work is already shaping how we prioritize assortment, services, and experiences, and it also informed our updated brand positioning: where the pets go to live their real life. One key takeaway from the segmentation work is the identification of who our most important engaged customers are. That segment we call Passionate Explorers. These are pet parents who are highly invested in their pets and seek innovation, expert support, and a welcoming shopping experience across the full pet journey. 2026 will be informed by this strategy work, and execution will center on four growth pillars I will review in detail later on this call. They are, number one, compelling product driven by increased newness, brand launches, and own brand expansion; number two, services at scale, leveraging our wholly owned vet, grooming, and training ecosystem; number three, trusted store experience, focused on driving traffic, engagement, and basket; and finally, number four, an integrated omnichannel model improving convenience, loyalty, and repeat behavior. With that, I will now turn it over to Sabrina to provide details on our fourth quarter financial performance and our 2026 outlook. Following her remarks, I will discuss the specifics of our growth strategy for 2026, and we will then open it up to your questions.

Thank you, Joel. Good afternoon, everyone. As we have discussed, our primary goal all year was improving profit and cash generation through our economic model, namely expanding gross margin rate, leveraging expense, and expanding operating margin. We are glad to report that we achieved this goal each and every quarter. For the full year 2025, we expanded our gross margin rate 66 basis points to 38.7%, leveraged SG&A 124 basis points to 36.6%, improved our operating profit by $100,000,000 and expanded our operating margin by 190 basis points, increased adjusted EBITDA 21.3% to $408,000,000 with a margin of 6.8%, and we delivered positive GAAP net income for the year. Additionally, free cash flow improved 276% versus the prior year to $187,000,000. These results enabled significant progress in achieving our goal of lowering our leverage ratio. Our net debt to EBITDA improved from 4.2x when we entered the year to 3.0x at the end of 2025. Now turning to the fourth quarter results, which reflect another quarter in which we delivered on our commitments while building a stronger foundation. In line with our outlook, net sales were down 2.4% to $1,520,000,000 with comp sales down 1.6%. As expected, the decline reflects our decision to move away from unprofitable sales, which was our strategy throughout 2025. As a reminder, the difference between total sales and comp is driven by the 25 net store closures in 2024 and the additional net 16 closures in 2025. The number of 2025 closures came in a bit favorable to our expectations, driven by a combination of improved store performance and favorable rent negotiations that supported improved unit economics for those locations. We ended the quarter with 1,382 stores in the U.S. Fourth quarter gross profit dollars were $581,000,000 while our gross margin rate expanded 37 basis…

Thank you, Sabrina. With our foundation firmly in place, I am energized to walk you through the specifics of our 2026 strategy that will drive our expected growth. As you know, we outlined a three-phased approach to our turnaround. We laid the foundation in phase one and phase two, and we are now entering phase three, which is about driving sustainable top-line growth. Internally, this phase three strategy is called “Reach for the Sky,” which is all about looking up and driving forward, leveraging our competitive advantages, and capitalizing on the growth opportunities we see across our business. It is also about the opportunity I see for Petco Health and Wellness Company, Inc. to be reimagined and broadened beyond primarily being a commodity-driven business. This is about the blue-sky opportunities Petco Health and Wellness Company, Inc. has to engage with pet families through the ups and downs and the real-life experiences of raising a pet. Our team has tenaciously driven cost savings and now will continue with that same rigor while driving sales and reaching forward. Petco Health and Wellness Company, Inc. is the only national fully integrated and comprehensive pet care ecosystem. Our vision for the Reach for the Sky strategy is centered around leveraging our differentiated store-based model to bolster our competitive positioning, increase relevance, and improve store productivity. We plan to fuel our growth by offering product newness and differentiation as well as further strengthening our community of pets and their humans through our unique store experiences, integrated omnichannel model, and wholly owned services. We are in the early innings of capitalizing on the significant opportunities that we see to gain share of wallet across all our businesses. The groundwork in 2025 has served us well. We expect these initiatives to grow sales and become more impactful…

We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Michael Lasser with UBS. Please go ahead.

Good evening. Thank you so much for taking my question. I feel you have provided a lot of great information on the strategy, the focus. How are you thinking about what is going to lead Petco Health and Wellness Company, Inc.'s growth from here? Is it going to be consumables first, which will then translate to the other parts of the business? Is this going to be services-led, which will then translate to other parts of the business? And how have you thought about the need to make further price investments, promotional investments, and other discounts in order to generate same-store sales growth over time? Thank you very much.

Yeah, thanks, Michael, and really great question. A lot to unpack there. I think it is less about which one is going to lead, and what I hope you took away from what I just took you all through is whereas last year we were telling you what we were going to do to deliver growth, on this call, I showed you how we are going to do it, and we gave, as you said, specific examples in all four pillars. We are working simultaneously, Michael, on all four of them. Having said that, product probably takes the longest because you have your existing product that you have to sell through, then the new product will begin to come in. I can tell you we have about 25 new brands or flavors coming this year, as well as resets throughout all of supplies and many of the other areas like companion animals. All of that will take time throughout the year, and it will happen actually starting this quarter. But I am really pleased that in all four of those pillars, you are going to begin to see change starting right now in Q1. As for your pricing comment, you know what? We started in on that back in 2024, and we really feel like we got our pricing right throughout 2025. It is something that is dynamic, and we are watching it closely, and we will continue to adjust as necessary, but we feel like we have got our pricing in good shape for now.

Yeah, I would just add to that, Michael, that we are definitely focused on delivering healthy margins for the year. It is an important focus, and we will stay competitive, we will stay adaptable, but we have still, you know, nice levers at our disposal to deliver on the healthy margins. We will continue to look, as Joel just said, where needed, we will participate in promos for sure to help drive traffic where appropriate, and then remember, we have this whole initiative of mix, where we are moving toward our own brand, and that should also support delivering on healthy margins.

Thank you so much.

The next question is from Oliver Wintermantel from Evercore ISI. Please go ahead.

My first question is about the drivers of the increase of the gross margins. And then as a follow-up—so maybe the first one is for Sabrina—Joel, for you on the growth initiatives, so inventories were down this year, which obviously helped free cash flow. With all these, you know, four pillars of initiatives, do you expect inventories then to increase this year, and what is the impact of that on your free cash flow outlook? Thank you.

Yes, so I will just go through the gross margin levers one more time. We are very focused on delivering healthy margins, and we are going to continue to use and review our pricing. We are going to deliver on promos where appropriate and they make sense and they help us drive traffic in, etcetera. And we are focused on mix. So those are the big levers that will help us deliver on our goal of keeping those gross margins really healthy. With regard to inventory, yes, we did a lot of cleanup in 2025 on inventory. Some of the silver lining, if you will, of the tariff imposition in the spring last year was that it kind of forced us to get very disciplined about cutting off the unproductive tail of SKUs. We are past that now. As we look forward to 2026 for growth, we definitely want to invest inventory behind that. The important thing to us is that we remain disciplined in managing that inventory. So even as we invest in inventory, we will look to keep the growth in inventory at or below sales growth and keep that relationship very tight.

I think you captured it all. Yep. Thanks, Oliver.

Thank you.

The next question is from Kaumil S. Gajrawala with Jefferies. Please go ahead.

Hi. Thank you, first of all, for all the detail on, you know, the plans for 2026. I guess there has been some oscillation over the years between you being specialty and premium and being mainstream. You mentioned a lot of national brands, which sort of makes me imply perhaps more of a mainstream look. But curious, you know, when you think about the brand of PepsiCo and—or sorry, the brand of Petco Health and Wellness Company, Inc.—and what its assortment says about the retailer, how are you thinking about what that assortment is going to say from a branding perspective? And you said something fascinating earlier on, you know, Gen Z's preference to, you know, shop in person, looking similar to baby boomers. Do you have a sense of why that is or what has changed, that generation versus the generations prior?

Yeah. Look. You are absolutely right. I think in prior years, we narrowed our aperture, and I think as I look forward, we have to be there for all customers. And as a new pet parent adopts a pet, they go through several stages of that life. And, you know, one of those stages might be, I just need to get my dog fed. And as that dog becomes part of the family, they might decide to, you know, upgrade what their dog is being fed for food, and they focus on health and nutrition. And so the focus we have done over the last couple years is really to widen the aperture, and so one of the unique advantages of being a specialty retailer is that we are able to carry that specialty, premiumization, unique product, but we are also there, you know, for the customer that, you know, affordability is their primary need. And so I think we really have widened, and I feel really good about where assortment is today. As for Gen Z, I mean, obviously that is a bigger statement than just as it relates to pets. But, you know, like any good retailer, you have to understand your core customer, and we did the research, and part of that research, we studied, you know, what the makeup was of the age of our customer, and then that, you know, coveted 18 to 34, that younger customer—we skew about five percentage points higher than some of the other pet retailers. And so that happens to work out nicely because what also is a characteristic of that demographic is they like shopping in stores. And so I think there has been more of a return to stores that serves us well with who our demographic is. And, you know, as we did the customer segmentation work, we took advantage of that, and that is something we are really focused on going forward. But it worked out to be a nicely nice fit with who our customer is.

The next question is from Steven Forbes with Guggenheim Securities. Please go ahead.

Hi, Joel. Given the goal of services at scale, I was curious—like you did with dog food—if you can frame what percentage of your customers today engage in services in some form or fashion. And then, given the customer segmentation work you did around the Passionate Explorer, curious if you can maybe expand on, you know, what you are sort of focused on in 2026 to make sure that specific cohort is engaging.

Yeah, let me take that cohort first. What we really learned about the Passionate Explorer is that they value discovery, they look for expertise—which plays in nicely to our services side—they seek innovation, and they are also somebody that shops more frequently and spends more with us. So our new merchandise strategy is certainly going to resonate with them: frequency of newness, innovation, the store events, and it also acts as a halo for all the other segments. And services is a really important part of the Passionate Explorer. Obviously, we have a lot of room to grow in services. As an example, you know, the hospital side of it, the vet side of it, it is only in about, you know, 20% of our chain—roughly 300 stores—so lots of room to grow there. Grooming is in all our stores, and, you know, that is an area we talked about on a couple, three calls now, where we have been improving the technology, we have been making it easier to make appointments, and so I see a lot of growth opportunities there as well. But, you know, one of the reasons I have said it many times: services is our moat, a point of differentiation for us, and we are going to keep leaning in on services.

And what I will add to that, Steve, is that what is really important to us is to leverage the whole ecosystem, because what we know is the NSPAC for a customer who engages in more than one channel or in services is five times higher than our other customers. So it is really just expanding our relationship with our customer wherever they want to shop and making sure we are getting that loyalty, retention, and higher spend.

The next question is from Simeon Gutman with Morgan Stanley. Please go ahead.

Hi, this is Lauren Ng on for Simeon. Thanks for taking our questions. First, you mentioned 50% of dog customers do not buy dog food from Petco Health and Wellness Company, Inc. Curious what parts of your strategy outlined today will capture these customers if they are already loyal to, you know, certain brands and platforms? Will you be able to leverage your private label for this? And just quickly following up, you talked about entering Phase III today. Can you share how much of Phase III is currently implemented versus maybe how much room there is to grow?

Yeah, great pickup from our prepared remarks. Probably the main reason I shared that with you is, you know, it is always easier to grow if you start with your current customers. And as part of our, you know, deep dive into who our customer is, where they shop with us, how they buy from us, that was a real big insight for us. And so, as an example, you know, prior to just recently, our groomers had no knowledge of whether a customer—a dog customer—bought food from us. And now we have enabled our groomers with technology to see every customer that comes in: when is the last time they bought dog food from us, what type of dog food are they buying, is it helping their sensitive skin or problem they have? And so that is just one example of us being able to cross-sell. And we believe, you know, the first place we are going to see growth is, you know, as Sabrina just alluded to, you know, NSPAC, you know, really growing the net spend per average customer. And I think we have a real opportunity with our dog customers that are not buying food from us today. As for Phase III, I would say from what the customer sees, very little has been implemented yet. From a strategy and teamwork internally, we have workstreams on every one of those I outlined for you today, plus a few others. So they are in various elements of being lit up for the customers. You know, product may be being shipped right now. Some may not come till second or third quarter. But very little of it, and you can see from our guide that, you know, we expect comp store growth to gain as the year goes by.

Again, if you have a question, please press star then one. The next question is from Peter Benedict with Baird. Please go ahead.

Hi, guys. Thanks for taking the question. So I wanted to—well, two questions. One, I just—Sabrina, if you could expand on kind of the fuel cost comment you made. I think you said something about fuel costs normalized. Just maybe help us understand maybe the variability with all the macro stuff going on with oil, etcetera. And then my second question is on your expanded fresh effort. You mentioned more freezers. I am just trying to understand, is it you are expanding the frozen fresh product? How about the refrigerated or chiller-based fresh? And I am curious, is it new brands, or you are expanding with existing brands? Maybe just expand upon that effort around Fresh a little more, if you would. Thank you so much.

Sure. I will start with the fuel comment. So it has been a bumpy ride the last week or so, so we were just trying to be helpful with regard to, you know, our base assumptions in our forecast. But here is how fuel impacts us, and it is similar to every retailer out there. We have our inbound ocean, and that sort of lags. It comes in later into our P&L through cost of goods sold. And then we have our outbound from our DCs to our stores, a lot of it trucking—that can impact more rapidly. And then we have our parcel shipping that can also be impacted. So we have incorporated in our scenarios in the range we gave absorbing some of the volatility we have seen in gas prices over the last week or so. But, you know, the base assumption is that things start to normalize after Q1.

Good. And then, you know, as it relates to fresh and frozen, you know, we look at that as one, and it ebbs and flows, and some of it is dependent on when our vendor partners are bringing out new product. And I think the most important fact you should take away from that is I am not just telling you we are going to grow fresh. You are seeing that we are making capital investments, and in this case, the example was the additional freezer coolers. But we also expect fresh to grow as well, and there are several new lines coming out middle of this year. So that is a category that grew significantly in 2025, and we see more growth coming in 2026. And, you know, some customers use it as a topper, some customers use it as a full meal, and so, you know, sometimes you need fresh and sometimes you need frozen depending on how you are using it with your respective pet. But big growth area for us. We are really excited about it.

The next question is from Zachary Fadem with Wells Fargo. Please go ahead.

Hey, guys. This is David Lantz on for Zack. Thanks for taking our questions. I guess, first one for me, within the 2026 outlook for top-line growth, what are you assuming for the broader category, and how did your performance stack up to peers in Q4 from a share perspective? And then one more: within Q1 and the midpoint of the guide being flat comp, is there anything we should keep in mind that is embedded within that for stimulus and/or, you know, store closures from winter storms here quarter to date?

Well, look. I am not going to break it down by, you know, specific areas. I think the focus on our end is to grow overall top-line growth, and some of that will come from consumables, obviously, because that is over 50% of our business. But, you know, we are really—as you can tell from my comments—we have got initiatives in all aspects of the business: services, consumables, companion animal, supplies. And, you know, obviously, with us intentionally reducing, you know, unprofitable sales last year, you know, we gave up some market share. And with our growth this year, we will start to gain that back.

Yeah, and I would just add to that, you know, this year is really more about another self-help year as we look to grow sales. We are not overly reliant—we are not counting on big tailwinds from the sector. I mean, we feel like we have all of these opportunities that Joel outlined, and these initiatives are going to really support our outlook. And, you know, as for how we think about our share, even though, yeah, we gave up a little top line in 2025, we really grew a lot of bottom line. So we have cleaned up the business. We are coming from a strong foundation. There is an opportunity, as Joel said, to first grow share of wallet with our current customers. I think the next opportunity to pick off is sort of small independents and small chains who have about four percentage points of market share in the pet sector. So there are lots of opportunities for us to go after without being overly reliant on any tailwinds. And on Q1, you know what? We have taken into account—there are so many pluses and minuses in this kind of noisy macro we are living through. So, sure, I mean, on the plus side, you have got, like, the tax refunds coming in—all, you know, can only be a positive. On the minus side now, you know, as we just talked about, you have some fuel pressure. So we have kind of tried to bake those scenarios within our guidance, and we do not—we have not been overly reliant on any of those levers because, again, even with the taxes, one does not know how much will go to savings versus spending, etcetera. Now what we like about this environment—or what we like about our customers, I should say—is our customers skew to the higher end of the income spectrum. So that is good news for us because that end of the spectrum can obviously withstand macro changes without it being as large of a percentage to their overall well-being.

Then as far as weather goes, you know, first quarter is always volatile. It was volatile last year, volatility in it this year. The way I think about it big picture is by the time the quarter is done, the volatility kind of evens out with pluses and minuses, and that is kind of how we thought about it in the guide for this year.

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

Great. I want to thank everyone for joining the call today, and we look forward to updating you on our progress.

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