Petco Health and Wellness Company, Inc. (WOOF) Q2 2026 Earnings Report, Transcript and Summary

Thank you. Good day, and welcome to Petco's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Roxanne Meyer, Vice President of Investor Relations and Treasury. Please go ahead.

Good afternoon, and welcome to Petco's Second Quarter Fiscal 2026 Earnings Conference Call. Joining me on the call today are Joel Anderson, Petco's Chief Executive Officer; and Sabrina Simmons, Petco's Chief Financial Officer. In addition to the earnings release, we've posted a slide presentation on our website at ir.petco.com. 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 the call over to Joel.

Thank you, Roxanne, and good afternoon, everyone. Thank you for joining us to discuss our second quarter results. Our focus this quarter was on accelerating progress across our Phase 3 Reach for the Sky strategy. The team successfully gained traction across all 4 of our strategic pillars, and we delivered solid profitability relative to our financial outlook. For the quarter, we delivered positive comps for the second quarter in a row. Sales were $1.5 billion, and adjusted EBITDA was $122 million, which included a net tariff refund of $6.8 million. As noted in our earnings release today, we voluntarily prepaid an additional $75 million in debt on September 1, given our solid results, healthy cash generation, and importantly, our confidence as we head into the second half, which Sabrina will discuss shortly. Before reviewing our second quarter accomplishments and strategic initiatives, I want to spend a few moments on our top-line results. During the quarter, we hit a major milestone in our Phase 3 strategy by relaunching our customer membership program, Petco Perks. This relaunch made point redemption significantly easier for our members, removing the friction that limited their prior engagement. As I noted last quarter, this change was exceptionally well received in our pilot. Following the national rollout in late January, customer point redemption volumes far exceeded our initial projections. While this demonstrated incredible customer engagement, it also had a negative impact on our Q2 net sales, particularly in our services business. To give you some context of our underlying momentum, prior to the nationwide membership rollout, our sales and comp run rates were ahead of our Q2 outlook. We acted swiftly to deploy post-launch guardrails on redemption velocity, [ with ] peak redemptions now behind us. With a clear path for progress, we can now focus on unlocking the program's most powerful component over the coming quarters: personalization and loyalty. We expect our new membership program to serve as a key catalyst that supports our long-term growth, and we are encouraged by early personalized offer tests. The balance of the year will be focused on these capabilities, and we expect a positive impact to emerge in 2027. Now turning to our initiatives. At the half-year mark, we are holding true to our commitments. We are successfully adding newness and innovation, improving our digital capabilities, investing in our vet hospitals and connecting services to the center of the store. I'm pleased to report that our core strategies are gaining traction. In addition to our ongoing strength in services, the underlying health of our business is also visible in consumables, where we saw positive growth. Today, I'll focus on two areas. First, our commitment to newness and anticipating trends is actively fueling our growth engine. And second, we are beginning to demonstrate the unique power of the ecosystem we've built. First, on newness, that continues to be a standout growth category. We remain ahead of the curve by looking far beyond basic nutrition to serve cat parents. Recent industry data shows kitten-owning households surpass puppy households starting in spring 2026. This demographic shift creates a massive opportunity for us to capture market share by serving these cat parents holistically across consumables, supplies, vet care and in grooming products. In the second quarter, we introduced new high-impact brands that resonate strongly with cat parents, generating nice gains across consumables, supplements, bedding and furniture. A key highlight was cat treats. Strong performance was powered by a significant number of new SKUs with high brand awareness. We also launched our private label, Candy Shop, for cat treats. Not only was it a huge success, but it demonstrated the opportunity behind our owned brands. As we look ahead, we are optimistic about the possibilities to grow our share in the cat category and expect momentum to only build in the second half, which I will elaborate on shortly. In addition, companion animal is a highly differentiated category, where a physical store provides a distinct competitive advantage. It uniquely sets us apart from online-only and big box peers while diversifying our animal exposure. In the second quarter, we saw particular strength in live reptiles, which in turn fueled gains in reptile food and supplies. We also continue to see growth in the Gardening with Your Pets category, driven by potted houseplants and pet-friendly garden seeds. Beyond driving top-line growth, companion animals are at the center of our experiential merchandising strategy. They allow us to engage customers during important cultural moments like the World Cup. An example of this is the Piggy Cup we held in the majority of our stores in July, featuring guinea pigs competing in soccer matches. This is a perfect bridge to the second area I want to highlight: the power of our fully integrated omnichannel ecosystem. As a reminder, our multichannel customers, meaning those that shop us online, in stores and utilize our services, generate a 5x higher NSPAC than single-channel customers. Consequently, we are laser-focused on initiatives that deepen these multichannel relationships across our ecosystems. First, I'm pleased to share that we have officially rolled out our Autoship sign-up capabilities across our physical store locations. It's been amazing to me as I traveled stores, how few of our regular customers were aware of our ability to provide this service to them. Just the rebranding alone has made a meaningful improvement in awareness. Online, Autoship is already a successful and sticky business, where it accounts for roughly half of our digital sales. These digital customers typically spend 2x to 3x more than non-Autoship customers. While we are still in the very early innings of this deployment, bringing this capability into stores represents a massive long-term opportunity for us to grow NSPAC with our large population of infrequent store shoppers. We look forward to leveraging it to encourage behaviors like BOPUS and unlocking Autoship for grooming customers who don't use Petco for their daily food needs. Ultimately, this should strengthen the most predictable, recurring parts of our business, support our future growth while making it easier for our customers to interact with Petco. This is simply another example of how we are leveraging the many differentiating attributes only Petco is delivering. Next, our veterinary business continues to deliver strong results. In the second quarter, our hospital sales productivity continued to improve. This was highlighted by double-digit growth in total pet visits. We've also expanded doctor days by double digits to better meet demand. Bottom line, we're growing pet visits, including dogs, in an environment where adoptions are down industry-wide. A reminder, our wholly owned vet hospital model is a key differentiator versus peers and is scaled at approximately 300 locations. Because we own these hospitals, our strategic priorities are aligned between our hospitals and the center of our store. Unlike our peers, our veterinarians and store partners are all Petco employees. They're increasingly working together to serve our pet parents holistically and are focused on maximizing the productivity of the entire box. As a reminder, last quarter, I shared with you that we expect to begin to open additional vet hospitals in 2027. This initiative remains on track, and I look forward to discussing the growth opportunity with you more on the Q3 earnings call. Our vet diet business perfectly illustrates these ecosystem synergies. By leveraging our in-store vets to recommend prescription nutrition, we are uniquely positioned to capture a larger share of wallet. In the second quarter, vet diet sales for both dogs and cats grew double digits versus last year. It's a great example of the many cross-shop opportunities available to Petco. We've better utilized the ecosystem of services, product and digital. Now let's talk about how we're evolving the ecosystem even further. We're applying deep insights about our core customer, Passionate Explorer, to elevate our in-store experience and drive traffic. Since I joined, the leadership team and I have been testing a new store prototype. After several iterations, we have landed on a format that better resonates with our customers. In May, we launched this new store format across a 7-store market test. Built on increased discovery, enjoyment and store associate expertise, this format is designed to strengthen customer connectivity and trust. We've introduced several enhanced features to these locations, with the goal of delivering a best-in-class retail environment for our customers. Some of the enhancements include interactive companion animal habitats that encourage exploration, Petco exclusive brand collaborations and several impulse buying opportunities. From a service perspective, we invested in dedicated front-of-store labor and integrated consultative nutrition advice directly into our grooming salons. These results thus far are highly encouraging. We are seeing a sizable lift in both new and reactivated customers, higher transaction counts and larger basket sizes, driving strong comp sales. We are also seeing a lift to margins. These improved metrics are backed by exceptional customer feedback. It aligns with the lift we are seeing in our Net Promoter Score, which improved by hundreds of basis points nearly overnight. We will continue to validate these test results through the balance of the year as we expedite a few more remodels ahead of identifying the stores that would benefit from this layout beginning in 2027. In my opinion, we have not been the best custodians of the physical part of our brand. I'm committed to fixing that, and this recent market makeover has given all of us on the management team a true shot in the arm as we commit to regaining lost market share. It is also a great example of how we are investing in the long-term health of the Petco brand. The Petco brand is strong and really resonates when we deliver an amazing environment. Looking ahead, I'd like to discuss where we see outsized opportunity for the second half and the third quarter in particular. First, we expect to sustain our momentum in fresh and frozen. Historically, this category has been dominated by natural brands, with mixed adoption from the vet community. We are thrilled to partner with Hill's Pet Nutrition and their entry into the fresh dog food category with their Q3 launch of Science Diet Single Protein Dog Food Rolls. We expect to complete our rollout by year end, yet another example of newness and being on trend. We are adding in-store chillers across the majority of our locations to support this premium offering. As veterinarian-backed fresh food begins to take off, this partnership serves as a powerful, incremental growth lever. Advantageously, our integrated model allows our veterinarians to recommend the science-backed nutrition while we capture the purchase in the middle of our store and expand our share of wallet. Second, turning to our inventory investments. As our merchandising initiatives roll out gradually and build throughout the year, we expect inventory to increasingly reflect a higher mix, optimized, go-forward product. This should support an improving sales trend in the back half. Towards the end of the second quarter, we invested a portion of our tariff refund to support the acceleration of our merchandising strategy. As a result, we expect to exit Q3 with increased newness in our go-forward assortment compared to Q2. This transition includes ramp of our owned brand offerings in supplies. Third, looking at the supplies category specifically, we expect progress in Q3, driven by a stronger in-stock position compared to last year and our work to address assortment gaps. We're accelerating owned brand innovation across both dog and cat products. This month, we're excited to introduce fresh assortments in bedding and cleanup. Additionally, we are leaning into expanding the travel category with new carriers, strollers and backpacks. Overall, we expect a pace of newness in supplies to build throughout Q3 and the second half. And fourth, we are maximizing the power of our physical footprint through retailtainment events that highly appeal to our Passionate Explorer. These in-store activations tap into seasonal milestones and local community moments, differentiate Petco, bring excitement to our sales floor and build lasting connections with pet parents and their pets. In Q3, we have an exciting lineup. In early August, we partnered with Hill's for their National Clear the Shelters adoption drive, which serves as a powerful funnel to acquire new pet parents as customers. And later in August, we offered a free pumpkin spice latte pup cup in our stores, timed with the seasonal return of the human version at Starbucks. September brings Catco Month, a dedicated celebration of cats featuring exclusive product launches, 3 consecutive Meow Market food tasting weekends and bringing back Find Mews hide-and-seek activity for kids. Looking ahead to October, we will host Halloween photo opportunities and even a costume party. All of these events are a benefit to store traffic and provide an in-store selling opportunity for our associates. In summary, we expect initiatives such as the Hill's Science Diet rollout leaning into cat, increased inventory in our go-forward strategy, newness in supplies, including owned brands, community building retailtainment events and stores to serve as key drivers will help fuel sales in Q3 and beyond. Petco is truly beginning to play offense again, yet we're doing so with discipline. So while the sales ramp may be measured, [ facts ] will be there to ensure the growth is sustainable and will build in 2027 and beyond. Separately, I also want to highlight the appointment of Jeffrey Naylor to the Petco Board of Directors last month and as Chair of the Audit Committee. Many of you know him from his time as the Chief Financial Officer of TJX Companies. I'm confident his financial acumen further strengthen our economic model and help create long-term value for shareholders. Jeff is another example of the number of great retail leaders joining because they believe in the Petco brand and the future in front of us. In conclusion, we are continuing to make progress on our Reach for the Sky strategy and are focused on driving the business forward. The initial friction related to the peak point redemption from our membership relaunch is behind us. Our operational core is strong. Our green shoots of success are building. And our ongoing catalysts for the back half, combined with the investments we are making in our growth, give us confidence in our reiterated outlook. I want to express my deep appreciation to the entire Petco team for their disciplined execution and unwavering dedication to the pets and pet parents we serve. I especially want to give a big shout out to our many partners in the stores. They have been passionate about the changes and have executed with relentless energy as we have pivoted to find success. Your commitment to our core customer is amazing, and I thank you personally for making a difference in the lives of millions of pets and their pet parents. With that, I'll turn the call over to Sabrina to take you through the financial details.

Thank you, Joel. Good afternoon, everyone. During the second quarter, despite the membership launch learning Joel touched on, we're pleased to deliver another quarter of positive comps and deliver on our bottom line commitments as we execute on our economic model. Looking ahead, we remain focused on achieving our full year sales and adjusted EBITDA guidance. Turning to second quarter results. Net sales were up slightly to last year at $1.5 billion. Importantly, Q2 marked our second consecutive quarter of positive comps with a 0.6% comp, underscoring that our initiatives across our 4 growth pillars are beginning to take hold. During the quarter, we had 1 net store closure, and we ended the quarter with 1,377 stores in the U.S. Moving on to margin results. Second quarter gross profit dollars were $591 million, while our gross margin rate expanded 37 basis points to 39.7%. This includes a benefit of $6.8 million in net tariff refunds. Without this net tariff refund, our Q2 normalized gross margin rate was about flat compared to the prior year. We were particularly pleased with the results given we were comping against our peak quarterly gross margin performance in Q2 last year. Regarding tariffs, as a reminder, our owned brand imports represent only about 5% of our total cost of sales. We received substantially all anticipated tariff refunds in the second quarter. We reinvested a portion of the refund to propel the repositioning of our new assortments for future growth by more aggressively moving through legacy inventory. Additionally, a small amount served to offset incremental fuel and tariff costs in Q2. The remaining $6.8 million net benefit, which was all recognized in Q2 gross margin as mentioned, will help provide flexibility to both potentially invest in our business for growth as well as offset some continuing headwinds in supply chain in the second half. Moving on to expenses. For the quarter, SG&A was $543 million, or 36.5% of net sales. Despite lapping last year's approximate $9 million benefit in SG&A from an actuarial true-up, expenses were only up $1 million versus the prior year, proving as evidence of our expense discipline. For Q2, our operating profit was $48 million, or 3.2% of net sales, versus $43 million, or 2.9% of net sales last year. Our adjusted EBITDA, which includes the incremental net tariff refund of $6.8 million, was $122 million, or 8.2% of net sales. We're pleased that our normalized adjusted EBITDA without the net tariff refund landed above last year and above our outlook at $115 million. Moving on to the balance sheet and cash flow. Second quarter ending inventory was down 1% year over year on top of a 9.5% decline last year, reflecting our ongoing discipline and execution. Free cash flow increased $51 million year to date, and we ended the quarter with a cash balance of $293 million, an increase of over $100 million versus the second quarter last year. Total liquidity for the second quarter was $781 million, up nearly $100 million versus the prior year. At quarter end, total debt was $1.48 billion, down $113 million compared to Q2 last year. Importantly, we remain laser-focused on our goal of reducing our leverage ratio to 2x. Underscoring that commitment, given our strong year-to-date cash generation, coupled with our confidence in the second half, we announced today an additional voluntary debt repayment of $75 million, which will be reflected on our third quarter balance sheet. With this repayment, total paydown over the last 9 months equates to $170 million. And now, turning to our outlook. We are committed to remaining agile and delivering on our financial commitments this year as we balance navigating a choppy external environment alongside investing responsibly behind our growth step strategies. As such, we are pleased to affirm our full-year sales and adjusted EBITDA outlook. Specifically, we continue to expect net sales of flat to up 1.5% compared to last year as the impact from our growth initiatives continues to build in the second half. We continue to expect adjusted EBITDA to be between $415 million and $430 million. Given our solid profit performance in the first half of the year, our outlook provides us the flexibility to continue investing behind our growth initiatives in the second half while also absorbing some ongoing supply chain headwinds. Moving on to the third quarter. We expect sales growth of 0.4% to 1% year over year. We expect adjusted EBITDA to be between $100 million and $103 million. With regards to other line items, we now expect net interest expense to be about $122 million, down from $125 million, given we're now incorporating our $75 million debt repayment; depreciation and amortization, about $200 million; capital expenditures of about $140 million with an ongoing focus on ROIC; net store closures between 15 and 20. In closing, I want to thank our teams for their dedication and discipline in executing our strategic initiatives. Q2 marks our seventh consecutive quarter of delivering on our profitability and cash flow goals, allowing us to significantly bring down our overall leverage. We look forward to continuing on this improving trajectory. We will now open up the call for your questions.

[Operator Instructions] The first question today comes from Michael Lasser with UBS.

Obviously, there's been a lot of work done by Petco in the last year and a half or so. Are you seeing evidence that the customer count is inflecting? And to what degree is getting to the next phase of the transformation dependent on seeing this inflection in customers? Because you can only sell so much to your existing customer base.

Yes. Hey, thanks, Michael. Look, we actually did see that inflection in Q2 of our total customer base actually growing slightly. So that's, call it, a good start to having reached the bottom and start to grow from there. As the part of your second part of the question, the only area I'd probably correct you a little bit is, I think what I've discovered more than anything in the last, let's call it, 6 months especially, is even without customer growth, we see an incredible opportunity to do a better job of migrating our customers across all 3 pieces of our business, meaning digital, stores and services. And we have a number of customers that use Petco infrequently. And so the opportunity to grow their NSPAC we think is a really big opportunity for us. So that, combined with the customer count starting to grow, are two big inflection points we've uncovered here in 2026.

Understood. Thank you very much for that. My follow-up question is, can you size the impact from the points transition? And you mentioned that you believe it's behind you, but how will the changing economics of your most loyal customer base impact the remainder of the year and really into 2027?

Hey Michael, it's Sabrina. In terms of size of impact, I think you could back into the ballpark. So what we've said is that we feel very confident that prior to the launch of the membership program, we were tracking to above our outlook, which was about 0.3%. We just reported sales about flat, slightly up, about flat. So if you do that math, that delta gets you to kind of a mid-single-digit millions of impact.

Yes. And then as for the customer, you know, just a reminder for everybody, getting our membership program launched, we really had to remove a lot of friction, both for our customers and for our associates. That, we noticed in the pilot, and that also proved true in the national rollout. So really pleased with that, Michael. And now we really turn to the big benefits of a membership program, that's loyalty and personalized offers. So excited to move to that phase next. And that will really help maintain and grow our most important customers. Thanks, Michael.

The next question comes from Kate McShane with Goldman Sachs.

We wanted to first ask about just what you're seeing with regards to the pricing and promotions. Obviously, there's been quite a few companies that have reported talking about taking tariff refunds and using it to invest in price not just this quarter, but into the back half. How should we think about you competing against this for the rest of the year?

Yes, thanks, Kate. Yes, we've seen that as well. But I would tell you, as far as it relates to the pet space, it's an area we're constantly evaluating the pricing in the market. And, you know, while price is important, it's not the only lever for Petco. We must remain price-competitive, but we also have an experience ecosystem that really drives the differentiation. That's why we've been leaning in on differentiated product and newness, in-store events. Our services is differentiated, companion animal opportunity to grow that. So as it relates to price, it's been relatively stable so far, but it is something we watch every week.

Okay, and then our second question is just about the 7 stores you mentioned. What is the ultimate strategy there? Is it going forward, whatever stores you open will be more of this newer concept, or will we expect some remodels in this new format that you've seen comp lift and margin improvement?

I was having a little trouble hearing you, but I think you're asking about what's the strategy with the new store, with the remodel. So, clearly, we're still in the very early innings of that. It's something we've been working on for a while. While we're really pleased with the initial results, we've got to keep testing that to make sure that we are not getting any false positives or false negatives. Specifically, we are fast-forwarding a couple more remodels this year so that we get some more tests out there. We are going to open a couple new stores this year with the new format. And so I think as we continue to move forward and gain more confidence in the early results, this will be the format you'll see from us going forward. And it'll certainly be in some of the new stores later this year.

And what I would add to that is what's exciting is we're going to find learnings from these remodels that we can apply to our fleet. It doesn't have to be full remodels across the board, but I think there's going to be some good learnings of what works for our customers, what's driving their satisfaction. And some of these changes can be low-capital, no-capital decisions we make based on the learnings.

The next question comes from Kaumil Gajrawala with Jefferies.

I guess, a couple of things to dig into. Sabrina, I think you gave some -- at least the first question, which was on these new store remodels/openings. No change to the CapEx guidance, this is just -- some of it is either low capital required or it's just not big enough yet. Is that the right way to think about it?

Well, we're juggling some projects. So we have a little bit of fallout, and we're adding a little bit, Kaumil. So more to come if we need to do any revisions, but all of it would be very marginal if we were doing that.

And certainly no change for '26.

Got it. Okay, useful. And then, I think it's interesting to sort of revisit this the strategy on the vet clinics or the animal hospitals. You sort of mentioned, you know, there was a time where you throttled -- intentionally throttled back. It was the right thing to do at that time. Now it looks like maybe the pendulum is swinging the other way. Does the P&L look the same as it did where it was, you know, 3 years, maybe 5 sometimes before break-even and you had to manage the vintages of these things? Or are you maybe operating it in a different way or the improvement in the store conditions suggests that the general trajectory of profitability for these changes is earlier than it used to be?

Yes, I mean, obviously, as I said in my prepared remarks, we're still on track to start to open new hospitals in '27. I take that as a sign that we continue to make progress in the productivity of our hospitals. And especially the existing fleet, which gives us confidence that as we open hospitals in 2027, that we've got an improved profile on profitability. Having said that, we no longer break out the hospital separately, and that's because we really have to look at the impact on the box overall. And that's the area I'm probably most pleased on, the ecosystem that happens when we add a hospital to an existing store. They really work hand-in-hand together, and that progress we're making is continuing to prove out to be positive.

Yes. And just to underscore what Joel said, we're definitely focused on shortening maturity curves, especially in the newer vintages of the vet hospitals. And so we're applying all those learnings to all go-forward vet hospitals. So there too, there's a lot of good, continuous improvement.

The next question comes from Peter Benedict with Baird.

First one around kind of the cat business, good to hear the momentum there. Can you maybe frame up the share of what cat represents, percentage of your consumables or supplies? Any perspective on kind of where that is versus history? Just trying to get a sense for kind of what's possible in terms of the cat impact.

Yes, I mean, for competitive reasons, I don't know that I want to go that low, Peter. But having said that, I would say to you, take the cat growth in a couple of ways. One, it's just a great example of how we have gotten so much better about being on trend and chasing long-term demographic shifts. And so this is an area that was -- been growing for a while. I gave you several examples in my prepared remarks of across all of cat, how we're really driving the business. And so seeing it continue to grow shows that we were on the right trend, and I feel really good about the progress we're making with cat. And what we are seeing is that we are growing above the market overall, and pleased to continue to see the growth in cat.

That's helpful, Joel. And then I guess related to that, maybe on the dog front, I mean, do you feel like the dog business is stabilized? Is it getting worse? Is it getting better? Just kind of peel back the onion there, what you're seeing in the dog business?

Yes, I mean, look, the dog business is still soft. Adoptions are down slightly. I think the forecast for it that we look at many different sources see that starting to rebound in 2027. But I think it just shows for you why it's so important to be diversified. And with us having great trends in cat, really growing companion animal, our services business is growing. You know, we've got a lot of diversification to not rely solely on dog. But I will tell you, the newness we're bringing in is resonating with the customer, and we feel really good that we're positioned when the macro side of it changes. And I've said many times, self-help year for Petco. And we are continuing to fix our dog business, and we'll be ready to grow even faster when the market turns around.

Understood. Thanks for the perspective. Good luck.

The next question comes from Steven Zaccone with Citi. Please go ahead.

I wanted to drill down on the category performance. Joel, maybe, could you help us understand how consumables, sounds like it's positive, but just how that performed relative to expectation? And then as we think about the second half of the year, are there differences in what's driving the comp in the consumables versus supplies and services?

Well, I mean, look. We've been working really hard, and we've really been focused on consumables. It is our largest piece of the business. And I think getting consumables to a positive comp is a great sign of the hard work starting to pay off. It also shows you that the strategy is working. And consumables is a foot -- is the traffic driver for us. And so as consumables improves, so will the other parts of the business with it. So really pleased with consumables, and we expect to continue to make more progress with that. And I think I gave you some really good examples of what's coming in the back half of the year.

Okay, great. And then Sabrina, question on gross margin. You sound like flat, ex- the tariffs. Like how should we think about puts and takes for the second half of the year? We've heard about higher freight across retail, but like how should we think about puts and takes on gross margin in the second half?

You know, we are still very focused on delivering healthy margins for the year. There's always some pressures coming in and then some opportunities. So, for example, as Joel's been talking about and we've discussed all year long, we are still focused on making improvements in our owned brands. That started out a little slower than we thought, but it's gaining momentum now. We've had some really great wins with relaunching brands like So Phresh. And as you guys all know, those private label brands carry with them very nice margins. So we have quite a few levers that we're focused on as we march forward, but the overarching goal is that for the full year, we deliver healthy margins.

Okay, understood. Best of luck on the back half.

The next question comes from Oliver Wintermantel with Evercore ISI.

You called out absorbing ongoing supply chain headwinds in the second half. Can you maybe give us a little bit more details on that, maybe a dollar or basis point number on what it is? Is it freight, tariff cost, or is it labor cost? A little bit more detail would be helpful.

Yes, I would put this in the category of kind of normal, manageable headwind. So versus the beginning of the year, the only reason I'm calling it out -- and this is a well-known fact, not anything specific to Petco. But versus the beginning of the year, when there was no Middle East conflict, of course, there's pressure on things like fuel, et cetera, in particular. So again, I don't want to -- I definitely want to put it in perspective that we feel like, sure, there are some headwinds, but it's under the camp of manageable. And really, what we're excited about is that we've delivered nice profitability in the first half. So now as we enter the second half, while reaffirming our full year adjusted EBITDA guide, we have kind of earned the right to have the flexibility to both absorb and offset some of these headwinds, but most importantly also, look to options to invest in our business.

Got it. And then just a clarification question. What did you guys mention on the reinvestment in tariffs? Did you say -- was that lowering prices to sell through older inventory? And maybe a second -- just overall environment of pricing and promos?

Yes, on the first part, yes. So, what we took the opportunity to do is to really emphasize, we want to expedite our new strategy and get our new assortments in. So we really took an opportunity to expedite moving through our older legacy inventory, whether that be through more aggressive clearance, whether it be through some write-offs. So that was an important part of the strategy. So as we enter Q2, we have the opportunity to now bring in fresh inventory in line with our new assortment strategy.

The next question comes from Steve Forbes with Guggenheim.

Joel, you mentioned expectations around capturing a vet-led fresh food sale in the prepared remarks. So, I was curious if you could maybe just give us a high-level commentary on how the cross-selling strategies are evolving here and maybe expectations for them to build into the back half of the year? And then I don't know if you maybe start that by framing up for us today, like what percentage of your customers shop more than 1 segment, digital store or services? And how do you sort of expect that, I guess, penetration to build? Like how rapidly could it evolve here as we look out over the next couple of years?

Yes. Look, I think the vet-led -- and specifically talking about Hill's Science Diet here. It's an example, Steve, A, of being on trend and being one of the first to market with it. But it's also something that our vets are very excited about as an alternative to an offering that they can, you know, suggest to our customers in. And the fact that our vets are all owned by Petco or Petco employees is just a great example of just the cross-functional nature of veterinary services and center of store. And so we're really pleased that's just starting to roll out here in the next couple weeks. Overall, fresh and frozen are a key business for us. We've been in leader in that for a while. We added freezers in the first half of the year, and now we're adding the chillers to support this. And it's also a customer that shops more frequently. So a lot of options now for our customer, and Petco is really being seen as a place to go and get fresh and frozen. And then, you know, our percent of shoppers that are across all 3 channels is still a very, very small number, Steve. And so the opportunity is huge. The strategy is working. And now we're kind of in that execution phase of Phase 3. We've experimented on a lot of things in the first half. We've gotten traction on several of them. I think the real opportunity is really targeting customers that use this only in 1 of the 3 areas, and getting them the 2 first and then all 3 eventually is the real opportunity. But still a very small piece of our overall customer base, Steve.

And then maybe just a quick follow-up. I believe e-commerce sales last quarter returned a positive growth maybe, correct me if I'm wrong there. But how did e-commerce perform in the quarter? And maybe just revisit sort of the strategic goals with the digital offering and sort of how you expect it to drive share via that channel going forward?

Yeah, we don't segment report, as you know. But for sure, we're pleased with how the e-com business is performing. Now remember last year, we talked about with you all how that channel had the most cleanup of unprofitable sales. So we're really thrilled to see this year a comeback, but in a very healthy way with strong margins. So, you know, all that hard work is definitely paying off, and we're pleased we're on track there.

The next question comes from Simeon Gutman with Morgan Stanley.

It's Simeon. I wanted to ask, stepping back, what's helped stabilize the business? And I know, Joel, it'll be a lot of things. And I wanted to ask within that, the consumables growth, I think flattish. What are you seeing there between traffic and ticket, if you would shine a light directly on that on that business?

Just to chime in really quick, Simeon, that the comp in consumables is positive. Because remember, we have store closures. So, it's an -- it's -- we're really pleased to see that the comp is positive. I think you're probably right that the total sales are flattish. So just wanted to correct that, that's moving in the right direction for us, and we're really pleased.

Yes, and I think the key things that stabilize a lot of that is, you know, we're just a lot more agile than we were a year ago. We used to do 1 dog reset a year. We used to do 1 cat reset a year. We've been bringing in newness every month. And we've been optimizing the resets to be in stock better, the right brands by store. And so all of those are really the catalyst that contributed to stabilizing consumables and then actually getting it back to growing positive.

And then the -- I guess, some of the inflections we've talked about for sales, I know you've teased a couple things for '27, even some stuff for back half of this year, and now there could even be a store format rollout at some point. I guess, if we think about '27 as maybe the top line inflection year, is it first half, back half, Joel? I know it's early to start putting a dart on it.

Yes, and look, it is too early to put a dart on it, but I would think of it as measured and continuous. And that's really the way we're approaching it. It's not going to be a hockey stick. You know, throughout this call, both prepared remarks and talking, you know, owned brands was behind, but the product's starting to come in. We did some acceleration of legacy inventory so that the newness can come in. The services, all the pillars, Simeon, are -- we're just being really diligent to make sure that the growth is profitable and that it's measured and we'll just see continuous improvement. And then obviously, you know, we'll give you guys a real outline for the year, but I think you'll just continue to see continuous improvement.

The next question comes from Zach Fadem with Wells Fargo.

Hi, this is David Lantz speaking for Zach. I guess, first one from me, we know Q2 SG&A includes about a 60 basis point impact from lapping last year's actuarial true-up, but curious if you can talk through the other puts and takes in the quarter and provide any other dynamics that we should be keeping in mind for the second half?

Yes, I would say we are really pleased, as I mentioned in my remarks, David, that we keep providing evidence, hopefully, to you all of our expense discipline. Because despite the fact that actually, marketing was up $2 million, overall, our expenses were only up $1 million. And you're totally right. We were laughing at that benefit of $9 million. So if you exclude that, expenses were actually down about $8 million. And I would just tell you that is across the board, old-fashioned discipline on every line item. There's nothing really stand out about that.

Got it. That's helpful. And then, can you talk about, you know, supplies and companion animal declines have been moderating over the last couple quarters. Can you talk about the drivers of that and how to think through expectations for the second half?

Yes, I mean, look, I think -- just as I got asked several questions about consumables, supplies is an area that we're equally focused on improving. It does take a little bit longer. It's a slower-turning product. A large part of it comes in from overseas. But just like Simeon's question about '27, this is a great example of just continuous improvement. And that moderation has been happening over several quarters, and we expect it to continue.

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

Thank you, operator. And thank you, everyone, for joining us for our second quarter call. We look forward to catching up with you with our third quarter call in a few months and the progress that we're continuing to make here at Petco. Have a great afternoon.

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