Petco Health and Wellness Company, Inc. Class A Common Stock 2027 Q2 Earnings Call

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 three Reach for the Sky strategy. The team successfully gained traction across all four 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 three 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. 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 am 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 will focus on two areas. First, how our commitment to newness and anticipating trends is actively fueling our growth engine, and second, how we are beginning to demonstrate the unique power of the ecosystem we have built. First, on newness. Cat 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 surpassed 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, Cat Candy Shop, for cat treats, which not only was a huge success, but demonstrated the opportunity behind our own 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 our physical store provides a distinct competitive advantage that 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 omni-channel ecosystem. As a reminder, our multi-channel customers, meaning those who 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 multi-channel relationships across our ecosystems. First, I am pleased to share that we have officially rolled out our Autoship sign-up capabilities across our physical store locations. It has 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. 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 2-3x 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 BOPIS and unlocking Autoship for grooming customers who do not 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 also expanded doctor days by double digits to better meet demand. Bottom line, we are 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 are 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 is a great example of the many cross-shop opportunities available to Petco as we better utilize the ecosystem of services, product, and digital. Now, let us talk about how we are evolving the ecosystem even further. We are 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 customer. In May, we launched this new store format across a seven-store market test. Built on increased discovery, enjoyment, and store associate expertise, this format is designed to strengthen customer connectivity and trust. We have 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.