[Management View]
Petco's management emphasized a multiphased transformation strategy aimed at improving retail fundamentals, operational efficiency, and profitability. CEO Joel Anderson highlighted the company's focus on expense leverage, gross margin expansion, and strategic resets in product assortment, such as raising dog food shelves to increase capacity by over 10%. CFO Sabrina Simmons underscored a disciplined cost-control mindset and sustainable SG&A management.

[Outlook]
Petco reiterated its full-year guidance for FY2025, expecting net sales to decline in the low single digits and adjusted EBITDA to range between $375 million and $390 million. For Q2, the company anticipates adjusted EBITDA of $92 million to $94 million, reflecting approximately 11% YoY growth. A new personalized membership program is under development, with a full launch expected in 2026 and a potential soft relaunch in late 2025.

[Financial Performance]
- Comparable sales declined 1.3% YoY, while net sales fell 2.3%, driven by decreased transactions and net store closures.
- Gross margin expanded by over 30 basis points to 38.2%, supported by improved product and services margins.
- Adjusted EBITDA increased $13.8 million YoY to $89.4 million, with a margin expansion of 105 basis points to 6% of sales.
- Free cash flow was negative $44 million, primarily due to incentive payouts.
- Inventory levels were 5% below last year, and the quarter-end cash balance improved by $48 million YoY to $139 million.

[Q&A Highlights]

**Question 1:** What are you seeing in pet adoption trends, and how do these trends impact your full-year outlook?
**Answer:** Pet adoption trends remain stable, with no significant changes since the last quarter. The 2025 outlook is not reliant on category tailwinds like increased pet adoption but rather on self-help initiatives to drive financial improvements.

**Question 2:** How are you ensuring permanent cost reductions while maintaining customer experience?
**Answer:** CFO Sabrina Simmons emphasized a shift in mindset toward sustainable SG&A leverage rather than one-time cost cuts. The focus is on building a strong foundation to manage costs effectively as sales grow, ensuring operating margin expansion without compromising customer experience.

**Question 3:** Regarding the top-line journey, where are you in terms of repositioning the brand and product assortment?
**Answer:** The company is in the early stages of identifying growth levers, including a more solutions-oriented marketing approach, product innovation, and omnichannel alignment. These initiatives are expected to materialize in the back half of 2025 and into 2026.

**Question 4:** Have you identified price gaps versus competitors, and what actions are being taken?
**Answer:** Petco has conducted a detailed SKU-level analysis to address price gaps. Adjustments have been made both upward and downward to balance customer value with business health, leveraging data-driven insights.

**Question 5:** Can you elaborate on gross margin performance and expectations for the full year?
**Answer:** Gross margin expanded modestly in Q1, driven by average unit cost (AUC) management and markdown optimization. The company remains committed to delivering gross margin expansion for the full year through a mix of pricing, assortment, and promotional strategies.

**Question 6:** How do category resets, such as the May planogram reset, impact sales?
**Answer:** The cat and dog category resets are expected to contribute to growth in the back half of the year. While disruptive in the short term, early signs from the cat reset are promising, with financial benefits anticipated in future quarters.

**Question 7:** What trends are you observing in services versus supplies, and what does this indicate about consumer behavior?
**Answer:** Services continue to outpace supplies, driven by needs-based categories like grooming. Software upgrades have improved appointment availability, enhancing customer retention and labor productivity. Supplies, being more discretionary, have seen softer performance.

**Question 8:** Within services, are there any specific areas of strength or weakness?
**Answer:** The Vital Care membership program has been a drag on services growth as it undergoes redesign. Core service offerings, excluding Vital Care, remain healthy and are expected to strengthen with ongoing operational improvements.

**Question 9:** What is the outlook for consumables, given the negative inflection in Q1?
**Answer:** The decline in consumables was anticipated and aligns with efforts to clean up low-margin promotions. The category resets are expected to drive improvements later in the year.

**Question 10:** What are your most loyal customer cohorts looking for, and how are you addressing their needs?
**Answer:** Petco is conducting a North Star customer segmentation analysis to better understand and target key customer groups. This work will inform growth strategies and customer engagement initiatives in the back half of 2025.

**Question 11:** What is the timeline for achieving a leverage ratio below two times, and how does free cash flow factor into this goal?
**Answer:** Profitability is the primary driver for reducing the leverage ratio and improving free cash flow. The company is focused on expanding operating margins as the first step toward achieving this goal.

**Question 12:** What is your view on inflation and pricing for the remainder of the year?
**Answer:** Inflation has been stable, and the company has embedded current tariff impacts into its forecast. Pricing adjustments are being made surgically to balance customer value with business needs.

[Sentiment Analysis]
Management displayed confidence in their multiphased strategy and the progress made in Q1. Analysts' questions reflected cautious optimism, focusing on the sustainability of cost controls, category resets, and long-term growth initiatives.

[Quarterly Comparison]
| Metric | Q1 2025 | Q1 2024 | YoY Change |
|-------------------------|-----------------|-----------------|------------------|
| Comparable Sales | -1.3% | +0.5% | -1.8% |
| Net Sales | $1.39B | $1.42B | -2.3% |
| Gross Margin Rate | 38.2% | 37.9% | +30 bps |
| Adjusted EBITDA | $89.4M | $75.6M | +18.2% |
| Adjusted EBITDA Margin | 6.0% | 4.9% | +105 bps |
| Free Cash Flow | -$44M | -$30M | -$14M |

[Risks and Concerns]
1. Declining comparable sales and net sales due to reduced transactions and store closures.
2. Negative free cash flow, limiting financial flexibility.
3. Tariff exposure, with owned brands now accounting for 7% of total COGS.
4. Potential delays in realizing financial benefits from category resets.

[Final Takeaway]
Petco's Q1 2025 results reflect progress in its transformation strategy, with notable improvements in gross margin and adjusted EBITDA despite declining sales. The company is focused on sustainable cost management, operational efficiencies, and strategic resets to drive profitability. While challenges such as declining transactions and tariff exposure persist, management's disciplined approach and long-term initiatives, including a new membership program and customer segmentation analysis, position Petco for a return to growth in the back half of 2025 and beyond.