[Management View]
Key metrics, strategic priorities: Petco Health and Wellness Company reported a 2.3% decline in net sales and a 1.4% decline in comparable sales due to strategic store closures and a shift away from unprofitable revenue. Gross margin increased by 120 basis points to 39.3%, driven by disciplined pricing and promotion management. Operating profit rose by $41 million to $43 million, and adjusted EBITDA increased by $30 million to $114 million. The company ended the quarter with $190 million in cash and $684 million in total liquidity.

[Outlook]
Performance guidance, future plans: Management raised full-year adjusted EBITDA guidance to $385 million–$395 million and expects net sales to be down low single digits for FY2025. Q3 2025 adjusted EBITDA is guided to $92 million–$94 million. Full-year capital expenditures are expected to total $125 million–$130 million. A new loyalty program is scheduled for roll-out in 2026, and e-commerce enhancements are underway.

[Financial Performance]
YoY/QoQ trends compared to expectations/estimates: Net sales decreased by 2.3%, and comparable sales were down 1.4%. Gross margin increased by 120 basis points to 39.3%. SG&A expenses were reduced by $36 million, and operating profit increased by $41 million to $43 million. Adjusted EBITDA rose by $30 million to $114 million, with a margin expansion of nearly 220 basis points to 7.6% of sales.

[Q&A Highlights]
Question 1: When is a reasonable expectation for generating a positive comp? Is that by the fourth quarter of this year, or is that more likely a 2026 outcome?
Answer: The third quarter is the hardest compare of the year. Results will begin to show up in 2026 as it relates to a positive comp. We are beginning to seed ideas and test and learn for phase three.

Question 2: Did gross margin gains come from eliminating promotional and unproductive activities? Were those mostly online, and did that drive the weakness in the online segment?
Answer: Focus has been on stores, where the majority of sales are. Online had more promo and stacking that needed cleanup. Both stores and e-commerce had cleanup, but more was needed on the e-commerce side.

Question 3: How did gross margin perform relative to expectations, and what is the impact of tariffs on gross margin in the back half of the year?
Answer: Gross margin expansion was driven by disciplined pricing and promotion management. Tariffs had minimal impact in Q2 but will become more meaningful in Q3 and Q4.

Question 4: What are the mitigation efforts for tariffs, and how did pricing perform in Q2?
Answer: Pricing has been used all year long with a consumer-first lens. The focus is on delivering value to customers, and pricing will continue to be used as a lever.

Question 5: Can you provide updates on planogram resets?
Answer: Dog and cat resets have been completed, improving on-shelf availability and store profitability. More resets will continue in other categories.

Question 6: Can you share more detail around the North Star initiative?
Answer: Phase three has four main pillars: delivering an amazing store experience, scaling services, merchandising differentiation, and winning with omnichannel.

Question 7: Where are you in the process of e-commerce pullback and retooling, and is inventory where you intend it to be?
Answer: E-commerce is more profitable today, and work is ongoing. Inventory is well-managed, with a focus on continuous improvement and maintaining a tight relationship between sales and inventory.

Question 8: What is behind the increasing NPS scores?
Answer: Improvements in store experience and reinvestment in people are resonating with customers, leading to positive customer sentiment and engagement.

Question 9: Can you comment on transactions versus AUR during the quarter?
Answer: UPT and Basket are performing well, but transactions are an area of focus for improvement. Efforts are being made to invite customers back into stores.

Question 10: What are the biggest remaining gaps before shifting fully into phase three?
Answer: Progress made to date gives confidence in continued improvement. Focus is on growth pillars and reinvesting back into the business.

Question 11: Can you talk about the number of pet families and their shopping behavior?
Answer: The pet space is relatively flat. Observations include a significant number of one-time customers and opportunities to grow share of wallet with service-only customers.

Question 12: Is there any inventory movement markdown risk associated with changing merchandise mix?
Answer: No significant inventory risk is anticipated. Inventory management processes and governance are in place to control buys and manage newness.

Question 13: Can you size the drag to the comp from cleaning up empty calorie promos?
Answer: It's more important to look at overall progress. Improvement in store performance is evident, and e-commerce is six months behind but progressing.

Question 14: What is driving the implied fourth quarter adjusted EBITDA decline?
Answer: Tariffs will have the most significant negative impact in Q4. The company is keeping some powder dry for potential investments and protecting against macro volatility.

[Sentiment Analysis]
Tone of analysts/management: Analysts were focused on understanding the timeline for positive comps, gross margin performance, and the impact of tariffs. Management was confident in their strategic initiatives and progress made, emphasizing disciplined pricing, promotion management, and reinvestment in the business.

[Quarterly Comparison]
| Key Metrics | Q2 2025 | Q2 2024 |
|----------------------------|---------------|---------------|
| Net Sales | -2.3% | N/A |
| Comparable Sales | -1.4% | N/A |
| Gross Margin | 39.3% | N/A |
| SG&A Expenses | -$36 million | N/A |
| Operating Profit | $43 million | N/A |
| Adjusted EBITDA | $114 million | N/A |
| Inventory | -9.5% | N/A |
| Free Cash Flow | $50 million | N/A |
| Store Count | 1,388 | N/A |
| Cash and Liquidity | $684 million | N/A |

[Risks and Concerns]
Risks and concerns content: Tariffs are expected to have a significant negative impact in Q4. External cost pressures and ongoing pressure in customer transaction volume are concerns. Management does not expect progress to be linear, and topline progress may be masked by further business model changes.

[Final Takeaway]
Petco Health and Wellness Company is making significant progress in improving profitability through disciplined pricing, promotion management, and cost reductions. While net sales and comparable sales have declined due to strategic store closures and a shift away from unprofitable revenue, the company has raised its full-year adjusted EBITDA guidance and is positioned for continued transformation. Management is focused on reinvesting in the business, enhancing the store experience, and driving growth through strategic initiatives. Investors should monitor the impact of tariffs and the company's ability to execute on its growth pillars as it moves into phase three.