Summary of Petco's Q2 2026 Earnings Call

1Key Financial Results and Metrics

Net Sales: $1.5 billion, slightly up from the previous year.

Adjusted EBITDA: $122 million (8.2% of net sales), including a $6.8 million net tariff refund; normalized adjusted EBITDA was $115 million.

Gross Profit: $591 million, with a gross margin of 39.7%, reflecting a 37 basis point increase.

Operating Profit: $48 million (3.2% of net sales), up from $43 million (2.9%).

Free Cash Flow: Increased by $51 million year-to-date; cash balance reached $293 million.

Total Debt: Reduced to $1.48 billion, down $113 million year-over-year.

Store Count: 1,377 stores, with 1 net closure during the quarter.

2Strategic Updates and Business Highlights

Phase 3 Strategy: Focused on enhancing customer engagement and loyalty through the relaunch of the Petco Perks membership program, which has shown strong initial engagement but negatively impacted net sales in Q2.

Product Innovation: Successful introduction of new products, particularly in the cat category, including private label offerings that have driven growth.

Veterinary Services: Continued strong performance with double-digit growth in pet visits; plans to open additional vet hospitals in 2027.

Omnichannel Strategy: Expanded Autoship capabilities in stores, aiming to enhance customer engagement and drive sales.

Store Format Testing: Launched a new store prototype with positive early results, focusing on customer experience and engagement.

3Forward Guidance and Outlook

Full-Year Guidance: Reaffirmed expectations for net sales growth of flat to 1.5% and adjusted EBITDA between $415 million and $430 million.

Q3 Expectations: Anticipated sales growth of 0.4% to 1% and adjusted EBITDA of $100 million to $103 million.

Inventory Strategy: Plans to optimize inventory mix and accelerate new product assortments, particularly in supplies and owned brands.

4Bad News, Challenges, or Points of Concern

Impact of Membership Program: The relaunch of the Petco Perks program initially led to a decline in net sales due to high point redemptions, although management believes this is now behind them.

Soft Dog Business: The dog segment remains weak, with declining adoptions impacting sales; management is focused on diversifying offerings to mitigate reliance on this category.

Supply Chain Headwinds: Ongoing challenges related to freight and tariff costs, though considered manageable.

Competitive Pricing Pressures: The need to remain price-competitive in a market where other retailers are leveraging tariff refunds to lower prices.

5Notable Q&A Insights

Customer Growth: Management noted a slight increase in total customer count in Q2, suggesting stabilization and potential for future growth.

Cross-Selling Opportunities: There is a significant opportunity to enhance customer engagement across digital, store, and service channels, with a focus on converting single-channel customers to multichannel shoppers.

Veterinary Business: The profitability trajectory of new vet hospitals is expected to improve due to lessons learned from existing locations, with a focus on shortening maturity curves.

Market Trends: The company is actively responding to demographic shifts, particularly in the cat segment, which is expected to drive future growth. Overall, Petco is navigating a challenging environment with a focus on strategic initiatives aimed at enhancing customer loyalty, expanding product offerings, and optimizing operational efficiencies while maintaining a cautious outlook on market conditions.