Q1 2024 Petco Health and Wellness Company Inc Earnings Call

For this presentation and our SEC filings and finally during the Q&A portion of today's call. We ask that you. Please keep to one question and one follow up with that let me turn it over to Mike.

Operator: And finally, during the Q&A portion of today's call, we ask that you please keep to one question and one follow-up. With that, I will turn it over to Mike.

Mike: Good morning, everyone, and thank you for joining us today. I'd also like to take this opportunity to welcome Glenn Murphy as our executive chairman. With over 30 years of retail experience, we're delighted to have him join our board. The entire leadership team will be working closely with him on the next stage of Petco's transformation. In Q1, we made meaningful progress against our strategy to reposition the business for sustainable and profitable growth.

Mike: Good morning, everyone and thank you for joining us today I'd also like to take this opportunity to welcome Glenn Murphy as our executive Chairman.

Mike: With over 30 years of retail experience, we're delighted to have him join our board the entire leadership team will be working closely with them on the next stage of <unk> transformation.

Mike: In Q1, we made meaningful progress against our strategy to reposition the business for sustainable and profitable growth.

Mike: Although I've been a pet parent for many years and a member of Petco's board for over three years, the last 60 days have provided me with even greater insight into what makes Petco a special place to both work and shop. We operate in an attractive category with a track record for consistent growth, and Petco remains an iconic and trusted brand for millions of pet parents. Our store partners bring a palpable energy for change, and I'm grateful for the incredible work they do.

Speaker Change: Although I have been a pet parent for many years and a member of <unk> Board for over three years. The last 60 days have provided me with even greater insight into what makes PATCO, a special place to both work and shop.

Speaker Change: We operate in an attractive category with a track record for consistent growth and Petco remains an iconic and trusted brand for millions of pet parents.

Speaker Change: Our store partners bring it a palpable energy for change and I am grateful for the incredible work they do.

Mike: It's their enthusiasm that shapes how our leadership team focuses on both our mission and our potential as we look ahead. We need to address some big challenges by capitalizing on our... specifically, we must return to profitable growth and generate improved free cash flow, keeping an eye on the long-term opportunity to capture further market share and what remains highly fragmented. In support of this, we have restructured Petco's executive leadership.

Speaker Change: It's their enthusiasm that shapes, how our leadership team focused on our mission and our potential as we look ahead.

Speaker Change: We need to address some big challenges by capitalizing on our strengths.

Specifically, we must return to profitable growth and generate improved free cash flow keeping an eye on the long term opportunity to capture further market share in what remains a highly fragmented industry.

In support of this we have structured <unk>, we've restructured <unk> executive leadership team.

Mike: Consequently, we've simplified decision making, aligned our focus on fewer and clearer priorities, and empowered the organization to move with greater speed and agility. The leadership team's priorities to improve profitability are clear: return to retail fundamentals while executing on cost transformation and takeout. Retail Fundamentals falls into the following distinct components.

Consequently, we simplify decision, making aligns our focus on fewer and clear priorities and empowered the organization to move with greater speed and agility.

Speaker Change: The leadership team's priorities to improve profitability are clear.

Speaker Change: Return to retail fundamentals, while executing on cost transformation and takeout.

Speaker Change: Retail fundamentals falls into the following distinct components.

Mike: The first is store productivity. In our pet care centers, we've begun to roll out the new store operating model. This builds on the work started last year, and it reinforces an owner's mindset. The model not only promotes prioritization and increases customer-facing time but also educates and empowers store partners to create a world-class customer experience and drive share of wallets. The second area is merchandising.

Speaker Change: First is store productivity.

Speaker Change: In our pet care centers, we have begun to rollout the new store operating model.

Speaker Change: This builds on the work started last year and our reinforces an owner's mindset.

Speaker Change: Our motto not only promotes prioritization and increases customer facing time, but also educate and empower store partners to create a world class customer experience and drive share of wallet.

Speaker Change: The second area is merchandising excellence.

Mike: We are conducting an end-to-end review and rationalization of our pricing and assortment strategies across our merchandise. Designed to improve traffic, basket, and overall quality of sales, this review is focused on better aligning our in-store and online merchandising to meet the needs of all pet parents while driving long-term profitable... This will be supported by the third component, which is increasing marketing effectiveness.

Speaker Change: We are conducting an end to end review and rationalization of our pricing and assortment strategy across our merchandise mix.

Speaker Change: Designed to improve traffic basket and overall quality of sales. This review is focused on better aligning our in store and online merchandising to meet the need of all pet parents, while driving long term profitable growth.

This will be supported by the third component, which is increasing marketing effectiveness.

Mike: As we plan now for the balance of the year, we are recalibrating our marketing efforts to deliver more effective, lower-frontal marketing and engaging actively with parents to drive traffic to our stores and online stores. We are partnering with vendors to increase top-of-the-line marketing, reinforcing our unique ability to cater to every pet and pet parent, and finally, Disciplines Inventory Management. We see ample opportunity to realign our omni-channel delivery model that balances both cost and capacity to better service our stores and direct-to-customer fulfillment centers, thereby managing overall distribution costs.

Speaker Change: As we plan now for the balance of the year, we are recalibrating, our marketing efforts to deliver more effective lower funnel marketing and engaging actively with payers to drive traffic to our stores and online channels.

Speaker Change: We are partnering with vendors to increase top of funnel marketing reinforcing our unique ability to cater to every pets and pet parents need.

Speaker Change: And finally disciplined inventory management.

Speaker Change: We see ample opportunity to realign our omnichannel delivery model that balances, both cost and capacity to better service, our stores and direct to customer fulfillment centers managing overall distribution costs.

Mike: We see meaningful opportunities across the entire supply chain to deliver further. While there is much more work ahead, I am pleased with the actions we have taken in just 60 days, and we anticipate a fuller update on progress as plans finalize. Now, turn to cost transformation

Speaker Change: We see meaningful opportunities across the entire supply chain to deliver further efficiencies.

Speaker Change: While there is much more work ahead I am pleased with the actions we've taken in just 60 days and we anticipate a fuller update on progress as plans finalized.

Speaker Change: Now turning to cost transformation.

Mike: We remain on track to unlock a targeted $150 million in cost savings and productivity enhancements by the end of fiscal 2025, with $40 million to be achieved in year one. As we look more deeply into the business, we're working diligently to expedite and augment these savings, including through the disposition or sunsetting of non-core assets. Specifically, we are being hyper-critical on all areas of spend by reducing or pausing projects that are G&A intensive but have lower confidence in ROI, sequencing the highest priority drivers that have minimal or no impact on a relationship with customers.

Speaker Change: We remain on track to unlock a targeted $150 million in cost savings and productivity enhancements by the end of fiscal 2025.

Speaker Change: With $40 million to be achieved in year one.

Speaker Change: As we look more deeply into the business, we're working diligently to expedite and augment these savings including through the disposition or sunsetting of noncore assets.

Speaker Change: Specifically, we are being hypercritical on all areas of spend and reducing or pausing projects that our G&A intensive but have lower confidence in ROI sequencing the highest priority drivers that have minimal or no impact on our relationship with customers.

Mike: For example, in Q1, we completed the sale of our Pupbox business, and we recently decided to pause non-critical updates to internal systems, thus allowing us to redirect investments in technology towards customer-focused enhanced. We also deferred this year's Store Leaders Summit and are working with our vendors to support this event to focus instead on additional customer and revenue generating activities. Referring this event not only keeps our partners in store to interact with customers but also delivers tangible cost savings. We expect a fuller update on the magnitude and timing of cost opportunities as we finalize our plan. As I close...

Speaker Change: For example in Q1, we completed the sale of our pulp box business and we recently decided to pause noncritical updates to internal system, thus, allowing us to redirect investments in technology towards customer focused enhancements.

Speaker Change: We also deferred this year's store leader summit and are working with our vendors who support this event to focus instead on additional customer and revenue generating activities.

Speaker Change: Deferring this event not only keeps our partners in stores to interact with customers, but also delivers tangible cost savings.

Speaker Change: We expect a fuller update on the magnitude and timing of cost opportunities as we finalize our plans.

Speaker Change: As I close.

Mike: I want to reinforce that despite the immense change we are driving throughout the organization, we remain committed to our long-term strategy. Our ecosystem, comprised of a fully integrated services offering, one of the most comprehensive nutrition and merchandising assortments in the market, and a powerful omni-channel delivery model, remains a competitive differentiator from online-only and mass players. This ecosystem powers our customer acquisition flywheel and reinforces our unique position as a retailer of choice within the pet category.

Speaker Change: I want to reinforce that despite the immense change we are driving throughout the organization.

Speaker Change: We remain committed to our long term strategy.

Speaker Change: Our ecosystem comprised of a fully integrated services offering what are the most comprehensive nutrition and merchandising assortments in the market and a powerful omnichannel delivery model remains a competitive differentiator from online only and mass players.

Speaker Change: This ecosystem powers, our customer acquisition flywheel and reinforces our unique position as a retailer of choice within the pet category.

Mike: The underlying value proposition of Petco remains strong, and I am confident we have clear lines of sight and the right plans in place to return to sustainable, profitable growth. Thank you, and I'll now turn the call over to Brian. Thanks, Mike, and good morning, everyone.

Speaker Change: The underlying value proposition of Petco remains strong and I am confident we have clear lines of sight and the right plans in place to return to sustainable profitable growth.

Speaker Change: Thank you and I'll now turn the call over to Brian.

Brian: Building on Mike's comments about the quarter, the last 60 days have given us even greater clarity on the full potential of our business, and we've already begun activating against clear and significant opportunities to deliver on it. Specifically, we're committed to restoring profitability and balancing our assortment to reflect the needs of pet parents. And we're being forensic and disciplined with costs to ensure future revenue growth translates meaningfully to the bottom line. Ultimately, we expect these actions to return value to all shareholders.

Brian: Thanks, Mike and good morning, everyone.

Brian: Building on Mike's comments about the quarter. The last 60 days have given us even greater clarity on the full potential of our business and we've already begun activating against clear and significant opportunities to deliver on it.

Brian: Specifically, we're committed to restoring profitability and balancing our assortment to reflect the needs of pet parents.

Brian: And we're being forensic and discipline with cost to ensure future revenue growth translates meaningfully to the bottom line ultimately.

Brian: Ultimately, we expect these actions to return value to all shareholders.

Brian: For the quarter, net revenue was $1.5 billion, a decrease of 2% year-over-year. Comparable sales were down one percent. In merchandise, consumables were flat year-over-year, reflecting the impact of lapping prior-year inflation coupled with the pricing actions we took in the third quarter. Our discretionary supplies and companion animal business experienced continued softness, down 7% year-over-year. Services Another, which includes services, wholesale, and recently disposed non-core businesses, delivered 4% revenue growth, with services up 10%, driven by ongoing strength in our veterinary hospitals, mobile clinics, and grooming services.

For the quarter net revenue was $1 5 billion, a decrease of 2% year over year.

Brian: Comparable sales were down 1%.

Brian: And merchandize consumables was flat year over year, reflecting the impact of lapping prior year inflation, coupled with the pricing actions, we took in the third quarter.

Brian: Our discretionary supplies and companion animal businesses experienced continued softness down 7% year over year.

Brian: Services and other which includes services wholesale and recently disposed non core businesses delivered 4% revenue growth with services up 10% driven by ongoing strength in our vet hospitals mobile clinics and grooming services.

Brian: Moving down the P&L, gross profit was $579 million, down $26 million from the prior year. Gross margin for the quarter was 37.8%, a decline of 101 basis points, primarily driven by MIPS. SG&A's percentage of revenue increased from 37.1% to 38.9% year-over-year, driven by severance expenses related to the management changes during the first quarter, increased depreciation, investments in store labor, and a one-time expense related to the disposition of pup box. Excluding severance-related charges and the one-time disposition expense, SG&A's percentage of revenue was 38.2%.

Brian: Moving down the P&L gross profit was $579 million down $26 million from prior year gross margin for the quarter was 37, 8% a decline of 101 basis points, primarily driven by mix.

Brian: SG&A as a percentage of revenue increased from 37, 1% to 38, 9% year over year, driven by severance expenses related to the management changes during the first quarter increased depreciation investments in store labor and a onetime expense related to the disposition of pump box.

Brian: Excluding severance related charges and the onetime disposition expense SG&A as a percentage of revenue was 38, 2%.

Brian: Q1 adjusted EBITDA was $75.6 million, down 32%, with an adjusted EBITDA margin rate of 4.9%, down 219 basis points year-over-year. Adjusted EPS was negative 4 cents compared to 6 cents per share in the prior year. Turning to the balance sheet, our liquidity remains strong at $617 million, inclusive of $90 million in cash and cash equivalents and $528 million of availability on our revolving credit facility, which was upsized and extended in March of 2024 for an additional five years. Pre-cash flow was negative $41 million, down from negative $24 million in the prior year.

Brian: Q1, adjusted EBITDA was $75 6 million down 32% with adjusted EBITDA margin rate of four 9% down 219 basis points year over year.

Brian: Adjusted EPS was negative <unk> <unk> compared to <unk> <unk> per share in the prior year.

Brian: Turning to the balance sheet, our liquidity remains strong at $617 million inclusive of $90 million in cash and cash equivalents and $528 million of availability on our revolving credit facility, which was upsized and extended in March of 2024 for an additional five years.

Brian: Free cash flow was negative $41 million down from negative $24 million in the prior year.

Brian: Q1 CapEx of $33 million is down 47% year-over-year, reflecting the Q1 component of the year-over-year reductions included in our CapEx guidance for the year. Given our Q1 execution against our CapEx guidance and the ramping benefits of our cost savings initiatives and working capital management, we expect to be free cash flow positive for fiscal 2024. As a reminder, we also maintain callers on roughly two-thirds of our debt, which has helped mitigate the impact of elevated interest rates.

Brian: Q1, capex of $33 million is down 47% year over year, reflecting the Q1 component of the year over year reductions included in our Capex guidance for the year.

Brian: Given our Q1 execution against our Capex guidance and the ramping benefits of our cost savings initiatives and working capital management, we expect to be free cash flow positive for fiscal 2024.

Brian: As a reminder, we also maintain callers on roughly two thirds of our debt, which have helped mitigate the impact of elevated interest rates.

Brian: I'll now turn to our Q2 Outlook. For the second quarter, we are guiding to the following revenue, adjusted EBITDA, and adjusted EPS. For the quarter, we expect revenue of approximately $1.525 billion, adjusted EBITDA of approximately $80 million, and adjusted EPS of approximately $2.6. Q2 guidance reflects our expectations for sequential improvement in revenue and profitability trends from the first quarter. Additionally, for the full year, we expect net interest expense of approximately $145 million, inclusive of the estimated impacts of our hedges against the forward rate curve, and $272 million weighted average fully diluted shares, which are unchanged. Additionally, we expect 140 million of capital expenditures for the full year, which is unchanged.

Speaker Change: I'll now turn to our Q2 outlook.

Speaker Change: For the second quarter, we are guiding to the following revenue adjusted EBITDA and adjusted EPS for the quarter. We expect revenue of approximately one five to two 5 billion adjusted.

Speaker Change: Adjusted EBITDA of approximately $80 million and adjusted EPS EPS of approximately negative two.

Speaker Change: Q2 guidance reflects our expectations for sequential improvement in revenue and profitability trends from the first quarter.

Speaker Change: Additionally for the full year, we expect net interest expense of approximately $145 million inclusive of the estimated impacts of our hedges against the forward rate curve and 272 million weighted average fully diluted shares which are unchanged.

Speaker Change: $140 million of capital expenditures for the full year, which is unchanged.

Brian: And, we remain on track to achieve $40 million in cost benefits in year one and $150 million in run rate savings by year end 2025, with a view to accelerating and augmenting those savings where we can. To echo Mike's remarks as I close, our focus on retail excellence includes shoring up the underlying financials of our business, both for the immediate and long term. Like him, I share the enthusiasm and energy of our partners in our stores, distribution centers, and support centers and have confidence in the way the management team is leading the company at this important juncture of our transformation. Thank you for your time, and with that, we'll be happy to take your questions.

Speaker Change: And we remain on track to achieve $40 million in cost benefits in year, one and $150 million in run rate savings by year end 2025, with a view to accelerating and augmenting those savings where we can.

Speaker Change: To Echo Mike's remarks, as I close our focus on retail excellence includes shoring up the underlying financials of our business both for the immediate and long term.

Speaker Change: Like him I share the enthusiasm and energy of our partners in our stores distribution centers and support centers and have confidence in the way. The management team is leading the company at this important juncture of our transformation.

Speaker Change: Thank you for your time and with that we'll be happy to take your questions.

Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been answered and you would like to withdraw your question, please press star then 2. Again, it is better to ask a question than to say nothing at all. As a reminder, please keep yourself to one question and one follow-up.

Speaker Change: We will now begin the question and answer session.

Speaker Change: To ask a question you May press Star then one on your telephone keypad.

Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

Again it is star then one to ask a question.

As a reminder, please keep yourself to one question and one follow up.

Operator: If you do not hear the tone after pressing star and then 1, please hang up and dial back into the call. At this time, we will pause momentarily to assemble our roster. The first question comes from Seth Basham with Wedbush Security. Please go ahead.

Speaker Change: If you do not hear the tone after pressing star then one please hang up and dial back into the call.

Speaker Change: At this time, we will pause momentarily to assemble our roster.

Speaker Change: The first question comes from Seth Basham with Wedbush Securities. Please go ahead.

Seth Mckain Basham: Thanks a lot and good morning. Congratulations on the improving results. I would love to get some color first on the supplies business, which remains under pressure. As you look forward and project revenue into the second quarter, how do you think that business is going to perform? Do you see changes in demand levels? Do you see any changes to the competitive environment?

Seth Mckain Basham: Thanks, a lot and good morning congrats.

Seth Mckain Basham: Congrats on the improving results I'd love to get some color first on the supplies business, which remains under pressure as you look forward and project revenue into the second quarter. How do you think that business is going to form do you see changes to demand levels, you see any changes to the competitive environment.

Mike: Asa, thanks for the question. We did see some slight improvement in the year-over-year decline in our supplies and container animals business, but we know we have more work to do. The team is taking some decisive action to deliver on this. Overall, we remain confident in our assortment strategy and plans, our breadth of offerings, and how we're serving our millions of pet parents. And I think, I want to be really, really clear for you, is that we're acting every day to improve profitability in the near term. My focus is to sequence the highest party drivers that we have while not compromising on our value proposition or relationship.

Speaker Change: Thanks, Thanks for the question.

Speaker Change: We did see some slight improvement in the year over year decline in our suppliers in Catania alloys business, but we know we have more work to do.

Speaker Change: The team has taken some decisive action to deliver on this.

Speaker Change: Overall, we remain confident in our assortment strategy and plans our breath of offerings.

Speaker Change: How we're serving our millions of pet parents, and I think youre right.

Speaker Change: I want to be really really clear for you as it were acting everyday to improve profitability in the near term.

Speaker Change: My focus is to sequence the highest party drivers.

Speaker Change: We have we are not compromising on our value proposition of our relationship with our customers.

Brian: And as it relates to gross margins, which were stronger than expected, can you provide some more color on the drivers there? As you look forward, how should we think about gross margins relative to FG&A in the second quarter?

Speaker Change: Understood as it relates to the gross margins, which were stronger than expected could you provide some more color on the drivers there as you look forward.

Speaker Change: How should we think about gross margins relative to SG&A in the second quarter.

Seth Mckain Basham: Thanks for the question Seth I'll, just say, we're focused on driving bottom line improvement and we expect sequential dollar improvement on bottom line profitability as the year progresses steady progress throughout the year, we're looking at initiatives to drive both gross profit improvement and SG&A efficiency and as I laid out in the prepared remarks, we're on track with our key.

Brian: improvement, and we expect sequential dollar improvement on bottom line profitability as the year progresses. Steady progress throughout the year. We're looking at initiatives to drive both gross profit improvement and SG&A efficiency, and as I laid out in the prepared remarks, we're on track with our cost transformation and believe there's opportunity to both augment and accelerate progress there. I will tell you specific to Q1 that you did see some modest improvement in the discretionary categories, and the team also did a good job across the supply chain driving

Seth Mckain Basham: Cost transformation I believe theres opportunity to both augment and accelerate progress there I will tell you specific to Q1, you did see some modest improvement in the discretionary categories and the team also did a good job across supply chain driving efficiencies.

Kaumil S. Gajrawala: The next question comes from Kaumil Gajrawala with Jeffreys. Please go ahead.

Speaker Change: The next question comes from.

Seth Mckain Basham: <unk>.

Speaker Change: <unk> <unk> with Jefferies. Please go ahead.

Kaumil S. Gajrawala: Hey guys, good morning. There is a lot going on, and it all makes, you know, kind of good logical sense.

Speaker Change: Hey, guys good morning.

Speaker Change: A lot going on.

Speaker Change: Good logical sense, but can you maybe just help us out with.

Speaker Change: Prioritization or how you how you balance each of these items for example effectiveness of marketing when does that come around versus the assortment versus the productivity. If you could just kind of.

Mike: But can you maybe just help us out with prioritization or how you balance each of these items, for example, the effectiveness of marketing? When does that come around versus the assortment versus the productivity? If you could just kind of work us out through what the timeline looks like, because obviously doing all at once is difficult. So maybe just we can get a better sense of prioritization.

Maybe just to work is obviously, what the timeline looks like because obviously doing all at once.

Speaker Change: Difficult. So maybe just to see if we can get a better sense of prioritization that'd be helpful.

Brian: No, great. Thank you for the question. I would start with that we are focused on fewer and clearer priorities, and we're taking decisive action to improve our profitability while we enhance our customer experience. And everyone in the organization, both at the store and leadership level, has rallied around our reset plan. From an overall standpoint, our number one focus is improving our profitability. The biggest area to improve our profitability is in merchandising, and that's why we have our focus in that area, as followed by improving our services profitability and a renewed focus on reviewing our SG&A spending.

Speaker Change: Great. Thank you for the question.

Speaker Change: I will start with that we are focused on fewer and clearer priorities we're taking.

Speaker Change: Nice of action to improve our profitability, while we enhance our customer experience and everyone in the organization. Both at the store leadership level has rallied around our reset plan.

Speaker Change: From a overall standpoint, our number one focus is improving our profitability.

Speaker Change: The biggest area to improve our profitability and merchandising and Thats why we have our focus in that area.

Speaker Change: Followed by improvement in our services profitability.

Renewed focus on reviewing our SG&A spending that's how I would lineup by priorities, Brian would you add anything I'd just say I'm.

Brian: That's how I would line up our priorities. Brian, would you add anything? Yeah, I'd just say, Seth, I mean, excuse me, Kamal, we gave a couple of examples of things we're doing to prioritize the disposition of Pupbox, the pausing of some of the internal upgrades to systems, as well as the deferment of the summit. Those are just a couple of examples of things where the team is united and working towards the same objectives, which is making sure we have fewer priorities, clearer priorities, and those that add the most value to the enterprise.

Kumar: Excuse me Kumar I gave a couple of examples of things, we're doing to prioritize the disposition of pump box of pausing with some of the internal upgrades to systems as well as the affirmative summit. Those are just a couple of examples of things where the team is United and working towards the same objectives, which is making sure we have fewer priority.

Kumar: Clear priorities and those that had the most value to the enterprise.

Kaumil S. Gajrawala: Okay, great. And then, in the context of all the things you're doing, it doesn't sound like optimizing the network or closing doors is part of the plan. Is that just me maybe just misreading that? Or is that something you're also evaluating?

Speaker Change: Okay, Great and then.

Speaker Change: In the context of <unk>.

Speaker Change: One of the things you're doing it doesn't sound like.

Speaker Change: Optimizing the network or closing stores as part of the plan is that just maybe just misreading that or is that something youre also evaluated.

Mike: I would tell you, Kamal, that we are dynamic in the way that we look at our real estate portfolio. We have a very comprehensive process to make sure that we understand the demographics of any market that we enter and the competitive dynamics as well as our own position in the markets that we may exit. So it's a rolling portfolio. I would say that there are not any large-scale changes planned at this time.

Speaker Change: I would tell you a small that we are dynamic and the way we look at our real estate portfolio. We have a very comprehensive process to make sure that we understand the demographics of any market that we enter and the competitive dynamics as well as our own position in the markets that we may exit so it's a rolling portfolio I would say that.

Speaker Change: There are not any large scale changes planned at this time.

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

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

Steven Emanuel Zaccone: Great, good morning. Thanks very much for taking my question.

Steven Emanuel Zaccone: Great. Good morning, Thanks, very much for taking my question.

Steven Emanuel Zaccone: I wanted to understand the category performance outlook for the second quarter, how should we think about consumables versus some of the more discretionary categories and then along those same lines you mentioned returning to sustainable growth.

Mike: I wanted to understand the category performance outlook for the second quarter. How should we think about consumables versus some of the more discretionary categories? And then, along those same lines, you mentioned returning to sustainable growth. The macro is a challenging thing to predict. But from a company-specific aspect, what do you think really needs to happen here to drive that sustainable growth going forward?

Speaker Change: The macro is a challenging thing to predict but from a company specific aspect. What do you think really needs to happen here to drive that sustainable growth going forward.

Brian: Hey, thanks, Steve. I'll start here with the category outlook, you know, embedded in our guide to the $1.525 billion revenue. We know we have work to do in our assortment, and that's why merchandising excellence and the work we're doing there are at the top of our list. You know, we have an opportunity to improve the quality of our sales to better support our pet parents' needs. And our focus is on improving profitability, you know, both within the mix that we sell and then every part of the. I would just add, Steve, we haven't baked in any significant recovery in the discretionary category into our guide, consistent with the way we came into the year.

Steve: Hey, Thanks, Steve I'll start here on the category outlook embedded in our guide of the one $5 to $5 billion revenue. We know we have work to do on our assortment and Thats why merchandising excellence and the work. We're doing there is at the top of our list, we have an opportunity to improve the quality of our sales to better support our pet.

Brian: Ours needs and our focus is on improving profitability both within the mix that we sell and then every part of the mix, Brian I would just add Steve we haven't baked in any significant recovery in the discretionary categories into our guide consistent with the way we came into the year.

Brian: Services remained strong in the first quarter, up 10%; consumables were roughly flat, which is partly due to the overlapping dynamics relative to inflation. So everything that we think about from those categories going forward is baked into the 1.525 guide for the second quarter.

Brian: Services remained strong in the first quarter up 10% consumables was roughly flat, which.

Brian: It's partly due to the overlapping dynamics relative to inflation. So everything that we think about from those categories going forward is baked into the one 5% to five guide for the second quarter.

Anna A. Andreeva: The next question comes from Anna Andreeva of Needham & Company. Please go ahead.

Speaker Change: The next question comes from.

Speaker Change: On Geneva with Needham and company. Please go ahead.

Anna A. Andreeva: Great, thanks so much. Good morning, and good to see you guys making progress. A couple of questions from us. With Glenn's appointment as Chairman of the Board, just any of the initiatives he's looking at that you can share, and would he be considered for the permanent CEO position with the company? That's my first question, and then we have a follow-up.

Speaker Change: Great. Thanks, so much good morning, and good to see you guys are making progress a couple of questions from us with Glenn's appointment as chairman of the board just any of the initiatives to keep looking at that you can hear and what can be considered for the permanent CEO position.

Speaker Change: The company. That's my first one and then we have a follow up.

Mike: I've spent a lot of time with Glenn over the last few weeks, and he'll be of great value to me and the team given his experience in retail turnarounds. We remain committed to our strategy and executing on it, and our top focus is improving our profitability. The search for a permanent CEO is ongoing, and we'll provide any updates as soon as we have additional information.

Speaker Change: Great. Thanks.

Speaker Change: I've spent a lot of time, it's done over the last few weeks and you will be of great value to me and the team given his experience in retail turnarounds, we remain committed to our strategy and executing on it and our top focus is improving our profitability.

Speaker Change: The search for the permanent CEO is ongoing and will provide any updates as soon as we have additional information for you.

Anna A. Andreeva: Okay, fair enough. And just as a follow-up, on VET, can you update us on some of the economics there? Should we think that most of the base is now a bit profitable, and are you still seeing that mid-single-digit lift to the center of the store from VET that you used to talk about?

Speaker Change: Okay fair enough and just as a follow up on that can you update us on some of the economics. There should we think that most of the base is now EBITDA profitable and are you still seeing that mid single digit lift to the center of the store from that that you used.

Speaker Change: To talk about.

Brian: Thanks Anna. There's been no change in our long-term economics in terms of the vet model, and our plans for the year have not changed since we guided coming into the year 5 to 10 vets for the year, which is baked into our CAPEX guide. I will tell you what we're focused on in that we've just brought in some additional expertise into the vet business. We have a new leader of that business with significant experience in that space, and we're focused on improving both the vet experience within our hospitals as well as the improved customer value proposition. We're also looking for ways to improve profitability through greater utilization.

Speaker Change: Thanks, John and Theres been no change in our long term economics in terms of that model and our plans for the year have not changed since we guided coming into the year 500 attendance. That's for the year, which are baked into our Capex Guide I will tell you what we're focused on and that we've just brought in some additional expertise into that business with new <unk>.

Speaker Change: Leader of that business with significant experience in that space and we're focused on improving both the vet experience within our hospitals as well as the improved customer value proposition. We are also looking for ways to improve the profitability through greater utilization.

Oliver Wintermantel: The next question comes from Oliver Wintermantel with Evercore ISI; please go ahead.

Speaker Change: The next question comes from Oliver.

Speaker Change: Winter mental with Evercore ISI. Please go ahead.

Oliver Wintermantel: I had a question regarding, first of all, the transactions versus tickets or AUR. If you could give us some updates on how that trended through the quarter and how you think about it for the rest of the year.

Speaker Change: Yes, Thanks Adam.

Oliver Wintermantel: I had a question regarding first of all that.

Oliver Wintermantel: Transactions versus ticket or AUR.

Speaker Change: Could give us some updates how they trended through the quarter and how you think about it for the rest of the year.

Brian: Thanks, Oliver. I'd say we're not going to break that out for you specifically. I would tell you, though, that basket was stronger than traffic, and that's been consistent with what we've been seeing.

Speaker Change: Thanks, Oliver I'd say, we're not going to break that out for you specifically I would tell you, though that basket was stronger than traffic and thats been consistent with what we've been seeing.

Oliver Wintermantel: Got it. And the other one, I think, Brian, you said you're expecting free cash flow to be positive this year. If you could maybe talk about how you get there, what the moving parts are. Thanks, Oliver.

Speaker Change: Got it and.

Speaker Change: The other one I think Brian you said, you're expecting free cash flow to be to be positive this year.

Speaker Change: If you could maybe talk about how you how you get there what the moving parts. Thank you.

Brian: Thanks, Oliver. I'll start with Q1. Although Q1 was negative 41 million, it was down negative 24 million last year, and Q1 is typically and historically a negative free cash flow quarter for us, given some of the seasonality of the rolling balance sheet items. The knobs for us, Oliver, are quite frankly to continue to focus on profitability, improving the profitability trajectory of the company, and we expect steady progress on that as the year progresses.

Speaker Change: Thanks, Oliver I'll start with Q1, although Q1 was negative $41 million was down negative 24 last year and Q1 is typically and historically a negative free cash flow, Florida quarter for us given some of the seasonality of the rolling balance sheet items.

Speaker Change: <unk> for us Oliver or quite frankly to continue to focus on profitability of the company and improving the profitability trajectory of the company and we expect steady progress on that as the year progresses. The second variable I would say is continued execution against our Capex guide, we were down 47% and spend in year, one from last year and Thats. It.

Brian: The second variable, I would say, is continued execution against our CapEx guide. We're down 47% in spend in year one from last year, and that's on track with the 140 we guided for the year. And the third thing is we have opportunities in inventory. Although the team's done a good job at managing inventory, we do have additional opportunities to continue to rationalize our inventory management and focus on higher velocity.

Speaker Change: It's on track with the $1 40, we guided for the year and the third thing is we have opportunities in inventory. Although the team has done a good job at managing inventory, we do have additional opportunity to continue to rationalize our inventory management and focus on higher velocity skus.

Operator: Once again, if you have a question, please press star, then 1 on a touch-tone phone. The next question comes from Steven Forbes on Guggenheim. Please go ahead.

Speaker Change: Once again, if you have a question. Please press Star then one on a touchtone phone.

Speaker Change: The next question comes from Steven Forbes with Guggenheim. Please go ahead.

Steven Paul Forbes: Good morning. This is Rene Maranon on Steve Forbes' behalf. Given relatively stable product gross margin profiles quarter over quarter, can you help us better understand where we are in terms of bottoming and what drivers the business is working through to improve overall profitability within product sales?

Speaker Change: Good morning. This is Rene Marion honestly, Steve Forbes, given relatively stability within the product gross margin profile quarter over quarter can you help us better understand where we are in terms of bottoming and what drivers the business is working through to improve overall profitability within product sales.

Brian: Thanks for the question. I would just tell you we're focused on driving bottom-line profitability. What you saw in the first quarter, as I mentioned earlier, was some modest improvement in the discretionary category coupled with the team's execution against some of the supply chain efficiencies that we saw in the first quarter. Looking forward, though, we have an opportunity across our merchandising strategy to continue to look for opportunities within the cost of sale.

Speaker Change: Yeah. Thanks for the question I would just tell you we're focused on driving bottom line profitability. What you saw in the first quarter as I mentioned earlier was some modest improvement in the discretionary category coupled with the team's execution against some of the supply chain efficiencies that we saw in the first quarter looking forward, though we have.

Speaker Change: Opportunity across our merchandising strategy to continue to look for opportunities within cost of sales.

Brian: And then, as a follow-up, can you help us further break down the 4% growth in services and other revenue between vet training and grooming? I know you mentioned the 10% in the prepared remarks between vet care and services, just so that we can get a better understanding of the underlying trends. Yeah, I'm not going to get

Speaker Change: Got it and then as a follow up can you help us further break down the 4% growth in services and other revenue between that training and grooming I know you mentioned the 10% in the prepared remarks between services.

Speaker Change: Just so that we can get a better understanding of the underlying trends.

Brian: Yeah, I'm not going to get into that level of detail for you. Services was strong at 10%, and that was driven by grooming, that was driven by our Vetco mobile business, and continued maturation of our veterinary hospitals underneath. So all three of those reported strong results.

Speaker Change: Yes, im not going to get into that level of detail for your services was strong at 10% and that was driven by grooming that was driven by our Iveco mobile business and continued maturation of our bed hospitals underneath so all three of those.

Speaker Change: Reported strong results.

Justin Klaber: The next question comes from Justin Klaber with Baird. Please go ahead.

Speaker Change: The next question comes from Justin Kleber with Baird. Please go ahead.

Justin Klaber: Hey, good morning, everyone. Thanks for taking the time to answer the question. My first one is just on the consumables business. I understand the disinflation trend, but any color on how units are trending? Are you seeing any improvement just based on, you know, the assortment efforts? And then how are you thinking about like for like pricing on consumables across the balance of the year? Do you see any risk of deflation, or is pricing simply flattening out here?

Justin Kleber: Hey, good morning, everyone. Thanks for taking the question. My first one is just on the consumables business I understand the disinflation trend but.

Justin Kleber: Any color on how units are trending are you seeing any improvement just based on the assortment efforts and then how are you thinking about like for like pricing on consumables across the balance of the year do you see any risk of deflation or is pricing simply.

Mike: Yeah, thanks, Justin. You know, I'll start here. I think I would just go with that.

Justin Kleber: Simply flattening out here.

Justin Kleber: Yeah. Thanks, Justin I'll start here I think I would just go with our comprehensive assortment and breadth of offerings makes record preferred destination for millions of pet parents.

Mike: Our comprehensive assortment and breadth of operations makes Petco the preferred destination for millions of pet parents. And, you know, we've introduced different products over the course of time to make sure we can have a solution for every pet parent and their needs. I think, you know, on a pricing standpoint and thinking about disinflation, the customer continues to be choiceful. But again, back to our whole offering, it gives them great products and solutions at the right price points.

Justin Kleber: We've introduced different products over the course of time to make sure. We can have a solution for every pet parents and their needs.

Justin Kleber: I think the on a pricing standpoint, and thinking about this inflation of that customer continues to be choice full but again back to our whole offering that gives them great products and solutions at the right price points. It gives us the ability to solve all of their needs. We're committed to meeting the customer wherever they are with whatever they need and we continue to over index in premiums.

Mike: It gives us the ability to solve all of their needs. We're committed to meeting the customer wherever they are with whatever they need. And we continue to over-index in premium, super premium, and our freshman pros and assortment.

Justin Kleber: Super premium in our fresh and frozen Assortments.

Justin Klaber: Okay, so you don't see any risk that vendors will lower prices to stimulate volume.

Speaker Change: Okay. So you don't see any risk with vendors will take prices lower to stimulate volume.

Mike: You know, the question is a good one. We're always working with our vendors to drive profitable outcomes for both of us on assortments, promotions, and demand generation marketing campaigns. You know, with our comprehensive assortment, we have the ability to meet all customers with whatever product solutions they're looking for.

Justin Kleber: No.

Justin Kleber: There is a good one we're always working with our vendors to drive profitable outcomes for both both of us on Assortments promotions in demand generation marketing campaigns.

Justin Kleber: With our comprehensive assortment, we have the ability to keep our customers with whatever product solutions. They are looking for.

Speaker Change: The next question comes from.

Greg Sommer: The next question comes from Greg, from Fetish Canyon with Wolf Research. Please go ahead.

Justin Kleber: Greg.

Speaker Change: Fetish Kennon with Wolfe Research. Please go ahead.

Scott Stringer: Hi guys, this is Scott Stringer on for Greg. I want to just ask some more macro questions. The topic of discussion last quarter was market share. Can you provide an update on how market share trended in 1Q? If you could break that out by value versus premium merchandise, that would be helpful.

Speaker Change: Hi, guys. This is Scott Stringer on for Greg I wanted to just ask some more macro questions. A topic of discussion last quarter was market share can you provide an update on how market share trended in <unk> and if you could break that out by value versus premium merchandise that would be helpful.

Mike: Thanks, Scott. I'm not going to give you the level of detail you're looking for, but I'm just going to start with our number one priority is to improve our profitability, and we have the entire organization rallied around these objectives. You know, focusing on offering our customers, our pet parents, the products they need and giving them an exceptional shopping experience while also adjusting our cost structures is our number one focus, and these actions will strengthen our competitive position.

Speaker Change: Thanks, Scott I'm not going to give you the level of detail you're looking for but I'm just going to start with our number one priority is to improve our profitability and we have the entire organization rallied around these objectives.

Scott Stringer: Got it. That's fair enough.

Speaker Change: Focusing on offering our customers our pet parents, the product they need and given them an exceptional shopping experience. While also addressing our cost structure is our number one focus and these actions will strengthen our competitive positioning.

Scott Stringer: Maybe just one follow-up on inflation. How is that trending? How is that impacting gross margins today? I think the big...

Speaker Change: Got it that's fair enough, maybe just one follow up on inflation, how is that trending how is that impacting gross margins today.

Brian: I think the biggest thing to call out there would be relative to the growth in consumables. You saw consumables roughly flat for the quarter, and the primary driver of that was the year-over-year lapping dynamics of inflation. That said, I think the team did a good job managing overall gross margin for the quarter.

Speaker Change: I think the biggest thing to call out there would be relative to the growth in consumables you saw consumables roughly flat for the quarter. The primary driver of that was the year over year lapping dynamics of inflation that said I think the team did a good job managing overall gross margin for the quarter.

Speaker Change: That's helpful. Thank you guys.

Michael Lasser: The next question comes from Michael Lasser with UBS. Please go ahead.

Speaker Change: The next question comes from Michael Lasser with UBS. Please go ahead.

Michael Lasser: Good morning. Thank you so much for taking my question, Mike Mohan. I hope you are great.

Michael Lasser: Good morning. Thank you so much for taking my question, Mike Mohan and I Hope you are great and your response to the last question suggested that right now Petco is prioritizing profitability over market share. So a is that right and b when is it realistic for outs.

Michael Lasser: And your response to the last question suggested that right now, Petco is prioritizing profitability over market share. So, A, is that right? And, B, when is it realistic for outsiders to expect that Petco's market share stabilizes, especially with stepped-up efforts from mass merchants and predominantly online-only retailers to aggressively target the category? Thanks, Michael.

Speaker Change: <unk> to expect that <unk>.

Speaker Change: Market share stabilize, especially with stepped up efforts for mass merchant and predominantly online only retailers to aggressively target the category.

Mike: Thanks, Michael. Our top priority is improving our profitability, and that gives us the basis for us to be more than competitive in a very fragmented marketplace. You know, our unique end-to-end offering and our millions of pet parents who love our brand get a chance to experience things that we can do that other online-only or mass players cannot do, and we're going to remain focused on that.

Michael Lasser: Thanks, Michael our top priority is improving our profitability and that gives us the basis for us to be.

Michael Lasser: More than competitive in a very fragmented marketplace, our unique end to end offering.

And our millions of pet parents love our brand get a chance to experience things that we can do that other online earlier mass players cannot do.

Michael Lasser: We're going to remain focused on that.

Operator: Thank you for your time and for your questions. That concludes today's learning school. Thank you.

Speaker Change: Thank you for your time, a few questions that concludes today's earnings call. Thank you.

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

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

Speaker Change: Okay.

Speaker Change: Goodbye.