Q3 2024 Petco Health and Wellness Co Inc Earnings Call
Good afternoon and welcome to the Petco third quarter.
2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
To ask a question, you may press star then 1 on your touchtone phone. To withdraw your question, please press star and then 2.
Speaker Change: Please note this event is being recorded. I would now like to turn the conference over to Lisa Stark, Senior Director of Communications. Please go ahead.
Lisa Stark: Good afternoon, and thank you for joining Petco's 3rd Quarter 2024 Earnings Conference Calls. In addition to the earnings release, there is a presentation available to download on our website at ir.petco.com, summarizing our results.
Lisa Stark: On the call with me today are Joel Anderson, Petco's Chief Executive Officer, and Brian LaRose, Petco's Chief Financial Officer.
Lisa Stark: Before they begin, 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.
Lisa Stark: 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.
Speaker Change: 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 Joel.
Joel Anderson: Thank you, Lisa. Good afternoon, everyone, and thank you for joining us today. Our third quarter results came in slightly ahead of our expectations.
Joel Anderson: As we more effectively navigated a dynamic consumer environment, and the actions we are taking to strengthen our retail fundamentals and drive costs out are beginning to take hold.
Joel Anderson: Revenue was $1.51 billion, up 1%, driven by consumables and services.
and Improvements in Services Margin.
Suggested EBITDA was $81.2 million.
Joel Anderson: While there is much more work to do, our improving results increase our conviction that we are on the right path as we position Petco to win.
Joel Anderson: Throughout the quarter, I spent a significant amount of time meeting with teammates across the organization, from working alongside our associates in our pet care centers, to visiting our distribution centers, to hosting small group listening sessions at our support centers.
I've witnessed firsthand.
Joel Anderson: the passion our people have for pets, and the dedication they bring to serving our customers.
Joel Anderson: Importantly, it's exciting to see the entire organization rally behind our plans to drive operational and financial performance improvement.
Joel Anderson: On our call, I outlined our commitment to resetting the trajectory of our business on the last call.
Joel Anderson: Today, I will share specific areas of opportunities, discuss developing plans to drive improvement,
Joel Anderson: and holding ourselves accountable while we're on the path to returning to long-term, sustainable, profitable growth.
Our initiatives are currently focused on three critical areas.
Merchandising?
servicing our customers
driving efficiency
across our business.
Joel Anderson: Allow me to provide you with an update on each, including specific examples.
first.
Joel Anderson: Improving merchandise remains the greatest near-term opportunity for us to strengthen profitability.
Joel Anderson: I'd like to take this moment to thank our merchandising team.
along with our Merchant Vendor Partners.
Joel Anderson: for their collaboration and support as we take the necessary steps to make Petco a better retailer, employer, and partner.
Joel Anderson: We're optimizing our assortment to be aligned more closely with customer demand.
and make it easier for them to shop with us.
Joel Anderson: In support of this, we completed a detailed review of our assortment.
across both consumables and supplies.
I've identified several opportunities to enhance our offering.
key focus areas for us.
Joel Anderson: include creating more space on shelves for faster-turning SKUs, as well as reducing SKUs in certain categories to simplify the customer's decision-making process.
Joel Anderson: In addition, I have met one-on-one with several of our vendors in order to directly learn how we can improve our relationships.
As consumers.
Joel Anderson: continue to be judicious in their spend, we have to meet them where and when they want with the value they're looking for.
Joel Anderson: We've implemented new processes to deliver timely product resets that allow us to offer more exciting products.
Joel Anderson: We're also sharpening our approach to pricing to remain competitive in the market and drive financial outcomes for Petco.
The date.
Joel Anderson: who put in place stronger pricing guardrails, implemented more robust reviews of our pricing gaps, and established processes for promo and assessments.
Joel Anderson: An example of our merchandising work in action is the recent launch of our Welcome to the Family program.
given the importance of first-time pet ownership.
Joel Anderson: We designed this program in partnership with our key vendors, as well as our expert vet, training, and grooming teams.
Joel Anderson: provide dog and cat parents with guidance, resources, and savings on new pet essentials and services.
Joel Anderson: Second, to win in today's retail environment, we must improve the way we service our customers.
Joel Anderson: across our pet care centers, online, and in our services platforms.
Joel Anderson: From my time spent working in our pet care centers, I observed several opportunities to drive greater consistency across the entire footprint.
and Strength in Profitability.
Joel Anderson: Let me share several examples of where we are making meaningful improvements to better serve our customers.
Joel Anderson: We've set new standards for our labor model to staff our stores and in a way that allows our partners to spend more time with the customers and less time on tasks in the back of the store.
This extends to store leadership.
Joel Anderson: where we're reducing tasking, administrative responsibilities, and overall complexity for our general managers.
Joel Anderson: bringing them up to spend more time leading their teams and driving store productivity.
Joel Anderson: Additionally, leveraging automation to standardize the online order fulfillment process in our pet care centers is one area in particular I see significant potential.
Joel Anderson: Finally, in services, our bed offering remains a key growth driver and differentiator for Petco. Services revenue was up 9% with strength across both hospitals and Betco mobile clinics.
Joel Anderson: As our hospital fleet continues to mature, our services team is focused on accelerating utilization
Joel Anderson: to support structural margin improvement of our vet hospitals and ensure we can meet the growing demand for our customers in a timely manner.
Joel Anderson: And we're leveraging our VET customer data to better understand their purchasing patterns, inform how we engage with them, and ultimately drive greater wallet share.
Joel Anderson: These initiatives are having a direct impact on our top and bottom line.
Joel Anderson: As we're creating more selling opportunities for partners while simultaneously driving greater efficiency.
and Benjamin Thiele.
Turning to our third commitment.
Joel Anderson: driving greater efficiencies across the business to bend the cost curve.
Within merchandising, we're taking action to improve our commercial execution.
Joel Anderson: In Q3, we completed key vendor negotiations, and we're pleased with the outcome as we continue to strengthen our vendor relationships and differentiated merchandising offerings.
Joel Anderson: In our supply chain, we're renegotiating multi-year contracts with our shipping partners, reducing split shipments, and driving incremental improvements in distribution center labor to reduce cost per shipment and improve speed of shipping.
Is that?
Speaker Change: We're closely measuring performance at the individual hospital level, providing us greater visibility into the needs of each hospital and the staffing required to maximize efficiency and productivity.
Speaker Change: We believe there is significant opportunity to improve the profitability of the existing fleet by ensuring hospitals remain staffed and are supported through marketing and merchandising efforts.
Speaker Change: and we're taking action to professionalize our procurement team. As a start, we've requested contract negotiations and conducted RFPs across a broad selection of medium to large-scale indirect procurement partners.
Speaker Change: We're pleased with the engagement and the outcomes we're seeing so far.
Overall, our cost initiatives are well underway.
and tracking against our prior expectations.
Speaker Change: Importantly, these aren't just one-time savings. These initiatives are designed to fundamentally change the way we think and work to consistently identify areas of opportunity to unlock long-term value.
Speaker Change: This redefinition of retail fundamentals is expected to have an enduring impact on our people and culture, leading to greater accountability and transparency.
Speaker Change: further ensure our success around our three initiatives of merchandising, servicing our customers, and driving efficiency.
We've added two key executives.
Speaker Change: Leadership is critical to shaping the direction of the business and I'm pleased with our recent hiring of two new leaders that will help us realize our full potential.
Speaker Change: We named Joe Benizia, Chief Revenue Officer, a newly created role in charge of developing the integrated strategies for improving the customer experience and driving revenue across the organization.
Joe will oversee these critical areas.
contribute to Petco's growth.
Speaker Change: including the pet care centers, services, real estate, and customer success capabilities.
Speaker Change: Dan Callista also has joined us as our Chief Strategy and Transformation Officer.
Speaker Change: In this role, Dan will be responsible for building the internal capabilities we need to get our fundamentals right, maintaining accountability to our ongoing transformation, and positioning ourselves for growth.
Speaker Change: These hires underscore our top priority for improving profitability through structural cost out while positioning Petco for growth.
Speaker Change: It's still early days, but our actions are beginning to take hold.
Speaker Change: We're setting ourselves up to play offense as we build momentum into Fiscal 2025.
Before I close, let me leave you with this.
Speaker Change: Having been in the role for over a hundred days, I can say with conviction and certainty that I'm more excited today than I have ever been on our potential here at Petco.
Speaker Change: The time I spent working alongside our associates showed me how their knowledge, expertise,
Speaker Change: and simply raw passion for improving the lives of pets and their parents is unlike anything else in the industry.
this enthusiasm that sets us apart
It makes me confident in our trajectory.
Speaker Change: With that, over to Brian to provide more details on our financial performance and guidance. Brian?
Thanks, Joel, and good afternoon, everyone.
Speaker Change: First, I want to extend my thanks to our Petco partners for their continued dedication to delivering for our customers.
Our third quarter performance demonstrates improved operational and financial execution.
enabling us to deliver results ahead of our expectations.
Speaker Change: For the quarter, net revenue was $1.51 billion, up 1% year-over-year, with comparable sales up 2% year-over-year.
Speaker Change: Breaking this down by category, consumables grew 3%. Supplies and companion animal remained soft at down 3%, but improved roughly 200 basis points sequentially on a percentage basis.
Speaker Change: Services and Other, which is comprised of services, wholesale, and recently disposed non-core businesses, delivered 5% growth.
Speaker Change: Services specifically were up 9% driven by ongoing strength in our vet hospitals, mobile clinics, and grooming.
Speaker Change: Moving down the P&L, gross profit was $576 million, up 5% from prior year.
Speaker Change: Gross margin for the quarter was 38.1%, up nearly 130 basis points from prior year, driven by progress on product cost management and improvements in services gross margin.
SG&A was $572 million, increasing 2% year-over-year.
Speaker Change: As a percentage of sales, SG&A rate was 37.8%, up nearly 40 basis points, driven primarily by our planned step-up in store labor, in line with our expectations, and reflecting our commitment to improving the in-store customer experience.
Speaker Change: We expect these increased SG&A costs to continue into the fourth quarter.
Speaker Change: Adjusted EBITDA was $81.2 million with an adjusted EBITDA margin rate of 5.4% up almost 60 basis points year-over-year.
Speaker Change: All in, adjusted EPS was negative two cents compared to negative five cents per share in the prior year.
Speaker Change: Turning to the balance sheet, merchandise inventories were $690 million at the end of the third quarter as we effectively controlled our inventory, which, along with in-stock rates, are in excellent shape.
Speaker Change: Liquidity remains strong at $644 million, inclusive of $117 million in cash and cash equivalents, and $528 million of availability on a revolving credit facility.
Thank you. Thank you. Thank you.
Speaker Change: CAPEX was down 31 million year-over-year for the quarter. Year-to-date down approximately 85 million year-over-year in line with our guidance to reduce CAPEX in 2024.
Speaker Change: Pre-cash flow was negative $10 million, a meaningful improvement year-over-year, supported by lower inventory levels achieved as part of our ongoing approach through disciplined inventory management.
Speaker Change: And we remain firmly on track to deliver positive free cash flow for fiscal 2024.
Speaker Change: Before moving on to guidance, let me address the recent announcement of potential tariffs on goods imported from China, Mexico, and Canada.
Speaker Change: We have a few immaterial vendors where we source directly from Mexico and Canada, which we do not expect to impact us negatively.
Speaker Change: Regarding China, relative to broader retail, we have a lower level of exposure to imported products and we believe the proposals, as currently outlined, would not be meaningful to our overall business.
Speaker Change: Specific to Petco Mexico, we do not source or import any products from them. Rather, they source their products primarily from the U.S. with select products exported directly to them from Asia or sourced directly from suppliers based in Mexico.
Speaker Change: Petco Mexico remains the clear market leader in pet specialty in Mexico and an important strategic partner for us continuing to drive long-term profitable growth.
I'll now turn to Outlook.
Speaker Change: As a reminder, Petco's fiscal 2023 fourth quarter and full year included an additional week.
Speaker Change: For the fourth quarter of fiscal 2024, we expect revenue of approximately $1.55 billion.
Speaker Change: adjusted EBITDA between 90 to 95 million which is inclusive of a minimum of 10 million in third-party consulting fees associated with our transformation effort.
and adjusted EPS between zero and two cents.
Speaker Change: Additionally, for the full year, we expect net interest expense of approximately $140 million, inclusive of the estimated impacts of our hedges against the forward rate curve.
Speaker Change: 273 million weighted average fully diluted shares and 130 million of capital expenditures.
Thank you.
Speaker Change: Stepping back, we're encouraged by the structural improvement we're seeing throughout the business.
Speaker Change: The meaningful changes we've made in the first nine months of the year sets us up for a solid finish to 2024 as we build momentum heading into 2025.
Speaker Change: Thank you for your time, and with that, we'll be happy to take your questions.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key.
Speaker Change: To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Komil Jajawala with Jeffreys. Please go ahead.
Komil Jajawala: Hey, thank you. I guess the first question, you've made a lot of progress on the cost side. What would be a target same-store sales figure where you could start levering off this newer cost base?
Speaker Change: Yeah, thank you for the question. I'll give you some of my thoughts and Brian if you want to add anything. Look, I think our focus right now is, as you said even in your question, is about
Speaker Change: taking costs out of our base permanently. It's a structural change that we want embedded in our DNA to drive accountability and transparency.
Speaker Change: But as it relates to a longer term and the question you're asking, I think that's something that we should leave for March as we think about the longer term. A lot's going to change. Obviously, the number's much lower right now because we're so focused on...
Speaker Change: structural elements of costs that we think are permanent and not one-time.
Speaker Change: Yeah, I would just add to that, if you look at SG&A, you know, we've talked for two, three quarters in a row now about sort of step up in
labor investments that we need.
Speaker Change: to improve the in-store customer experience. We've done that, we've seen that actually manifest in an improved customer experience in the stores. Simultaneously, we have taken cost out of the SG&A structure through some G&A actions, as well as making sure that we reduce the tasks in-store, simplifying the experience for our GMs and partners in the store, and again, improving that customer experience.
Okay, great.
Thank you.
Speaker Change: The next question comes from Steve Shemash with RBC Capital. Please go ahead.
Steve Shemash: Great, good evening and thank you for for taking my question. I wanted to ask on supplies and companion animals and the more discretionary segment. So still negative, but you know the underlying trend is improving there. Wondering if you can elaborate on that, if that's just
Steve Shemash: that all subsegments generally just doing better or if there's any insight to glean from specific subsegments?
Speaker Change: Yeah, look, I think you're asking about discretionary, you know, I think it's more important you think about Petco in the broader business, which...
Speaker Change: as I look at it is really two-pronged. We have a huge consumables business and that's really all about being in stock.
Speaker Change: and that's where a large focus of ours has been. We just implemented a new inventory management system. We're improving shelf utilization. And then as it relates to discretionary, you're right, we've seen a 200 basis points sequential improvement.
Speaker Change: Discretionary is really all about innovation, newness, being trend right, and really driving impulse buying. We'll continue to get better at that, but we're really focused on both sides of the business and getting them right.
Speaker Change: got it helpful thank you and maybe just as a follow-up you know what one of your competitors has been talking for a few quarters now on
Speaker Change: Adoption trending in the right direction. Curious if that aligns with what you guys are seeing in the market. I know that the data for adoptions is pretty spotty. And if not, has it stabilized? What are you looking for to maybe get ahead of an inflection there?
Speaker Change: Yeah, look, I think everybody is looking at it a little bit differently. You know, the market...
You know, it is...
Speaker Change: Rather flat is what we're seeing But you know as it relates to Petco
Speaker Change: in the short term and by that I mean throughout 2025 we're really in a
Speaker Change: in a self-help situation, and that we don't have to rely on the market getting better in order for our business to get better. And so, look, if the market improves like you're talking about, that's just icing on the cake and makes us even stronger. We're really focused on what's in our control, and we don't need the industry's success to drive near-term operational and profit improvement.
The market growth is upside, as I said.
Thanks.
Got it.
Speaker Change: And the next question comes from Seth Basham with Wedbush Securities. Please go ahead.
Speaker Change: Hi, this is Matt McCartney on for Seth Basham. I'm just wondering if you could talk about the pricing impact in the quarter, whether it was positive or negative, and how we should think about pricing going forward as you tweak your product mix.
Speaker Change: Yeah, thanks for the question Matt. We don't we don't typically talk about the impact of pricing I will tell you that the overall environment I'll comment on the overall environment has been rational Both from a pricing standpoint and a random promotional environment
Speaker Change: Great, thanks. I'm just wondering then if you could talk about the services margin and what drove the improvement there this quarter
Speaker Change: Yeah, a couple things. First, I'd talk in overall gross margin. If you look at our gross margin improvement year-over-year of 130 basis points, that was with mix going against us. So, although supplies and CA
Speaker Change: We're down 3% versus 5% last quarter. We're still a negative mix year over year. The two biggest drivers of the gross margin improvement for the company were, number one, our cost actions taking hold.
Speaker Change: and seeing improvement throughout the cost ecosystem. Number two was that services gross margin improvement that you talked about, and that's a function of a number of things.
Speaker Change: First and foremost would be maturation of the vet hospitals and all the great work that the team's doing there, going hospital by hospital, and as Joel indicated in his prepared remarks, we believe we have ample opportunity to improve the profitability of the existing vet fleet.
Speaker Change: Second would be the continuation of strength in our BecoMobile business. So BecoMobile is all a, it's a volume and utilization business and we continue to actually increase the top line in that business and with that drags along incremental margin improvement and then the grooming business also remains strong for us.
Great, thank you. I'll pass it along.
Thanks, Matt.
Speaker Change: The next question comes from Michael Lasser with UBS. Please go ahead.
Good evening, thank you so much for taking my question.
Speaker Change: So, Joel, it seems like your initial priority is to come in, cut some costs, focus on retail fundamentals. So, A, how much of an opportunity for savings is there?
If you could size that, that would be great.
Speaker Change: and B, how much of that are you going to have to reinvest?
Speaker Change: in the business to drive sustainable same-store sales growth because, as we know, this is a very competitive market with some reinvigorated players who are all looking to address the addressable market here. Thank you.
Speaker Change: Hey, thanks Michael and good to hear your voice. Look, I think at the phase we're at right now, Michael,
Speaker Change: None of what we're taking out at this point in time is stuff that we see we need to reinvest.
we think we still have significant more cost.
opportunities.
Speaker Change: And as we get down to that second wave of stuff, certainly that's when we'll start to look at things to reinvest, like more marketing to drive top-line growth. But at this point in time, our real focus right now is about taking costs out of the business. It's not just one time in nature that has to be.
Speaker Change: reinvest in a business but it's a permanent cost out and that's kind of how we're thinking about it Michael
All right. Thanks, Michael.
Speaker Change: And the next question comes from Steven Zacon with Citi. Please go ahead.
Speaker Change: Hi, this is Arianna, on for Steve. Thank you for taking our question. My first question is, how has the business trended thus far in 4Q, and are there any call-outs for holiday performance relative to the implied 4Q outlook for revenue growth?
Speaker Change: Look, I'm not going to get into kind of inner quarter trends and stuff. I mean, that's, you know, clearly reflected in our guide.
Speaker Change: We're pleased with the start of the quarter and you can see by the guide the sequential improvement from Q3 is a nice improvement. And so that's kind of where we're tracking for now and I think we've got momentum going into the back half of the quarter here.
Speaker Change: Thank you, and then my follow-up is how do you think about the ability to regain market share in 2025 and in the medium term? Like aside from better growth in the category, what do you see as the specific drivers to have customers re-engage with Petco?
Speaker Change: Well, look, hopefully what you took away from my remarks is that I'm more bullish than ever on my decision to join Petco. The passion I saw from our associates, the way everybody here has just embraced us
Speaker Change: in turning this business around and getting back to retail disciplines.
Speaker Change: certainly then sets us up for for growth in 2025 and beyond and as far as you know specific numbers and everything we'll outlay that we'll outlay that for you as we we get into March and next year but hopefully you sense in my tone and my prepared remarks how excited I am and the progress we've made in a extremely short period of time.
Thanks, Ariana.
Speaker Change: And the next question comes from Steve Forbes with Guggenheim. Please go ahead.
Speaker Change: Hey guys, this is Julio Marquez for C-Forbes. I wanted to touch on the vet hospitals and the opportunity for efficiency enhancements.
Speaker Change: I think you mentioned a need for full-time staffing, maybe some improvement on the merchandising side. So any color you can provide there on staffing and merchandising and maybe the anticipated list.
Speaker Change: And finally, any way to contextualize maybe the, you know, end-state margin for the vet clinics and, you know, I guess maybe the scaling to get there. Thank you.
Speaker Change: Yeah, if I heard you right, your question was about the hospitals.
Speaker Change: Look, we've made a lot of progress this year. Steven, who joined us earlier this year and leads our hospital operations team.
has just done a great job of...
you know, delivering better profitability.
Speaker Change: Helping us invest better in in terms of staffing You know utilization rates Etc, etc. So The progress we're making there is fantastic. And you know, it's certainly resulted in in sales continuing to grow I mean our hospitals and vetco were up 17% this last quarter
Speaker Change: and really pleased with the progress we're making with hospitals and vets overall.
Speaker Change: Is there a second part to that question I missed on there?
Speaker Change: Maybe on the merchandising opportunities there and, you know, just how you guys are thinking about like the end-state margin for, you know, the vet-hospital business and maybe the scaling to get there. Is it more like an intermediate kind of thing or longer term kind of thing?
Speaker Change: Yeah, look, I think on the merchandising piece, it's us getting better at Rx, it's us getting better at...
Speaker Change: connecting our vets back into the stores and to grooming and to recommendations. They're a product.
Speaker Change: That's something we're just still in our infancy on and we can get to better. As far as the ultimate goal on margins...
Speaker Change: There's just still so much improvement there that we're nowhere close to the peak there of what the ultimate margin is. Our hospitals are rather still in their infancy and we'll continue to improve as our utilization rates go up.
Thank you.
You bet.
Speaker Change: And the next question comes from Zach Battam with Wells Fargo. Please go ahead.
Speaker Change: Hey guys, this is David Lanzon for Zach. Thanks for taking our questions. So, I guess, how should we think about the potential glide path, of course, margin improvement from here, and is there any color you can provide around Q4 outside of lapping the 130 basis point inventory write-down?
Speaker Change: Thanks for your question. We're not going to get into guiding for the rest of the year on gross margin. I will tell you we're encouraged by what we saw in Q3. As I mentioned earlier, there were two fundamental drivers in the improvement year over year. Number one was the cost actions beginning to take hold. Number two was the improvement in the services business. And again, that's with mixed going against us. So
Speaker Change: We are starting to see those actions take hold. Joe talked about those being not one time in nature, but being fundamental to our DNA and how we operate and run the company. So beyond that, though, we're not gonna give anything forward.
Speaker Change: got it okay that's helpful and then oh sorry go ahead
Speaker Change: Oh, go ahead David. Okay, can you talk about the 3% decline in services in companion animal in the context of the broader market?
David Lanzon: I would contextualize it this way, just as we said earlier.
Speaker Change: We're in self-help mode here, and when we think about the market, we are not passively waiting for the market to recover in supplies and companion animal. We're taking actions. Part of the cost actions are in those two categories. The assortment actions are in those two categories, and we see a lot of room for improvement for us regardless of how the market performs overall.
Got it. Thank you.
Speaker Change: And the next question comes from Simeon Gutman with Morgan Stanley. Please go ahead.
Speaker Change: Hi, this is Lauren Ingham for Simian Guttman. We wanted to ask about the consumables improvement in Q3. Just curious to know if this was, you know, ticket-driven. Are you seeing new pet owners or customers coming to Petco? Just any color on the improvement there. Thank you.
Speaker Change: Yeah, look, consumer was something I talked about a couple questions ago, and that business is all about being in stock.
Speaker Change: and you know I think it's a combination of our new inventory management system that's
now fully in place in Q3.
Speaker Change: It's about the teams getting better at flowing inventory, better shelf utilization, and then just being priced competitively. So, all those actions we're taking are starting to show up in better sales, and that's what you saw start to happen in Q3. I would just add one thing to that, and that's Fresh Frozen continues.
Thank you very much.
Thank you. Thank you. Thank you.
Great, thank you.
Thanks Lauren.
Speaker Change: And the next question comes from Kendall Toscano with Bank of America. Please go ahead.
Speaker Change: Hi, thanks for taking my question. I just wanted to go back to, you talked before about opportunities in merchandising and negotiating better terms from your suppliers.
Speaker Change: And it may still be early, but just curious if there's any update on what the response has been from vendors and how receptive they've been to your efforts there. Thanks.
Yeah, thanks for the question, Kendall.
Speaker Change: I actually think I commented on it specifically in my prepared remarks, the discussions with our vendors have been really well received. I personally have met with some of our merch vendor partners myself and you know the key to all that is transparency and openness and you know talking to them about what they need as much as what we need.
Speaker Change: We've had just really successful discussions there as we build our joint business plans for 2025 and I'm really pleased with the progress our merchant teams have done.
Speaker Change: Got it. Thanks for the help there. Another question I had was just on and another one that may still be early to ask but curious if there's any update on the vet hospitals and when
Speaker Change: You're thinking about potentially returning to rolling those out Since you're kind of positive for this year in the foreseeable future Curious on the timeline of that
Speaker Change: Yeah you know the the vet hospitals are a key growth driver for us and they're also a key differentiator for us as all our vet hospitals are pet co-owned.
Speaker Change: As far as what the specific growth for next year will be, we'll lay that out for you in detail as we get into March.
Speaker Change: But we do expect that to continue to be a growth driver for us. And I would just add, Kendall, the decision to open a handful this year was not because that's not strategic, not because we don't believe it's a short, medium, and long-term opportunity.
Speaker Change: It was made because we wanted to make sure we continued to strengthen our balance sheet, generate free cash flow, and get the company back in the position of strength so that we can invest in those high ROI projects going forward.