Q4 2024 Petco Health and Wellness Co Inc Earnings Call
Speaker Change: Good afternoon and welcome to the Petco fourth quarter and full year 2024 earnings conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: 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 with that let me turn it over to Joel.
Speaker Change: Good afternoon, everyone.
Joel: And thank you for joining us today.
Speaker Change: 125 marks the sixth anniversary of the Petco brand.
Speaker Change: What started as a single store in 1965 has grown into a fleet of over 1500 stores in North America.
Speaker Change: Allowing us to reach approximately three and four people in the United States live within 10 miles of a petco.
Speaker Change: As we celebrate the company's history. We also have an opportunity to reinvent our iconic brand for the future and position the business to regain share in the large but highly fragmented market.
Speaker Change: This includes broadening our brand and vision from a singular focus on health and wellness to serving all pets and pet parents, while tapping into the emotional connection to pets inherit in our brand DNA.
Speaker Change: Before I discuss today's results I want to briefly reflect on my 10 year to date a petco.
Speaker Change: Culture is something that has always been important to me as a CEO.
Speaker Change: It is an area of petco that needed immediate attention.
Speaker Change: It is also not something that changes overnight.
Speaker Change: It takes consistency and authenticity to evolve the mindset of our broader teams or.
Speaker Change: For increased transparency.
Speaker Change: Countability.
Speaker Change: Teamwork.
Speaker Change: As part of this I have been actively engaged visiting and working in our pet care centers distribution warehouses, holding small group listening sessions, which I call coffee connects as well as large town halls.
Speaker Change: I have found our team members responding well to the message and appreciative of the openness about what we need to do to improve this great brand once again.
Speaker Change: I want all 30000 partners to know how committed I am to them and express my opposite Newsom about the long term opportunity in front of us.
Speaker Change: In my prepared remarks today.
Speaker Change: I will provide you with specific details of what we have accomplished and what is on the horizon to continue our progress.
Speaker Change: In addition to the internal changes underway.
Speaker Change: We also benefit from operating in a resilient market. The pet category is expected to reach $200 billion in the next five years and the ongoing humanization of pets continues to be a powerful tailwind one that we are all well positioned to benefit from.
Speaker Change: Additionally services is the fastest growing area of the pet category, where we have an established leadership position and a differentiated model of owned grooming and that locations at scale.
Speaker Change: Importantly, our petco team brings our mission to life.
Speaker Change: With their passion for pets and dedication to serving our customers.
Speaker Change: It is against this backdrop.
Speaker Change: I believe firmly the petco is the only retailer that can deliver complete care for pets and expert support for pet parents in one stop.
Speaker Change: Let's turn to our results in.
Speaker Change: In the fourth quarter, we delivered revenue of 155 billion in line with our prior outlook and adjusted EBITDA of $96 1 million, which was ahead of our expectations.
Speaker Change: Our results demonstrate the progress we've made to return the business model to retail operating excellence and drive structural cost out.
Speaker Change: While there is more work ahead.
Speaker Change: I am confident we're going to reset our long term economic model, starting this year and are well positioned to build on this early momentum and deliver double digit growth on adjusted EBITDA year over year and 2025.
Speaker Change: Let me now unpack in greater detail, our long term phased approach to delivering on pet coast full potential.
Speaker Change: Starting with phase, one which is well underway.
Speaker Change: Over the last six months I have relentlessly focused on one improving the operating model to giving our stores a voice and.
Speaker Change: And three restoring our retail fundamentals.
Speaker Change: Frankly.
Speaker Change: Our foundational practices were not those of a successful consumer business and needed overhauling.
Speaker Change: We have made great progress on all three and are strengthening the foundation for petco to return to sustainable profitable growth.
Speaker Change: The successful evolution of our leadership team is a critical enabler of this work.
Speaker Change: Each of our leaders bring a wealth of retail industry expertise.
Speaker Change: And a proven track record for delivering and driving results.
Speaker Change: And they are already accelerating our operational improvements.
Speaker Change: Specifically as.
Speaker Change: As CFO Sabrina Simmons brings more than 20 years of executive financial leadership experience and consumer retail.
Speaker Change: She will help us harness the collective expertise of the wider leadership team.
Speaker Change: By driving increased financial rigor and discipline around our initiatives.
As chief customer and product officer.
Michael: Michael <unk> will drive the transformation of the pet co brand from product development to presentation to messaging.
Michael: The focus on tapping into the unparalleled joy and love pets bring to our lives.
Michael: This spans the uniqueness of proprietary brands.
Michael: Well, we tell the story of our national brands and customer centric marketing strategies.
Speaker Change: And Jack Stout transitioned into our chief merchant role.
Speaker Change: Where he has been institutionalizing best in class retail practices across our buying teams as well as merchandising operations and supply chain.
Speaker Change: Additionally.
Speaker Change: Last year, we welcome Jovan easier as Chief revenue Officer, who is focused on optimizing our real estate portfolio, while maximizing growth in our existing store and hospital fleet.
Speaker Change: Dan Calista, as Chief strategy, and transformation officer, Who's building, the internal capabilities to execute on our transformation and.
Speaker Change: And Holly May who has supported all of these leadership changes as our chief Human Resources Officer.
Speaker Change: I'm incredibly excited to begin working along this fantastic team to unlock <unk> full potential.
Speaker Change: Across our pet care distribution and support centers.
Speaker Change: Our leadership team is helping the entire organization fundamentally changed the way, we think and work to ensure all aspects of the business are operating effectively and seamlessly.
Speaker Change: Collectively we are committed to reinvigorating our culture and I believe we now have the right cost controls in place and are executing against them.
Speaker Change: With urgency.
Speaker Change: As we enter 2025.
Speaker Change: We will continue to identify additional opportunities to drive savings and unlock value.
This brings me to phase II.
Speaker Change: With a seasoned leadership team in place and greater control over our cost Brent Brent.
Speaker Change: We are currently in phase two of our long term strategy, which is all about implementing and executing to strengthen our retail fundamentals.
Speaker Change: Specifically.
Speaker Change: Merchandising continues to be the greatest near term opportunity for us to drive gross profit improvement.
Speaker Change: We have completed negotiations with our vendors and put in place a rigorous product cost framework.
Speaker Change: Designed to reduce product costs and support gross margin improvement in 2025 and beyond.
Speaker Change: In today's more challenging economic and consumer environment we.
Speaker Change: We recognize the consumer remains discerning and it is critical that we always have the right products at the right price to that end.
Speaker Change: We conducted a detailed review of our product assortment and are optimizing it to more closely aligned to consumer demand and preferences specifically.
Speaker Change: Specifically <unk>.
Speaker Change: Allocating more of our focus and shelf space to top selling brands and high velocity skus across categories.
Speaker Change: In addition, we're continuing to sharpen our approach to pricing and have established a strategic pricing framework.
Speaker Change: By category.
Speaker Change: This allows us to offer quality across the value spectrum with competitive price points.
Speaker Change: Also protecting margins.
Speaker Change: Next to.
Speaker Change: To further lower costs and strengthen the economic model, we are laser focused on driving efficiencies throughout the organization.
Speaker Change: Part of our pricing work, we have refocused our promotional strategy to move away from low margin revenue and toward more impactful targeted opportunities.
We are now executing.
Speaker Change: More targeted promotions.
Speaker Change: And seeing favorable initial results.
Speaker Change: We're also optimizing our customer support infrastructure.
Speaker Change: That concludes our call center vendor partnerships and physical locations of our support teams.
Speaker Change: We expect these actions to read.
Speaker Change: Juice friction for the customer while also removing costs from the system.
Speaker Change: And within E Commerce.
Speaker Change: We identified opportunities to reduce the cost per order.
Speaker Change: And the number of split shipments, increasing overall shipping efficiencies and delivering speed.
Speaker Change: Taken together.
Speaker Change: These actions are not only improving profitability, but they are delivering exceptional customer service.
Speaker Change: Across our pet care centers, we are continuing to evolve our labor model to reduce in store tasking and free our team up to spend more time with our customers.
Speaker Change: And we're taking actions to improve overall customer satisfaction, including reducing click to delivery time for our e-commerce customers and increasing visibility into order tracking for omni channel customers.
Speaker Change: In addition during.
Speaker Change: This phase of implementing and executing.
Speaker Change: The entire leadership team is busy studying the pet category the market opportunities the competition and getting to know the superpowers of our internal teams.
Speaker Change: It is important that before we turn our full attention to growth.
Speaker Change: Our actions are rooted in deep data and analysis.
Speaker Change: I am pleased with the early phase II progress to further strengthen the fundamentals of the business as well as the identification of additional opportunities to drive savings and unlock value.
Speaker Change: Let me spend a few minutes now on phase III.
Speaker Change: Which should begin to Innerness late 2025.
Speaker Change: While we are 100% focused on executing on our initiatives to drive profit improvement. We are also preparing for the third phase of our trajectory.
Speaker Change: Revenue growth.
Speaker Change: As we positioned the business to return to offense, we will begin to see and test revenue growth initiatives.
Speaker Change: Now me to share several examples.
Speaker Change: One.
Speaker Change: Central to the growth.
Michael: We'll be the customer and product work currently underway led by Michael <unk>.
Michael: In his initial days is begun to evaluate a more cohesive approach to communicating with our customer is.
Michael: He is also focused on better utilizing our internal product development capabilities to source unique products just for petco.
Michael: With differentiating us from the market and increasing our relevance with pet parents.
Michael: <unk>.
Michael: We are engaged in a comprehensive north star project to fully understand our positioning and the competitive landscape.
Michael: And we're the clear white space is for petco to win with customers.
Michael: We expect to complete that work by the end of second quarter.
Michael: Hi.
Michael: It is important we identify ways to make our store fleet more productive as well as study, which <unk> are underserved by petco.
Michael: That work kicked off in Q1 of this year.
Michael: Four.
Michael: We will also look to enhance our omnichannel capabilities and digital experience to stimulate growth <unk>.
Michael: Including.
Michael: Revisiting and scaling our membership program in 2026.
Michael: And five we will continue to invest in services opportunities the fastest growing area of the pet category, where we have an established leadership position and a differentiated model.
Michael: All of these actions and more.
Michael: We will gain momentum once we have successfully implemented the actions of phase III that I outlined for you earlier.
Michael: Collectively.
Michael: They are designed to identify new ways to elevate the petco brand.
Michael: Hence the customer experience and build top line momentum.
Michael: I look forward.
Michael: To providing periodic updates on our progress as we prepare the organization to shift to offense.
Sabrina Simmons: Before I hand, it over to Sabrina let.
Sabrina Simmons: Let me reiterate that I am pleased with the progress we have made in 2024 to strengthen our retail fundamentals and set the foundation for sustainable profitable growth.
Sabrina Simmons: While there is more work ahead, we are operating from a stronger position today and we have a detailed multi phased approach.
Sabrina Simmons: In place for continued improvements I am confident we have the right strategy and team in place to reach our full potential over time <unk>.
Sabrina Simmons: Sabrina.
Speaker Change: Thank you Joel and good afternoon, everyone I'm thrilled to be joining all of you today I feel fortunate to step into this position at such a pivotal time for petco.
Speaker Change: So it didn't really imagine it'd be taking on another operating ROE potential before us with frankly, just too hard to resist.
Speaker Change: Joe comment Petco is an incredible brand and with the work the teams have underway well hold an increasingly differentiated position within the large and resilient category.
Speaker Change: Serving on the board over the past few years has allowed me a running start in focusing on the key areas that will support improved mix in our operating and financial performance.
As you've heard from Joe over the past several quarters, our focus remains improving profitability, which we believe in large part will result from improved execution.
Speaker Change: Our number one financial priority is clear restoring the health of our economic model, which in turn will improve our earnings power and set the foundation for sustainable profitable growth over the long term.
Speaker Change: Specifically, we are focused on three areas.
Speaker Change: First is an intense focus on driving gross margin improvement both in terms of rate and dollar.
Speaker Change: Principally this means that we will no longer chase sales at the expense of margin.
Speaker Change: Instead, we will look to maximize all levers that are those all including AUC pricing and promotions and mix to improve our gross margin rate.
Speaker Change: While this takes time and requires great attention to detail. It represents a foundational tenant of managing a healthier business.
Speaker Change: And that's what excites me the focus simply strengthening retail fundamental presents such opportunity to improve our earnings power.
Speaker Change: A great example would be our service isn't it work on our existing fleet of that hospitals is underway, where the teams are optimizing our current locations that are not at full utilization.
Speaker Change: Optimizing existing hospital is a highly efficient way to drive services growth and improve our services margin with minimal capital.
Speaker Change: That is just one example, but again as simple back to retail fundamentals approach that will have a meaningful benefit to our margin structure over time.
Speaker Change: Moving to our second priority leveraging SG&A will be a key pillar of our strengthened economic model, ensuring all aspects of our business are operating effectively while instilling cost discipline across the organization.
Speaker Change: To be clear this is not a one time cost cutting exercise, but rather an operating principle and shifts in our mindset, resulting in greater efficiency agility and increased productivity all of which will require a higher level of accountability and discipline across.
Speaker Change: Every aspect of our business.
Speaker Change: Which brings me to our third priority the imperative to improve our return on invested capital I am Sterling.
Speaker Change: Sterling, new rigor and discipline into our capital allocation decisions.
Speaker Change: Our focus on these three pillars gross margin expansion.
Speaker Change: SG&A leverage and IC will improve profitability and quite importantly, free cash flow generation.
Speaker Change: Look forward to discussing all of these topics further best today and in our conversations to come.
Speaker Change: Now I will go into our fourth quarter results, followed by our outlook for 2025.
Speaker Change: Fourth quarter comparable sales were up 50 basis points year over year for the quarter net sales were 155 billion in line with the prior outlook.
Speaker Change: When comparing net sales to the prior year, it's important to note that the fourth quarter of 2023 benefitted from an additional week.
Speaker Change: Fourth quarter gross profit decreased about 3% to $589 million, primarily reflecting the impact from the loss of the 50 <unk> week in 2024.
Speaker Change: Fourth quarter gross margin increased 100, 880 basis points to 38%. The majority of the increase is driven by the lapping of <unk>.
Speaker Change: Inventory impairment charge in the fourth quarter of last year with the remainder driven by progress on margin management.
Speaker Change: Moving on to expenses total SG&A with $571 9 million or 36, 8% of net sales an increase of approximately 60 basis points versus last year, primarily driven by consulting fees and incentive compensation associated with.
Speaker Change: Our ongoing transformation efforts.
Speaker Change: Adjusted EBITDA was $96 1 million with an adjusted EBIT margin rate of six 2% down approximately 10 basis points versus last year.
Speaker Change: Regarding the balance sheet and cash flow are critical goal for us is to achieve a debt to EBITDA leverage ratio below two times.
Speaker Change: Clearly this will take time and will require profitability improvement through the tenants I spoke about earlier, which we are pursuing with urgency.
Speaker Change: In the short term, we're focused on making incremental progress as evidenced by the step forward. We made in 2024, including $50 million of positive free cash flow and an improved cash balance of $182 million.
Speaker Change: Now turning to our outlook for 2025.
Speaker Change: Of note our outlook excludes any estimated impact of potential tariff, where the dynamics remain quite volatile.
Speaker Change: To be helpful in providing some perspective on potential impact there are a few points I can share the.
Speaker Change: The most direct tariff exposure sits within our own brands.
Speaker Change: Inventory purchases from China, Canada and Mexico.
Speaker Change: For our own brands represent only about 5% of our total merchandise cost of goods sold.
Speaker Change: Our indirect exposure sits primarily within our national brands.
Speaker Change: We are fortunate to have strong vendor relationships at scale, which provide productive conversations and supply flexibility as we partner together to navigate fluid dynamics and uncertainty.
Speaker Change: We like everyone are closely monitoring the situation as developments continue to unfold and we will leverage our flexible supply chain to mitigate any potential impact.
Speaker Change: With that for the full year, we expect overall net sales to be down low single digits to last year of note. We closed 25 net locations in 2024 and ended the year with 1398 pet care centers in the U S.
Speaker Change: In 2025, we expect to close between 20 to 30 net locations.
Speaker Change: We expect adjusted EBITDA to be between 375 and $390 million.
Speaker Change: Within this guidance and following the framework laid out earlier in my remarks, our goal would be to expand gross margin rate each quarter on a year over year basis, albeit modestly initially and to leverage SG&A.
Speaker Change: With regards to other guidance items for the full year, we expect depreciation and amortization to be approximately $200 million net interest expense of approximately $130 million and approximately $130 million to $140 million of capital expenditures with a <unk>.
Speaker Change: Greater focus on ROIC.
Speaker Change: Now, let me share some perspective on our outlook for the first quarter broadly we expect the first quarter to align to the economic model framework I've outlined for the year.
Speaker Change: Pacifically, we expect net sales to be down low single digits versus the prior year and adjusted EBITDA to be between 82 and $83 million up approximately 9% year over year at the midpoint.
Speaker Change: Before opening up for Q&A I, just wanted to reiterate my optimism for the opportunities in front of us with a seasoned leadership team now in place.
Speaker Change: Find framework to strengthen our economic model and operational improvements underway and confident we are establishing a solid foundation for pepco to return to long term profitable growth with that we welcome your questions.
Speaker Change: Well now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are 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 and then two at this time, we will pause for a moment too.
Speaker Change: <unk> roster.
Steve Forbes: And your first question today will come from Steve Forbes with Guggenheim. Please go ahead.
Steve Forbes: Good afternoon.
Speaker Change: Joe I'll be curious you lay out the phase this year phase one phase two phase III, a lot of us sort of.
Speaker Change: You want to look out to phase III and the return to growth. So maybe maybe just talk about sort of the infrastructure.
Speaker Change: Our supply chain infrastructure or digital capabilities that you may need to invest behind <unk> improve now that you've got the people in place like what other sort of larger moves or larger investments do you need to sort of lean into to really ready the business for that phase III.
Steven: Yes, hi, it's Steven Thanks for the question.
Speaker Change: I think it was important I laid out for all of you a specific plan for our.
Steven: Long term growth objectives, and clearly a phase one is something I started in on right away.
Steven: And I would summarize that is stabilized profitability as you said get the leadership team in place and improved culture and right now we're right smack in the middle of this whole phase of implementing and executing.
Steven: And then as it relates to phase III, which I'm sure you're all anxious about.
Steven: What's more important though is that we've really got to stay focused on this implementation and execution phase of.
Steven: Getting our costs back under control and in delivering improved EBITDA.
Steven: I don't see any significant infrastructure investments that we've got to make but we just got to be more disciplined Steve about how we go about.
Steven: Delivering improved EBITDA specifically.
Steven: Yeah.
Speaker Change: Sabrina talk a lot about our discipline around ROIC and I think that is something that.
Speaker Change: We weren't probably as diligent on as we add two before but there is not as significant.
Speaker Change: Infrastructure investment and we've got to make in order to start to get back to driving offence, yeah, maybe just to add onto what Joel said Steve.
Speaker Change: Our total capex spend this year.
Speaker Change: About 40% is against what we would call expansion capital so within that 40% we are investing in it infrastructure, including digital and we are investing in a lot of testing like four remodels and all of that so we are sort of.
Speaker Change: Queuing up for our faith to re growth within that capital spend I. Just wanted you to know rest assured that it's not all just maintenance capital. Thanks Maria.
Speaker Change: Okay. That's super helpful. And then maybe a follow up on that as we think about sort of this ROIC.
Speaker Change: Fixation.
Speaker Change: As you deploy capital separately I think you mentioned.
Speaker Change: Optimizing right.
Speaker Change: Existing bed hospitals. So can you maybe talk about sort of what what is the current like what's driving the difference in performance among the hospitals today is it just an issue with.
Speaker Change: Like real estate location or is it operations.
Speaker Change: Because that was obviously a big initiative of the past team like what are you guys sort of doing as you think about optimizing that initiative.
Speaker Change: Yes, Steve that strategy remains very important to us.
Speaker Change: First of all we have a relatively new fleet of hospitals. So the first thing we've got to do is.
Speaker Change: Continue to staff up all those hospitals.
Speaker Change: More marketing tool, making customers aware, we have them and that is a very low capital investments and a strong return on investment is we've already invested in the capital to build them and so now we've got to really get them staffed until tell people that they are there.
Steve Forbes: Thank you thanks, Steve.
Speaker Change: And your next question today will come from Stephens account with Citi. Please go ahead.
Speaker Change: Great. Good afternoon, thanks, very much for taking my question.
Speaker Change: Sabrina I was curious for your assessment coming into the business when you look at the.
Speaker Change: Opportunity here for EBITDA improvement, where do you see as some of the low hanging fruit that maybe should have done.
Speaker Change: <unk> ago, and what gets you most excited about getting some margin opportunity in the future.
Steve Forbes: Thanks for the question, Steve I mean.
Speaker Change: You could probably hear in my voice I'm, just so excited to be here, because I think the opportunity before us is immense.
Speaker Change: And I know that many of my colleagues, who are new to the team also saw this enormous opportunity for this great brand to return to greater economic health and as Joe has said in a couple of his past call.
Speaker Change: The most exciting part of looking at this is it's really just fundamental retail back it's not you know.
Speaker Change: It's not something Super unique it's really about working every lever of the business properly.
Speaker Change: To improve profitability and so this year as I said in my remarks, we have an opportunity to really go after in a disciplined manner gross margin expansion and that means every lever working with our vendors on the AUC part working on pricing stopping from a stacking all sorts of <unk>.
Speaker Change: <unk> within that line item and then on the SG&A line. We're so committed like I said, it's really a mindset change where we're just looking at efficiency and effectiveness everywhere, we go and commitment to leveraging SG&A and you guys know the retail math, if youre able to do that.
Speaker Change: When we start to re grow sales that flow through of sales is just a beautiful thing and thats the opportunity on EBITA before us and it's I think super exciting.
Speaker Change: Okay, Great and then.
Speaker Change: Yes, the commentary Joe about merchandise improvement could you could you just elaborate a little bit more there how much of that is.
Speaker Change: Working more with stuff that's already in the store versus getting better kind of allocation for stuff that you don't already have I'm kind of curious because we've gone through a period where.
Speaker Change: Prior team talked about not having enough mass product, we we've kind of added that to the store. So just help us understand what the merchandise improvements are.
Steven: Yes, great question Steven.
Steven: Theres two sides to that one is when I look at our unique merchandising model.
Steven: What got me excited about this business is this nice balance between consumables and discretionary on.
Steven: On the consumable side, what we've been really focused on is improving our in stock and so we.
Steven: We put in place a new inventory system last year, that's helped significantly and on the discretionary side.
Steven: That's about innovation newness and trend right and I think that we have a big opportunity there to drive.
Steven: A better impulse buying so that's on the merchandise side.
Steven: The initiatives that are underway that are already starting to gain traction we've gotten better at vendor negotiation, we've gotten better at assortment optimization and we've sharpened our pricing approach.
Steven: And all of those combined.
Steven: What youll start to really see take traction here in this phase II that I call implementing and executing but hopefully that gives you a really good overview of how we're thinking about the merchandising model.
Steven: Yes, thanks, very much best of luck you bet Steve.
Speaker Change: Your next question today will come from Michael Lasser with UBS. Please go ahead.
Speaker Change: Good evening. Thank you so much for taking our question just given some of the commentary in the plan that you've outlined along with comparing <unk> performance in the fourth quarter to its largest pure pure.
Speaker Change: Pure place pet specialty competitor it would seem like the message is we are willing to sacrifice some sales and market share at least in the short run to improve the profitability and establish the foundation.
Speaker Change: For the long run.
Speaker Change: Is that a fair interpretation and B, how do you get the market share back, especially if customers are gravitating to other outlets.
Speaker Change: We win those customers over the long term. Thank you very much.
Michael Lasser: Yes, Thanks, Michael.
Speaker Change: I think that's a fair.
Speaker Change: Assessment in and take that as an example of how disciplined we are about returning this great brand to growth and so part of that discipline is really understanding all levers that we had and quite frankly, we we were chasing sales.
Speaker Change: And in several instances.
Speaker Change: Long term had no LTV to them and so.
While in the short term that was needed that by no means is our long term goal and I think I think of the long term potential.
Speaker Change: I think success looks like.
Speaker Change: Strengthening our profitability, we've improved our cash flow with lowered our leverage with Sabrina outlined in detail and then petco is a growing retailer and so what youll see in phase III, which will start to emerge the back half of this year and the beginning of next year.
Speaker Change: Is that we will.
Speaker Change: Begin to identify levers of growth.
Speaker Change: Outlines specifically four or five areas that I'm focused on Michael and we will test our way into those and make sure that.
Speaker Change: They are promising but that'll be the third phase absolutely that will focus on.
Michael Lasser: And if I could ask a quick follow up question. It looks like your guidance for this year is embedding.
Speaker Change: <unk> that your comps are flat to maybe slightly negative.
Speaker Change: So if that's the case.
Speaker Change: Or do you manage your SG&A in light of that and at some point do you run the risk.
Speaker Change: <unk> touching customer facing activities.
Speaker Change: Could result in.
Speaker Change: Be more challenging to return to growth.
Speaker Change: When that phase will occur thank you.
Speaker Change: Yeah, Let me I'll start.
Michael Lasser: It's a great question, Michael we are absolutely customer focused and part of this whole foundation building that we're talking about in 2025, which is so critical before we.
Michael Lasser: Sort of turn even more of our focus to re growth is really making sure that we are addressing our customer needs. So SG&A.
Michael Lasser: Again, it's about leverage it's not about one time cut programs.
Michael Lasser: All about leveraging what we have.
Michael Lasser: There's many many areas to go after and this is something in in <unk>.
Speaker Change: In my former life I have lots and lots of experience with there are so many areas to go after that don't touch our customer we are in no way.
Michael Lasser: Harm our customer experience that's our number one goal is to please our customers.
Michael Lasser: Yes.
Michael Lasser: Michael I might just add to that.
Michael Lasser: Allow me some rounding.
Michael Lasser: Don't look too far deep into that because we we shared with you. We closed 25 stores last year most of those happened right at the end of the fourth quarter.
Michael Lasser: And then closing 20 to 30 this year that rate there just adds up to a couple of points of decline.
Michael Lasser: And those were obviously wouldn't be closing those stores. If they were profitable. So a lot of the improved EBITDA comes just from removing some stores that.
Michael Lasser: We're dragging us backwards.
Sabrina Simmons: But I think Sabrina you outlined it perfectly.
Speaker Change: That's very helpful and good luck. Thank you.
Michael Lasser: Thanks, Michael.
Speaker Change: Your next question today will come from Oliver Winter mental with Evercore. Please go ahead.
Oliver Winter: Yes, hi, thanks.
Oliver Winter: My question is regarding your EBITDA flow through to free cash flow. If you maybe could give us a little bit of details of how you think the EBITA is converting into into free cash flow in 2025.
Oliver Winter: Yes.
Oliver Winter: A lot of variables as you know a number of factors that impact free cash flow. If you think about how we just guided 2025, adjusted EBITDA up 14% at the midpoint.
Oliver Winter: One of the biggest levers to cash flow in 2025 will be that improved profitability.
Oliver Winter: After that we will continue working all our working capital levers and there are several there we may even look during the year to do a little investing of inventory again with this.
Oliver Winter: <unk> about may.
Oliver Winter: Making sure our customers needs. Our match, we may do a little bit of investing in inventory to make sure. We're in stock, but we have other levers within working capital to offset that so thats kind of how we're thinking about cash flow for 2025.
Speaker Change: Got it. Thank you and then maybe as a fee.
Oliver Winter: Follow up.
Oliver Winter: Can you talk a little bit how you expect the mix shift to be.
Oliver Winter: Playing out this year.
Speaker Change: Applies hard goods versus services. Thank you very much.
Oliver Winter: Yeah.
Oliver Winter: I guess the good news is we are not relying on any mix shift into supplies out of consumable to meet our guidance.
Oliver Winter: That happens.
Oliver Winter: Wonderful tailwind fantastic, but we're not relying on that to deliver our guidance.
Oliver Winter: Thank you very much and good luck.
Speaker Change: Thank you all for your next and your next question today will come from Simeon Gutman with Morgan Stanley. Please go ahead.
Speaker Change: Yes, Hi, guys Hi, Joel.
Speaker Change: I wanted to ask about your perception on price and vital care stepping back looking at the offering how.
Speaker Change: How much value. There is I think this company has done a lot of work on pricing and narrowing gaps.
Speaker Change: Asking also in the context, because one of the competitors that rewards program or theyre, giving 5% back it seems like Youre offering is still in the right place, but wanted to get your perception.
Speaker Change: Yeah. Thanks, Simeon look price was one of the things.
Speaker Change: We were working on before I, even got in here and we implemented thousands of price changes in the fall.
Speaker Change: To be more competitive both up and down and so I feel like we're in a really good place on price right now and but obviously that's something that's dynamic.
Speaker Change: And we've now gotten better at just monitoring that weekend week out month in month out so our prices in a good spot.
Speaker Change: From a perception place and then as far as a vital care goes.
Speaker Change: Long term the membership program is really important for us and.
Speaker Change: We're in the process of making that even better doing some enhancements to it and I think that'll be one of the levers we will look at.
Speaker Change: That will help us drive growth in 2006 and beyond but we feel really really good about our membership program in <unk>.
Speaker Change: Expect to see that continue to grow as we have both a free membership program and a paid membership program. So we're pretty far down that path and I think we can make it better cement.
Speaker Change: One follow up I mean no.
No one that explicitly ask what the implied comp as I know, we are talking we talked about it but curious if you can share whats implied comp and then what does the industry due in 25, because it looks like its growing slightly again and curious if it ends up being better or what kind of assumptions that youre building in such that you can get comped positive.
Speaker Change: Yes look our assumption on it is that we're not waiting for the industry to recover this 2025 as a self help year for petco and we can clearly deliver on what we shared with you today by driving internal operational and profit improvements.
Sabrina Simmons: They are not dependent on the industry. So like other things Sabrina shared.
Sabrina Simmons: The industry grows and we take our fair share that's another tailwind for US yeah, and just to underscore that with the guidance down low single digit comp sales.
Sabrina Simmons: That's the range, we're not counting on a positive comp to achieve our adjusted EBITDA guidance, but there again, if it comes and we welcome all customers if it can great. It's just tailwind.
Speaker Change: Okay. Thanks, good luck.
Simeon Gutman: Thanks Simeon.
Speaker Change: And your next question today will come from Zack <unk> with Wells Fargo. Please go ahead.
Speaker Change: Hi, guys. This is David Lance on for Zach Thanks for taking our questions with sales expected down low single digit in Q1 curious if you could talk about the shape of Q2 to Q4 in a bit more detail and whether there was anything to keep in mind in terms of timing of store closures. This year.
Speaker Change: Yes.
Speaker Change: I'll start off there I mean.
Speaker Change: Where we try to be really helpful is giving you the shape of the P&L that we are trying to achieve as a goal each and every quarter. So so again just as a reminder, our goal would be to expand.
Speaker Change: Gross margin.
Speaker Change: Every quarter on a year over year basis, I'm, not talking sequentially Im talking year over year and to leverage SG&A and so weakest March that economic model right through every single quarter and that is people.
Speaker Change: And then as far as store closures.
Speaker Change: We can't give you anything definitive on that but I think if you thought about it as one third two thirds first half of the year second half of the year I think thats a reasonable range and then obviously will we handle them on an individual basis as their leases come up.
Speaker Change: Got it that's helpful and then fresh frozen remains a standout. So I was just curious if you could talk about the drivers of that and how thats performing relative to the industry.
Speaker Change: Look I mean fresh frozen relative to the industry is still one of the faster growers.
Speaker Change: It's an area we've been in for a long time invested in in and it's an area you should see us continue to expand and I feel really strong about our fresh frozen capabilities in.
Speaker Change: That'll be another potential growth lever for us down the road as we explore that further.
Speaker Change: Thanks, David.
Speaker Change: And your next question today will come from Peter Benedict with Baird. Please go ahead.
Peter Benedict: Hey, guys. Thanks for taking the question one just staying on the stores. The 20 to 30 net closures. This year is that a run rate that we should expect to continue maybe in out years, just curious kind of what the longer term viewpoint is on kind of the the store fleet. That's my first question.
Speaker Change: Yes, I wouldn't read too much into that.
Speaker Change: With a fleet of 1500 store I'm, sorry, 1400 stores.
Speaker Change: Youre going to see some optimizing every single year I think that's probably the way to think about the net closure number yes, we're not actually opening a lot of stores against that and that's why maybe the net closure it looks a little bit bigger.
Speaker Change: But.
Speaker Change: The theme here is that we own a lot of assets already on our balance sheet that we <unk>.
Speaker Change: Wrongly believe we can make more productive and so job one is taking the assets we own on our balance sheet and really making those work and then we will look to the future to regrow.
Speaker Change: We grow in some of that May come in in the form of worst of more stores more to come but I wouldn't read into too much of the two years.
Speaker Change: 25 closures.
Speaker Change: Okay. Thanks, that's helpful. And then my next question was just kind of on the merchandise differentiation effort you kind of talk a little bit just recently here about the fresh frozen I am just curious if there's anything else in consumables that you kind of have your eyes on.
Speaker Change: Is it brands is it owned brands.
Speaker Change: And then also on supplies.
Speaker Change: How do you achieve that I know theres been some efforts around that already.
Speaker Change: But just curious any more insights you'd share on where you are looking to go. Thank you.
Speaker Change: Okay.
Speaker Change: I think the best insight to share on that is just to be a little bit broad with you all is.
Speaker Change: As I've gotten firmly planted we've named Jack as our chief merchant.
Speaker Change: Looking to get out in the field and doing some top to tops with our top suppliers and I would tell you. We just have great relationships with our vendors.
Speaker Change: They want to see petco succeed they liked the discipline, we put in place the transparency, we're having at the top and what that will translate into as opportunities and they are talking to us about brands. They are working on ideas. They are working on and I'm really excited about the prosper.
Speaker Change: <unk> that are out there, but I think specifically that will all come as we move down the.
Speaker Change: For the year and as shared with you right now we are optimizing our store really focused on the top sellers and what's driving the business. So we're in the middle of a big reset that's going to happen here and a big optimization of our overall consumables, but.
Speaker Change: I don't see any limit to some new ideas, we talked about fresh and frozen cap business is really strong and we will get more specific as we move on down the year, but.
Speaker Change: This has really been focused demand redeveloped and relationships with the vendor community.
Speaker Change: Fair enough. Thank you and good luck.
Speaker Change: Thank you.
Speaker Change: And your next question today will come from Kendall Toscano with Bank of America. Please go ahead.
Kendall Toscano: Hi, Thanks for taking my question.
Kendall Toscano: I'm just curious as you're doing all this work to optimize the assortment any update on how youre thinking about differentiation for petco at a high level and where the opportunities are whether it's.
Kendall Toscano: On the consumables or general merchandise.
Kendall Toscano: I'm not at any point that I want to talk about it openly but I would tell you.
Kendall Toscano: The marching orders for the team here has really been about looking at newness looking at where there is innovation and testing new product out there and.
Kendall Toscano: That's why we're in phase II right now not phase III and what's more important right now is that we get our cost infrastructure back under control and deliver on the three principles that Sabrina outlined in detail.
Speaker Change: Understood. Thanks, and then if I could just ask one more.
Kendall Toscano: Any more color on how traffic versus <unk>.
Kendall Toscano: Pricing looks during the quarter within the <unk>.
Kendall Toscano: <unk>, 5% comp.
Kendall Toscano: I think we're just we're we're looking at every lever to drive.
Kendall Toscano: Our position that we've guided to so it's not one lever that we're looking to overuse. So really there is no big callout there.
Speaker Change: Thank you.
Speaker Change: And your next question today will come from Seth Basham with Wedbush Securities. Please go ahead.
Seth Basham: Thanks, a lot and good afternoon, maybe just to clarify or reiterate in terms of your EBITDA guidance of 14% increase at the midpoint.
Speaker Change: What are the largest building blocks that you can help us quantify those.
Speaker Change: Helpful.
Speaker Change: Well the two biggest levers are this notion of expanding gross margin and leveraging SG&A and we are going to use both of them.
Speaker Change: Not leaning into one at the expense of the other we're going to be balanced we're gonna be flexible we're going to be adaptable and so those are our big two levers and we're laser focused on delivering that.
Speaker Change: The store closures represent a material improvement.
Speaker Change: And within that 14% growth Youre expecting can you clarify or quantify that and tell us what any other primary.
Speaker Change: Key drivers are.
Speaker Change: Yes, Joe mentioned so in 2024, we closed 25 net stores and so life broad numbers I'm, just simple assumption, that's about $50 million in sale.
Speaker Change: And nearly 1% of sales as we come into 2025, and then again in 2025, we expect to close net 20 to 30.
Speaker Change: Generally back halfway closures as most retailers would.
Speaker Change: So that won't have as big of an impact in 2025 through 24 closures, but it gives you a sense of what the closures mean to the year.
Speaker Change: Alright, and last follow up question related to that when we think about the biggest risks and opportunity to the visibility of your EBITDA improvement in 2025, how do you assess does.
Speaker Change: Well, what I like about how we're managing this year is we're not relying on a robust macro or robust consumer.
Speaker Change: Again, because you see our top line is anchored on a low single digit.
Decrease in sales.
Speaker Change: Back to me.
Speaker Change: This is good news because it forces us to use all the other levers to deliver the adjusted EBITDA and if we do better macro topline.
Speaker Change: I'll, just great extra tailwind for us.
Speaker Change: Thank you.
Speaker Change: And your final question today will come from Chris, particularly Aerie with BNP Paribas. Please go ahead.
Chris: Hey, thanks for taking the questions.
Chris: Just wanted to ask what you're kind of embedding for inflation within your outlook, if you're seeing any kind of signs from vendors that costs are going up again and get pass that through and then kind of.
Chris: Not really related but somewhat related.
Chris: Are you assuming for promos like percentage of your Cogs sold on promo given that you said you are pulling back are you.
Chris: Like is there way you can frame that for us will promos be down year on year.
Speaker Change: Can you just can be repurposing, those promos until like more productive programs actually drive profits. Thank you.
Chris: Yes look.
Chris: It's pretty steady year over year.
Chris: From that I mean, the market's promotional but it's generally rational.
Chris: My commentary was more just about chasing empty calories sales and just being more disciplined.
Chris: When we do a promo there is an end game to it that it.
Chris: Deliver some lifetime value for us and so it's just all part of us getting back to executing against retail fundamentals, but overall I think the promotional environments pretty steady year over year, yes. The only thing I'd add to that Chris is that we we want to offer value to our customer and we want to be perceived as offering.
Chris: Value to our customer, but some of the things that we were allowing systemically in our in our offering with for example stacking of promise.
Chris: You just don't want to do that's just cleanup. So when we say managing promos. Some of it is just it's real cleanup. So that we're not allowing these destocking of promos, but we're still going to be offering good value and we're going to be in there with the competition.
Sabrina Simmons: Fantastic Thanks, Joanne Sabrina.
Sabrina Simmons: <unk> the call today. Thank you everyone for your time and your thoughtful questions and look forward to continuing the conversation.
Sabrina Simmons: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.