Q1 2025 Petco Health and Wellness Co Inc Earnings Call
Unknown Executive: Good afternoon and welcome to the Petco first quarter 2025 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 a zero.
Good afternoon, and welcome to the Pet co first quarter 2025 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.
Unknown Executive: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note that this event is being recorded.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note that this event is being recorded.
Tina Romani: I would now like to turn the conference over to Tina Romani, Head of Investor Relations and Treasury. Please go ahead. Good afternoon, and thank you for joining Petco's first quarter 2025 earnings conference call.
Speaker Change: I would now like to turn the conference over to Tina Romani head of Investor Relations and Treasury. Please go ahead.
Tina Romani: Good afternoon, and thank you for joining <unk> first quarter 2025 earnings conference call.
Unknown Executive: In addition to the earnings release, there is a presentation available to download on our website at ir.petco.com.
In addition to the earnings release, there is a presentation available for download on our website at IR <unk>.
Speaker Change: Dot com.
Tina Romani: On the call with me today are Joel Anderson, Petco's Chief Executive Officer, and Sabrina Simmons, Petco's Chief Financial Officer. Before we 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. These risks and uncertainties include those set out in our earnings materials and SEC filing.
Speaker Change: On the call with me today are Joel Anderson.
Speaker Change: <unk>, Chief Executive Officer, and Sabrina Simmons <unk> Chief Financial Officer.
Speaker Change: Before we 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 steep.
Speaker Change: These risks and uncertainties include those set out in our earnings materials in our SEC filings.
Tina Romani: 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 filing.
Speaker Change: In addition on today's call, we will refer to certain non-GAAP financial measures.
Speaker Change: Conciliations that these measures can be found in our earnings release presentation and SEC filings.
Joel Anderson: With that, I'll turn it over to Joel. Good afternoon, everyone, and thank you for joining us today. as I discussed with you at the start of the year. We have a unique opportunity to reinvent our iconic brand for the future and position the business to regain share in the large, highly fragmented and resilient pet market. We are taking a multi-phased approach to this work through improving our operating model, giving our stores a voice. and Restoring Retail Fundamentals. Our first quarter performance reflects these ongoing efforts. as we deliver top-line results in line with expectations. but most importantly, over delivered on our profitability goal.
Joel: With that I'll turn it over to Joel.
Joel: Good afternoon, everyone and.
Speaker Change: And thank you for joining us today.
Speaker Change: As I discussed with you at the start of the year.
Speaker Change: We have a unique opportunity to reinvent our iconic brands for the future and position the business to regain share in the large highly fragmented and resilient pet market.
Speaker Change: We are taking a multi phased approach to this work to improving our operating model.
Joel: Our stores are voice.
Joel: And restoring retail fundamentals.
Joel: Our first quarter performance reflects these ongoing efforts as we delivered top line results in line with expectations, but most importantly over delivered on our profitability goals.
Joel Anderson: This is a great testament to how our teams across the organization for coalescing around our overarching goal of delivering profitable sales growth while operating with dis-. I'm proud of our team's dedication. Agility and Execution in Delivering on our Commitment. During the quarter, I had the opportunity to spend time with our district managers and our service leaders at our field leadership team meetings. We bought our stores and service leaders together for the first time ever. I saw firsthand the energy that was created by connecting as one Petco team and was motivated by the work underway to simplify our operations, strengthen our retail and services foundation, and get back to our roots.
Joel: This is a great Testament to how our teams across the organization.
Joel: Coalescing around our overarching goal of delivering profitable sales growth, while operating with discipline.
Joel: I am proud of our team's dedication.
Joel: <unk> and execution and delivering on our commitments.
Joel: During the quarter I had the opportunity to spend time with our district managers and our service leaders and our field leadership team meeting.
Joel: When we bought our stores and service leaders together for the first time ever.
Speaker Change: I saw firsthand the energy that was created by connecting as one petco team and was motivated by the work underway to simplify our operations strengthen our retail and services foundation and get back to our roots.
Joel Anderson: Our first quarter results bolster my confidence that we have the right strategy in place and a re-energized team that shares a collective commitment to unlocking Petco's full potential.
Speaker Change: Our first quarter results bolster my confidence that we have the right strategy in place and a reenergized team that shares our collective commitment to unlocking <unk> full potential.
Joel Anderson: With phase one complete. and a highly experienced leadership team in place, our full attention has quickly turned to phase two. This phase is all about implementing and executing the multiple work streams we identified in phase one to improve our overall retail fundamentals and financial performance.
Speaker Change: With phase one complete now.
Speaker Change: In a highly experienced leadership team in place.
Speaker Change: Our full attention is quickly turned to phase II.
Speaker Change: This phase is all about implementing and executing multiple work streams, we identified in phase one to improve our overall retail fundamentals and financial performance.
Joel Anderson: Said another way. We are putting our work into action. and seeing our customer respond and react in real time.
Speaker Change: Said another way.
Speaker Change: We are putting our work into action.
Speaker Change: Seeing our customer respond and react in real time.
Joel Anderson: The examples I will share with you today all represent foundational building blocks that will support us when we transition to phase three, focused on growth. Before getting into the progress against Phase 2, I'd like to spend some time on sourcing and the progress we've made to preserve maximum flexibility. Face of Tariff Uncertainty. Our cross-functional teams across merchandising, assortment planning, supply chain, finance, and operations. have mobilized together to identify various contingency plans and mitigation strategies. We are leaning into our longstanding scale vendor relationship. We truly appreciate their partnership as we navigate ongoing fluid dynamics and uncertainty.
Speaker Change: The examples I will share with you today.
Speaker Change: All represent foundational building blocks that will support us when we transition to phase III focused on growth.
Speaker Change: Before getting into the progress against Phase II.
Speaker Change: I'd like to spend some time on sourcing and the progress we've made to preserve maximum flexibility in the face of tariff uncertainties.
Speaker Change: Our cross functional teams across merchandising assortment planning supply chain finance and operations.
Speaker Change: Have mobilized together to identify various contingency plans and mitigation strategies.
Speaker Change: We are leaning into our longstanding scale vendor relationship.
Speaker Change: And we truly appreciate their partnership as we navigate ongoing fluid dynamics and uncertainty.
Joel Anderson: The current environment has served as a catalyst to accelerate work that was already underway as we strengthen our operating fundamentals. We are working towards building best in class product cost management, pricing capabilities, and centralized operating principles to our product import process, just to name a few. I'm proud of the work the teams have accomplished to date. Pleased to see them harnessing the energy that comes from seeing their work positively impact our results. Our ability to reiterate our full year outlook. Despite absorbing, the impact of terrorism currently in place illustrates the meaningful progress we've made.
Speaker Change: The current environment has served as a catalyst to accelerate work that was already underway as we strengthen our operating fundamentals.
Speaker Change: We are working towards building best in class product cost management pricing capabilities and centralized operating principles to our product import process.
Speaker Change: To name a few.
Speaker Change: I'm proud of the work the teams have accomplished to date.
Speaker Change: I'm pleased to see them harnessing the energy that comes from seeing their work positively impact our results.
Speaker Change: Our ability to reiterate our full year outlook, despite absorbing the impact of tariffs currently in place illustrates the meaningful progress we've made.
Joel Anderson: Now, turning back to phase two. is all about implementing and Merchandise excellence is at the forefront of this. As I discussed last quarter, we are optimizing our product assortment to more closely align with consumer demand. We're allocating more shelf space to higher productivity brands and Let me give you a couple examples, the teams executed on since our last call, and then you can already see in our story. First, we completed our cat category product reset at the end of May. Second, we kicked off our dog category reset this week. Both are being executed earlier in the year than we had done previously.
Speaker Change: Now turning back to phase III.
Speaker Change: It's all about implementing and executing.
Speaker Change: Merchandize excellence is at the forefront of this work as.
Speaker Change: As I discussed last quarter we.
Speaker Change: We are optimizing our product assortment to more closely align with consumer demand.
Speaker Change: And we are allocating more shelf space to higher productivity brands and Skus.
Speaker Change: Let me give you a couple of examples the teams executed on since our last call and then you can already see in our stores.
Speaker Change: First we completed our cat category product reset at the end of May.
Speaker Change: Second we kicked off our dog category reset this week.
Speaker Change: Both are being executed earlier in the year than we had done previously.
Joel Anderson: Well, there are many elements that go into a planogram. Key focus for this year centered around adding capacity. Top Selling SKUs Through Both Lower Productivity SKU Rationalization and Increased Shelf Let me give you one simple but powerful example. As we complete the dog food reset, you will see our shelves move about six inches higher. While this may not seem material, it allows us to remove a lot of airspace throughout our dog consumable department and increase the shelf capacity by more than 10%. This example demonstrates how detailed the teams are in fixing every part of our business.
Speaker Change: While there are many elements that go into our plan a gram reset.
Speaker Change: Focus for this year centered around adding capacity for.
Speaker Change: Our top selling skus to both lower productivity SKU rationalization.
Speaker Change: And increased shelf space.
Speaker Change: Let me give you one simple but powerful example.
Speaker Change: As we complete the dog food reset you will see our shelves move about six inches higher.
Speaker Change: This may not seem material.
Speaker Change: It allows us to remove a lot of aerospace throughout our dog consumable department and increases shelf capacity by more than 10%.
Speaker Change: This example demonstrates how detailed the teams are in fixing every part of our business.
Joel Anderson: Increased capacity drives both operational improvements and customer experience enhancement. Operationally, we are reducing lost sales from on-shelf stock out. and Improving Labor Productivity by Eliminating Constant or Continuous Shelf Replenishment Between Truck Replenishments. From the customer perspective, we're improving shoppability. higher in stock availability. When you put all this together, it reinforces Petco as a reliable destination for all our customers' pet care needs.
Speaker Change: Increased capacity right, it's both operational improvements.
Speaker Change: And customer experience enhancements.
Speaker Change: Operationally, we are reducing loss sales from on shelf stock outs, and improving labor productivity by eliminating constant or continuous shelf replenishment between truck replenishment.
Speaker Change: From the customer perspective, we are improving shop ability.
Speaker Change: It's higher in stock availability when.
Speaker Change: When you put all this together it reinforces petco as reliable destination for all our customers pet care needs.
Joel Anderson: Another example you will begin to see in stores this quarter with a continued rollout throughout the year is a more strategic approach to NCAP. Historically, our end-cap displays were more transactional agreements with our vendors without a customer lens. Today, we are implementing a more strategic, sales-focused approach that is mutually beneficial to Petco, our vendor partners, and, most importantly, our customers. We will leverage end cap displays to highlight newness. Spotlight Innovation, Feature Seasonal Offerings, and Promote Value. I encourage all our vendors to bring forth ideas of newness and innovation. that can create a physical spotlight for our customers' needs.
Speaker Change: Another example, you'll begin to see in stores this quarter with the continued rollout throughout the year is a more strategic approach to end cap displays the.
Speaker Change: Historically.
Speaker Change: Our end cap displays were more transactional agreements with our vendors without a customer lens today, we're implementing a more strategic sales focused approach that is mutually beneficial to petco or.
Speaker Change: Our vendor partners.
Speaker Change: And most importantly, our customers.
Speaker Change: We will leverage end cap displays to highlight newness.
Speaker Change: Late innovation feature seasonal offerings and promote value.
Speaker Change: I encourage all of our vendors to bring forth ideas of newness and innovation.
Speaker Change: Can create a physical spotlight.
Speaker Change: Our customers' needs to better serve their pets.
Joel Anderson: better serve their pets.
Joel Anderson: Next. Services, the fastest growing area of the pet category. In my view, our services offering is what fortifies our competitive mode. We have an established leadership position and a differentiated model of owned grooming and vet locations at scale. During Phase 1, we identified several opportunities for improved productivity and have already implemented several of them.
Speaker Change: Next.
Speaker Change: Services is the fastest growing area of the pet category.
Speaker Change: In my view, our services offering is what fortifies our competitive moat.
Speaker Change: We have an established leadership position and a differentiated model of owned grooming and vet locations at scale.
Speaker Change: During phase one we identified several opportunities for improved productivity and have already implemented several of them.
Joel Anderson: For example. Our grooming software has been upgraded to allow more flexibility for online appointments. With over 40% of our appointments made online, it is important our pet parents constantly see multiple open time slots. so they don't consider an alternative grouping solution. On the vet side. We've made several software enhancements to our vet scheduling system to ensure we have better coverage. I believe our industry-leading services offering, once optimized, will be a key driver of in-store customer traffic, customer retention, and loyalty over time. Our aim is to provide a comprehensive ecosystem that embodies our mission to improve the lives of pets and pet parents.
Speaker Change: For example, our.
Speaker Change: Grooming software has been upgraded to allow more flexibility for online appointments.
Speaker Change: With over 40% of our appointments made online.
Speaker Change: It is important to our pet parents constantly see multiple open time slots.
Speaker Change: So they don't consider an alternative grooming solution on that.
Speaker Change: That side.
Speaker Change: We've made several software enhancements to our vet scheduling system to ensure we have better coverage.
Speaker Change: I believe our industry, leading services offering once optimized.
Speaker Change: It will be a key driver of in store customer traffic customer retention and loyalty over time.
Speaker Change: Our aim is to provide a comprehensive ecosystem.
Speaker Change: It embodies our mission to improve the lives of pets and pet parents.
Joel Anderson: Services remains our fastest growing business and continues to deliver positive growth. Additionally, we are pleased with the productivity improvement seen in both hospitals and grooming operations supporting gross margin expansion in the court.
Speaker Change: Services remains our fastest growing business and continues to deliver positive growth and.
Speaker Change: Additionally, we are pleased with the productivity improvements seen in both hospitals and grooming operations supporting gross margin expansion in the quarter.
Joel Anderson: With respect to operational As you've heard me talk for several quarters now. We're instilling an owner's mindset when it comes to cost dis So we've made some great progress in areas like marketing, store expenses, and supply chain. We have more opportunity ahead and are leaving no stone unturned across the organization. In light of a more uncertain macro environment, this work is paramount. I'm impressed with how our teams have come together working cross-functionally and in a more coordinated fashion with everyone driving towards the same objective.
Speaker Change: With respect to operational efficiencies.
Speaker Change: As you've heard me talked for several quarters now.
Speaker Change: We're instilling an owner's mindset when it comes to cost discipline.
Speaker Change: So we've made some great progress in areas like marketing store expenses and supply chain.
Speaker Change: We have more opportunity ahead and are leaving no stone unturned across the organization.
Speaker Change: In light of a more uncertain macro environment. This work is paramount.
Speaker Change: I'm impressed with how our teams have come together working cross functionally.
Speaker Change: And in a more coordinated fashion with everyone driving towards the same objective.
Joel Anderson: Specifically, the operations team led by Joe Venezia, our Chief Revenue Officer. is working on three areas of improvement. Source Simplification. retail excellence around leveraging the one Petco way. and Customer Engagement. All three of these work streams were kicked off at the field leadership meeting I discussed earlier. Since joining last year, Joe has quickly assessed the opportunities and is unifying both the services and operations team to make quick and lasting operational efficiency. As we enter the second quarter. and move into the back half, we remain focused on positioning the business for a return to office.
Speaker Change: Specifically the.
Joe: The operations team led by Joe <unk>, Our Chief revenue Officer is working on three areas of improvement.
Speaker Change: Implication.
Speaker Change: Retail excellence around leveraging the one petco way.
Speaker Change: And customer engagement.
Speaker Change: All three of these work streams were kicked off at the field leadership meeting I discussed earlier.
Speaker Change: Since joining last year Joy, Joe has quickly assess the opportunities and as unifying both the services and operations team to make quick and lasting operational efficiencies.
Speaker Change: As we enter the second quarter.
Speaker Change: And move into the back half.
Speaker Change: We remain focused on positioning the business for a return to offense.
Joel Anderson: But it is important to remind you that improving our retail fundamentals and delivering better financial performance is our first priority. We will continue driving productivity. are beginning to seed and test revenue growth initiatives. for us, product innovation, marketing.
Speaker Change: But it is important to remind you that improving our retail fundamentals and delivering better financial performance is our first priority.
Speaker Change: We will continue driving productivity will.
Speaker Change: While beginning to seed and test revenue growth initiatives.
Speaker Change: Cross product innovation.
Speaker Change: Marketing.
Speaker Change: And store experience.
Joel Anderson: Finally, let me conclude our phase two progress from a customer The Petco brand marks the 60th anniversary. This is an amazing milestone not many retailers reach. With our rich heritage, we have an obligation to serve our customers a robust assortment of solutions-based and trend-right products with a compelling value proposition. and we see significant opportunity to continue to improve on this front.
Speaker Change: Finally, let me conclude our phase II progress from a customer lens.
Speaker Change: The pet co brand marks the 60 <unk> anniversary this year.
Speaker Change: This is an amazing milestone not many retailers reach.
Speaker Change: With our rich heritage, we have an obligation to serve our customers a robust assortment of solutions based and trend right product with a compelling value proposition and we see significant opportunity to continue to improve on this front.
Joel Anderson: Let me give you some specific examples of customer facing areas you should expect to see change. Number one, our stores over time. feature increased newness and more fun products with the convenient weekly consumable items they count on always being in stock.
Speaker Change: Let me give you some specific examples of customer facing areas you should expect to see change.
Speaker Change: Number one our stores overtime will feature increased newness and more fun product with the convenient weekly consumable items they can.
Speaker Change: On always being in stock.
Joel Anderson: Number two. Our marketing message will be evolving to a more solutions-oriented framework showcasing our comprehensive offering.
Speaker Change: Number two.
Speaker Change: Our marketing message will be evolving to a more solutions oriented framework showcasing our comprehensive offerings.
Joel Anderson: And number three, a new membership program is being designed to create a more personalized, long-term loyalty experience with an expected launch in 2026. In addition, our North Star work, which we expect to complete in the back half of 2025, has helped us better understand the customer segments we can own. We are in the midst of conducting both qualitative and quantitative analysis that will inform both our strategy and our customer engagement going forward.
Speaker Change: And number three.
Speaker Change: New membership program is being designed to create a more personalized long term loyalty experience with an expected launch in 2026.
Speaker Change: In addition.
Speaker Change: Our North Star work, which we expect to complete in the back half of 2025.
Speaker Change: That's helped us better understand the customer segments, we can own.
Speaker Change: We are in the midst of conducting both qualitative and quantitative analysis that will inform both our strategy and.
Speaker Change: And our customer engagement going forward.
Joel Anderson: Results of this work will be foundational to informing our Phase 3, a return to growth. These examples demonstrate that while we are moving fast to improve productivity and deliver better financial performance, we're equally now focused on identifying areas to grow and how to better communicate with our customers. We will be unified in our message to include both online and in-store and utilize a test-and-learn approach. to ensure these changes truly resonate with our customers. We look forward to sharing more as this evolves on future calls.
Speaker Change: Results of this work will be foundational to informing our phase III it returned to growth.
Speaker Change: These examples demonstrate that while we are moving fast to improve productivity and deliver better financial performance.
Speaker Change: Equally now focused on identifying areas to grow and how to better communicate with our customers.
Speaker Change: We will be unified and our message to include both online and in store.
Speaker Change: And utilize a test and learn approach to ensure these changes truly resonate with our customers.
Speaker Change: We look forward to sharing more as this evolves on future calls this year.
Joel Anderson: So in summary... 2025 is a year of transformation for Petco. I'm incredibly pleased with the work accomplished to date, which you can see in our Q1 results. This is especially gratifying as it's all been done while we navigate today's evolving trade. Our leadership team and our board are aligned to the same goal of returning Petco to an industry leading destination for pets and pet parents.
Speaker Change: So in summary.
Speaker Change: 2025 is a year of transformation for Petco I'm incredibly pleased with the work accomplished to date.
Speaker Change: Which you can see in our Q1 results.
Speaker Change: This is especially gratifying as it's all been done while we navigate today's evolving trade environment.
Speaker Change: Our leadership team and our board are aligned to the same goal of returning petco, two and an industry, leading destination for pets and pet parents.
Joel Anderson: I want to thank our nearly 30,000 Petco partners for leaning into our transformation. while simultaneously delivering customers the service and experience they look to Petco. Acknowledging there is work ahead. I'm confident in the detailed, multi-phased approach currently in place. I'm pleased with the progress to date and optimistic in Petco's ability to reach its full potential over time.
Speaker Change: I want to thank our nearly 30000 Petco partners.
Speaker Change: We're leaning into our transformation, while simultaneously delivering customers the service and experience they look to petco for.
Speaker Change: Acknowledging there is work ahead.
Speaker Change: I am confident in the detail.
Speaker Change: Phased approach currently in place.
Speaker Change: I am pleased with the progress to date and optimistic and Petco is ability to reach its full potential over time.
Sabrina Simmons: With that, I'd like to turn the call over to Sabrina, who will review the financials in more detail. Thank you, Joel. And good afternoon, everyone. We entered the year with the number one financial priority being to restore the health of our economic model through three key pillars. Gross Margin Expansion, SG&A Leverage, and ROIC Improvement. I'm very pleased we delivered against all three of these pillars in the first quarter. For the first quarter, comparable sales were down 1.3%, with net sales down 2.3%. The difference between the comp and sales decline was driven by the 25 net store closures in 2024, and the additional five closures we had in Q1, bringing our ending store count to 1,393.
Speaker Change: With that I'd like to turn the call over to Sabrina, who will review the financials in more detail.
Sabrina: Thank you Joe and good afternoon, everyone. We entered the year with the number one financial priority being to restore the health of our economic model through three key pillars.
Speaker Change: Gross margin expansion SG&A leverage and ROIC improvement.
Speaker Change: I'm very pleased we delivered against all three of these pillars in the first quarter.
Speaker Change: For the first quarter comparable sales were down one 3% with net sales down two 3% the.
Speaker Change: The difference between the comp and sales decline was driven by the 25 net store closures in 2024 and the additional five closures we had in Q1, bringing our ending store count to 1393.
Sabrina Simmons: We expanded gross margin rate by over 30 basis points versus last year to 38.2% with expansion across both our product and services business. As an as an organization, we're focused on improving all levers within margins, including a more robust approach to average unit cost and average unit retail management. We established stronger guardrails, implemented more robust reviews of our pricing gaps, and deployed more data-driven processes to better manage markdowns and promotions. All of this work exemplifies our focus on executing the retail fundamentals well. with greater attention to detail and higher levels of accountability with the goal of expanding our margin.
Speaker Change: We expanded gross margin rate by over 30 basis points versus last year to 38, 2% with expansion across both our products and services businesses.
Speaker Change: As you know as an organization, we're focused on improving all levers within margin, including a more robust approach to average unit costs and average unit retail management.
Speaker Change: We establish stronger guardrail implemented more robust reviews of our pricing gap and deployed more data driven processes to better manage markdowns and promotions.
Speaker Change: All of this work exemplifies our focus on executing the retail fundamentals well.
Speaker Change: With greater attention to detail and higher levels of accountability with a goal of expanding our margin.
Sabrina Simmons: It's through the same focus on disciplined execution that we delivered more than 180 basis points of expense leverage during the quarter. Excluding last year's one-time disposition costs, we leveraged approximately 160 basis points. As we've spoken about previously, this work is not a one-time cost-cutting exercise, but rather a shift in mindset, resulting in greater efficiency, agility, and increased productivity. Given the turbulent environment, we are especially proud of how our teams have mobilized quickly to accelerate several efficiency initiatives, such as optimization of marketing spend and implementation of operational improvements in our store labor model. We're pleased with the progress to date and our teams continue to identify further savings opportunities as we adopt this more disciplined mindset in our day-to-day operations.
Speaker Change: It's through the same focus on disciplined execution that we delivered more than 180 basis points of expense leverage during the quarter.
Speaker Change: Excluding last year's one time disposition costs, we leveraged approximately 160 basis points.
Speaker Change: As we've spoken about previously this work is not a one time cost cutting exercise, but rather a shift in mindset, resulting in greater efficiency agility and increased productivity.
Speaker Change: The turbulent environment, we are especially proud of how our teams have mobilized quickly to accelerate several efficiency initiatives such as optimization of marketing spend and implementation of operational improvements and our store labor model.
Speaker Change: We're pleased with the progress to date and our teams continue to identify further savings opportunities as we adopt this more disciplined mindset in our day to day operation.
Sabrina Simmons: Operating profit was $16.4 million, an increase of $33 million or approximately $29 million when excluding disposition costs last year. Adjusted EBITDA increased $13.8 million to $89.4 million and expanded 105 basis points to 6% of sales. We're pleased that in the first quarter, we delivered on the framework we laid out at the start of the year to expand our gross margin rate and to leverage SG&A driving improvement in profitability.
Speaker Change: Operating profit was $16 4 million, an increase of $33 million or approximately $29 million when excluding disposition costs last year.
Speaker Change: Adjusted EBITDA increased $13 8 million to 89, 4 million and expanded 105 basis points to 6% of sales.
Speaker Change: We're pleased that in the first quarter, we delivered on the framework, we laid out at the start of the year to expand our gross margin rate and to leverage SG&A driving improvements and profitability.
Sabrina Simmons: Moving to the balance sheet and cash flow. We ended the quarter with a cash balance of $139 million, an improvement of $48 million versus last year. Inventory continues to be managed well with ending inventory 5% below last year. Free cash flow was negative $44 million, primarily driven by incentive payout during the quarter.
Speaker Change: Moving to the balance sheet and cash flow.
Speaker Change: We ended the quarter with a cash balance of $139 million, an improvement of $48 million versus last year.
Speaker Change: Inventory continues to be managed well with ending inventory, 5% below last year.
Speaker Change: Free cash flow was negative $44 million, primarily driven by incentive payout during the quarter.
Sabrina Simmons: Now turning to our Let me start with an update on our tariff exposure. As a reminder, our most direct care of exposure sits within our owned brand. On our fourth quarter call, we shared that our own brand inventory purchases from China, Canada, and Mexico were about 5% of our total merchandise cost of goods sold. When updating for the revised and expanded list of countries currently impacted, our exposure is only slightly higher at about 7%. Our indirect exposure sits primarily within our national brands. For many of these suppliers, we have long standing relationships at scale, and we are partnering together to navigate fluid dynamics and deploy mitigation efforts.
Speaker Change: Now turning to our outlook.
Speaker Change: Let me start with an update on our tariff exposure.
Speaker Change: As a reminder, our most direct tariff exposure fits within our owned brand.
Speaker Change: On our fourth quarter call, we shared that our own brand inventory purchases from <unk>.
Speaker Change: China, Canada, and Mexico were about 5% of our total merchandise cost of goods sold.
Speaker Change: When updating for the revised and expanded list of countries currently impacted our exposure is only slightly higher at about 7%.
Speaker Change: Our indirect exposure sits primarily within our national brands.
Speaker Change: For many of these suppliers, we have longstanding relationships at scale and we are partnering together to navigate fluid dynamics and deploy mitigation efforts.
Sabrina Simmons: With that, for the full year, we are reiterating our full year outlook for 2025. As a reminder, our outlook at the beginning of the year excluded any potential impact of tariffs. Assuming tariffs remain at today's current level and no higher, we believe we can still deliver on the outlook we provided at the start of the year. For the full year, we continue to expect overall net sales to be down low single digits to last year, which includes the impact of 20 to 30 net store closures in 2025. We continue to expect adjusted EBITDA to be between $375 and $390 million.
Speaker Change: With that for the full year, we are reiterating our full year outlook for 2025.
Speaker Change: As a reminder, our outlook at the beginning of the year excluded any potential impact of tariffs.
Speaker Change: Assuming tariffs remain at today's current level and no higher.
Speaker Change: We believe we can still deliver on the outlook, we provided at the start of the year.
Speaker Change: For the full year, we continue to expect overall net sales to be down low single digits to last year, which includes the impact of 20 to 30 net store closures in 2025.
Speaker Change: We continue to expect adjusted EBITDA to be between 375 and $390 million.
Sabrina Simmons: With regard to other guidance items, for the full year, we expect depreciation to be approximately $200 million, net interest expense of approximately $130 million. and approximately 125 to 130 million of capital expenditures with a greater focus on ROI.
Speaker Change: With regard to other guidance items for the full year, we expect depreciation to be approximately $200 million net interest expense of approximately $130 million.
Speaker Change: And approximately $125 million to $130 million of capital expenditures with a greater focus on ROIC.
Sabrina Simmons: For the second quarter specifically, we expect net sales to be down low single digits versus the prior year and adjusted EBITDA to be between $92 and $94 million, up approximately 11% year over year at the mid For more information visit www.FEMA.gov In closing, I want to thank our teams across the organization for moving with urgency as we execute against the phases of our transformation, while also mobilizing quickly and taking action to prioritize profitability in light of a fast-changing operating environment. We are pleased with the progress we've made, as demonstrated in our first quarter results and guidance for the remainder of the year.
Speaker Change: For the second quarter, specifically, we expect net sales to be down low single digits versus the prior year and adjusted EBITDA to be between 92 and $94 million up approximately 11% year over year at the midpoint.
Speaker Change: In closing I want to thank our teams across the organization for moving with urgency as we execute against the phases of our transformation. While also mobilizing quickly and taking action to prioritize profitability in light of a fast changing operating environment.
Speaker Change: We are pleased with the progress we've made as demonstrated in our first quarter results and guidance for the remainder of the year with that we welcome your questions.
Unknown Executive: With that, we welcome your questions. 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 addressed and you would like to withdraw your question, please press star and then. Please limit yourself to one question and one follow-up.
Speaker Change: We will 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.
Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two please.
Speaker Change: Please limit yourself to one question and one follow up at.
Unknown Executive: At this time, we will pause momentarily to assemble our roster.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Michael Lasser: And your first question today will come from Michael Lasser with UBS. Please go ahead. Good evening. Thank you for taking my question.
Speaker Change: And your first question today will come from Michael Lasser with UBS. Please go ahead.
Speaker Change: Good evening. Thank you for taking my question. This is such an bloomer on for Michael less lastly, I'd like to start with what are you seeing in pet adoption trends and how these trends impact your full year outlook.
Sachin Verma: This is Sachin Verma on for Michael Lasser. I'd like to start with what are you seeing in pet adoption trends? And how do these trends impact your four-year outlook? Hey, thanks for the call. You know, we're seeing it's pretty stable, not much change from the last call we had. And as far as the full year goes, and I said this last quarter as well, 2025 is really a self-help story for Petco. So we're not relying on any tailwinds from the category, like pet adoption, to increase in order for us to deliver on the financial improvements that we talked about on this call and the last call.
Speaker Change: Yeah, Hey, thanks for the call.
Speaker Change: We're seeing it's pretty stable not much change from the last call we had.
Speaker Change: And as far as the full year ago.
Speaker Change: This last quarter as well the 2025 is really a self help story for petco. So we're not relying on any tailwind from the category.
Speaker Change: Pet adoption to increase in order for us to.
Speaker Change: Deliver on the financial improvements that we talked about on this call on the last call. So we feel really good about the progress we've made and I think Q1 is a great indicator of how strong the year is playing out.
Sachin Verma: So we feel really good about the progress we've made.
Sachin Verma: And I think Q1 is a great indicator of how strong the year is playing out. Thank you. My follow up question is, you know, as you're focused on improving your profitability and not focusing on one time cost out, how are you ensuring guardrails to take permanent costs out while keeping the customer experience intact? In other words, what kind of ways are you looking to take permanent costs out while still maintaining your top line and adjusted even? Thank you. Yes, it's a good question.
Speaker Change: Thank you my follow up question is.
Speaker Change: As you are focused on improving their profitability and not focusing on one time cost out how are you.
Speaker Change: You, ensuring guardrails to take permanent cost out while keeping the customer experience and half in other words, what kind of ways are you looking to take permanent cost out while still maintaining your top line and adjusted EBITDA. Thank you.
Speaker Change: Yes, good question and maybe I'll turn it over to Sabrina for some specifics, but I can tell you.
Joel Anderson: And maybe I'll turn it over to Sabrina for some specifics. But I can tell you, Sabrina has been here about 90 days now. And, and then the discipline, you know, she's brought to the entire organization on cost controls, it has been a great focus for all of us. And, you know, Sabrina, maybe you want to talk about a couple of the findings you found and you know, how we're not focused on one time. Yeah, and I'll start at the highest level. You know, I talked about last quarter, and again, this quarter, that we're really working on a change in mindset.
Speaker Change: Sabrina has been here about 90 days now.
Speaker Change: And then the discipline she has brought to the entire organization.
Speaker Change: <unk> cost controls.
Speaker Change: And a great focus for all of Us and Sabrina maybe you want to talk about a couple of the findings you've found and how we're not focused on one time and I'll I'll start at the highest level.
Speaker Change: Talked about last quarter and again this quarter that were really working on a change in mindset. That's the most important thing.
Sabrina Simmons: That's the most important thing. Also, as I've articulated, our goal is not just about cost cutting, our goal is to leverage SG&A. So we're very much setting the stage, building the strong foundation right now, this year, but as we grow sales, we can manage SG&A well and still deliver leverage that will help operating margin expansion. So it's not all about cutting and cutting, it's about managing it well, to get high returns, and help drive our business growth going forward.
Speaker Change: Also as I have articulated our goal is not just about cost cutting our goal is to leverage SG&A. So we're very much setting the stage building the strong foundation right now this year, but as we grow sale.
Speaker Change: We can manage SG&A, well and still deliver leverage that will help operating margin expansion. So it's not all about cutting and cutting its about managing it well to get high returns and helped drive our business growth going forward.
Sachin Verma: Thank you, and goodbye.
Speaker Change: Thank you and good luck.
Simeon Gutman: And your next question today will come from Simeon Gutman with Morgan Stanley. Please go ahead. Good afternoon, everyone.
Speaker Change: And your next question today will come from Simeon Gutman with Morgan Stanley. Please go ahead.
Simeon Gutman: Good afternoon, everyone, Hi, Joel Sabrina, Hey, Joel the topline journey I realize phase III is still a ways away returned to growth as.
Simeon Gutman: Hi, Joel. Hi, Sabrina. Hey, Joel, the top line journey, I realize phase three is still a ways away, return to growth. As far as the pieces that you're putting in place now, can you go to the baseball analogy? Are you in the beginning innings? Or you still haven't even started in terms of the repositioning, brand, product assortment, anything, you know, front end customer facing? Yeah, look, Simeon, great question. I think to answer the baseball analogy, it depends on how you're looking at it. You know, from your guys' perspective on the outside, you would say, you know, we haven't even started, you haven't seen it.
Speaker Change: As far as the pieces that you are putting in place now can you go to the baseball analogy are you in the beginning innings are you still haven't even started in terms of the repositioning brand product assortment Anythings front end customer facing.
Speaker Change: Yes look.
Speaker Change: Great question I think to answer the baseball analogy it depends on how youre looking at it.
Speaker Change: From your guys' perspective on the outside you would say we haven't even started you havent seen it but I'll tell you inside.
Joel Anderson: But I'll tell you, inside You know, we're already beginning to identify several levers of growth. We got to get better at, you know, one voice to our customer. We're an omni-channel retailer, and I think that's a real opportunity. Our marketing being more solutions-oriented, you know, we're starting to look at a lot of product innovation, which brings newness and differentiation. The North Star project work is underway, and so all those put together are really starting to bubble up a lot of ideas on the organization. And just like in phase one on the cost-cutting, we started with, you know, really looking at all the opportunities, and phase two has been about implementing and executing.
Speaker Change: We're already beginning to identify several levers of growth.
Speaker Change: Got to get better at one voice to our customer, we're an omnichannel retailer and I.
Speaker Change: I think thats, a real opportunities our marketing being more solutions oriented.
Speaker Change: We're starting to look at a lot of product innovation, which brings newness and differentiation.
Speaker Change: The North Star project work is underway.
Speaker Change: So all of those put together.
Speaker Change: <unk> really starting to bubble up a lot of ideas on the organization and just like in phase one on the cost cutting we started with really looking at all the opportunities in phase III has been about implementing and executing we're doing the same on the growth side Simeon right now we're gathering the idea.
Joel Anderson: We're doing the same on the growth side, Simeon. Right now we're gathering the ideas, looking at all of them, and then we're going to put them through a lens of both test and learn, backed up with data and analytics to ensure they really produce, you know, profitable growth for us. So the work is starting.
Speaker Change: Is looking at all of them and then we're going to put them through a lens of both test and learn.
Speaker Change: Backed up with data and analytics to ensure they they really produce profitable growth for us. So the work is starting.
Simeon Gutman: You just won't see it yet until we get to the back half and into 2016. Thanks, Simeon. Thanks.
Speaker Change: You just won't see it yet until we get to the back half and into 2006.
Kim Ann: Kim Ann.
Sabrina Simmons: I don't know if I can do a follow-up, but I wanted to ask, when Sabrina was mentioning, I think pricing gaps, looking at some things, I don't know if that was in reference to markdowns or actual price gaps that you have versus competitors today. So, I wanted to ask what you learned, and are there any things that you learned through this, it sounds like deep dive on the merchandising and product side, where there's some opportunities either to drive top line or actually take out costs. Yeah, maybe I'll start with that, since those were my words, and explain and clarify what I meant.
Kim Ann: Thanks, I don't know if I can do a follow up but I'll.
Kim Ann: Wanted to ask when Sabrina was mentioning I think pricing gaps looking at some things I don't know if that was in reference to markdowns or actual.
Kim Ann: Price gaps that you have versus competitors today. So I wanted to ask what you learned and are there any things that you learned through this it sounds like deep dive on the merchandising and product side.
Kim Ann: Or are there some opportunities either to drive top line or actually take out costs.
Kim Ann: Yeah, maybe I'll start with that since those were my words.
Kim Ann: Explain and clarify what on that so we as you know in 2023.
Sabrina Simmons: So we, as you know, in 2023, started to shift and broaden our assortment to make sure we had enough value for our customers. So that was really important work strategically. The execution was a bit choppy. We're working through that now. So we're looking at our full assortment, how we're offering value to our customer at sort of every level of target. And unlike, I would say, importantly, unlike maybe some other retailers, we were already in progress on using all our levers, including pricing as a tool for our margin expansion goals, you know, long before tariffs in the current macro situation.
Kim Ann: Started to shift and broadened our assortment to make sure we had enough value for our customers. So that was really important work strategically execution was a bit choppy. We're working through that now so we're looking at a full assortment, how we're offering value to our customer.
Kim Ann: Sort of every level of target.
Kim Ann: And unlike I would say importantly, unlike maybe some other retailers we were already in progress.
Kim Ann: I'm using all our levers, including pricing as a tool for our margin expansion goal long before tariffs in the current macro situation. So that's sort of how we think about it we're always balancing what the customer needs with driving the health of our own business.
Sabrina Simmons: So that's sort of how we think about it. We're always balancing what the customer needs with, you know, driving the health of our own business. And certainly none of this is a one fits all approach. We're doing work very surgically down to the SKU level and using a lot of good data and analytics. Thanks.
Kim Ann: And certainly none of this is a one fits all approach we're doing work very surgically down to the SK U S SKU level.
Kim Ann: And using a lot of good data and analytics now.
Sabrina Simmons: Good luck.
Speaker Change: Thanks, Good luck.
Kim Ann: Thanks.
Steven Zaccone: Your next question today will come from Steven Zaccone with Citi. Please go ahead. Great. Good afternoon. Thanks very much for taking my question. I was going to focus on margins.
Speaker Change: Your next question today will come from Stephens of Cohen with Citi. Please go ahead.
Speaker Change: Great. Good afternoon, thanks, very much for taking my question.
Speaker Change: I was going to focus on margins so yes.
Sabrina Simmons: So, you know, Sabrina, could you just talk about gross margin a bit how that perform versus your own expectations? And then in light of some of the you know, the new news and the guide, should we still expect gross margin to expand for the for the full year? Yeah, so I will start with the quarter. We're pleased with where we came out. We actually I think I said in my remarks last quarter that we would start modestly, initially, on this journey of expanding our margins. So pleased where they came out. AUC was a powerful lever this quarter, but of course, we're using every lever in the margin mix as we move forward.
Speaker Change: Sabrina could you just talk about gross margin a bit how that performed versus your own expectations and then in light of some of the new news and the guide should we still expect gross margin to expand for the full year.
Speaker Change: Yeah, So I will start with the quarter.
Speaker Change: We're pleased with where we came out we actually I think I said in my remarks last quarter that we would start modestly initially on this journey of expanding our margins. So I'm pleased where they came out AUC was a powerful lever this quarter, but of course, we're using every lever in the March.
Speaker Change: <unk> mix as we move forward and it's very much still our goal to deliver gross margin expansion for the year, we feel given our starting point given all our work with all of our levers, including not just the AUC side, but of course from a markdown clearance assort.
Sabrina Simmons: And it's very much still our goal to deliver gross margin expansion for the year. We feel given our starting point, given all our work with all our levers, including not just the AUC side, but of course, promo, markdown, clearance, assortment mix, pricing. That is a very, very important goal.
Speaker Change: Mix pricing.
Speaker Change: That is a very very important goal for us.
Sabrina Simmons: Okay, and then maybe, maybe a sales question to follow up, because it sounds like you did a bit of a planogram reset here in the month of in the month of May. You know, as you think about that, as an impact to sales, could this be a bit of a helper in the near term or, you know, the phase three to kind of return to growth is probably gonna take a little bit longer. Yeah, no, look, I think the cat and dog reset that I spoke to on my prepared remarks was really more to show you the specific example of how we're making progress.
Speaker Change: Okay, and then maybe maybe a sales question a follow up because it sounds like you did a bit of a planet Gram reset here in the months of in the month of May.
Speaker Change: As you think about that as an impact to sales could this be a bit of a helper in the near term or.
Speaker Change: Phase III to kind of return to growth is probably going to take a little bit longer.
Speaker Change: Yeah No look.
Speaker Change: I think the cat and dog reset that I spoke to on my prepared remarks.
Speaker Change: It was really more to show you. The specific example of how we're making progress and the fact that we pulled that up into the year earlier is certainly will show up as we get into the back half of the year.
Sabrina Simmons: And the fact that we pulled that up into the year earlier, is certainly will show up as we get into the back half of the year. You know, remember, every time you do these resets, they're very disruptive. So you don't see an improvement immediately. But, you know, early signs of the cat reset look very promising. And we got to get through the dog reset next week. But we wouldn't have brought these forward if we didn't think they wouldn't be a contributor to, you know, getting back to growth in the back half of the year. But you shouldn't you shouldn't see it in Q2 as much as you'll see it in future quarters.
Speaker Change: Remember every time you do these resets are very disruptive. So you don't see an improvement immediately but early signs of the cat reset look very promising and we got to get through the Dod reset next week, but we wouldn't have brought these forward if we didnt think they.
Speaker Change: Wouldn't be a contributor to getting back to growth in the back half of the year, but you shouldn't you shouldn't see it in Q2 as much as Youll see it in.
Speaker Change: In future quarters.
Unknown Executive: Okay, thanks for the detail. You bet. Again, if you have a question, please press star and then 1.
Speaker Change: Okay. Thanks for the detail.
Speaker Change: You bet.
Speaker Change: Again, if you have a question. Please press star and then one and your next question today will come from <unk> <unk> with Jefferies. Please go ahead.
Kaumil Gajrawala: And your next question today will come from Kaumil Gajrawala with Jeffreys. Please go ahead.
Kaumil Gajrawala: Hey, everyone, can we maybe just talk a little bit about sort of services versus supplies and different sort of divisions, if you're seeing anything in today's consumer environment, that's maybe suggesting that maybe they're fine, which is what we hear from some or that things are weaker, and maybe they're delaying pet purchases, or maybe they're backing off of discretionary. I'm just curious if you look at the mix of your revenue, if it tells you anything about where the consumer is. Yeah, I mean, look, services, you know, has continued to lead our business. And I and I think it's leading for a couple reasons.
Speaker Change: Okay.
Speaker Change: Everyone can we maybe just talk a little bit about sort of.
Speaker Change: Services versus supplies different sort of divisions.
Speaker Change: Seeing anything in today's consumer environment, that's maybe.
Speaker Change: Suggesting that maybe they are fine, which is what we hear from some or that.
Speaker Change: Things are weaker and maybe they're delaying pet purchases or maybe theyre backing off with discretionary I'm. Just curious just as you look at the mix of your revenue.
Speaker Change: As you know anything about where the consumers.
Speaker Change: Yes, let me look.
Speaker Change: Services.
Speaker Change: Continue to to.
Speaker Change: To lead our business and I think it's leading for a couple of reasons.
Joel Anderson: But most importantly, it's leading because, you know, as I said, this is self help store year, and we saw significant opportunities for us to increase productivity. I gave you a couple examples on on my prepared remarks. And, you know, I'll reiterate the grooming one. We've made several upgrades to the software so that our pet parents We're always seeing openings in our grooming calendar. Almost 50% of our customers schedule a grooming appointment online. And if they don't see openings or they have to wait a week or two, they're going to consider somebody else besides Petco. So that change has been very, very positive for us.
Speaker Change: But most importantly is leading because as I said this is self help story here and we saw significant opportunities for us to increase productivity I gave you a couple of examples.
Speaker Change: <unk>.
Speaker Change: My prepared remarks, and I'll reiterate the grooming one we.
Speaker Change: We've made several upgrades to the software so that our pet parents.
Speaker Change: We're always seeing openings in our grooming calendar almost 50% of our customers schedule of grooming appointment online and if they don't see openings or they have to wait a week or two they're going to consider somebody else. Besides petco. So that change has been very very positive for us.
Joel Anderson: You know, grooming is something that probably is more needs-based than, say, supplies. And so we continue to see our more needs-based categories driving our business. And I think that's a testament to how resilient the overall pet category is. And two out of the three of our pet categories are consumable in nature or needs-based in nature. So that'll continue to drive the business. Got it, thank you. You bet.
Speaker Change: Grooming is something that probably has more needs base, then say supplies and so we continue to see our more needs based categories driving our business and I think.
Speaker Change: That's a testament to how resilient the overall pet category is in two out of the three of our categories are consumable in nature needs based in nature. So that will continue to drive the business for us.
Speaker Change: Got it thank you.
Speaker Change: You bet.
Kendall Toscano: And your next question today will come from Kendall Toscano with Bank of America. Please go ahead. Hi, thanks for taking my question. I was curious, another kind of follow up on the category growth. Just given that services, it looks like the growth slowed a little bit, just plus 1% year over year. Now I'm curious within services, if there's any call outs in terms of businesses that are still seeing stronger growth versus maybe any that were a little bit softer in the quarter? Thanks.
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 was curious is another kind of follow up on the category growth.
Kendall Toscano: Just given that services it looks like that growth slowed a little bit just plus 1% year over year and I was curious within services. If there's any callouts in terms of businesses that are still seeing stronger growth versus maybe any of that were a little bit softer in the quarter. Thanks.
Sabrina Simmons: And you want me to start on that, Joel? Yeah, I would say, within services, we have our vital care membership business. And as Joel talked about, we're super excited about relaunching that. We're doing a lot of work in the back half, and we'll have the bigger relaunch in 26. We might have some soft relaunch in the back half. But because we have been de-emphasizing that while we work to relaunch it, that is within services and others. And that's actually been a bit of a drag. Our core service business without that is actually quite healthy. and continues to get stronger as we make the changes that I just gave an example from the previous question.
Kendall Toscano: Yes, you want me to start on that so yeah, I would say.
Speaker Change: Within services, we have are vital care membership business and as Joel talked about we're super excited about re launching that we're doing a lot of work in the back half and we'll have that the bigger relaunch in 2006, we might have some soft relaunch in the back half, but because we have been deemphasizing that.
Speaker Change: While we work to relaunch it that is within services and others and Thats actually been a bit of a drag our core service business without that is actually quite healthy.
Speaker Change: And continues to get stronger as we make the changes that I. Just gave an example from the previous question.
Sabrina Simmons: Got it. Okay, that's helpful.
Speaker Change: Got it okay. That's helpful.
Sabrina Simmons: And then another question on category sales was just for consumables with that inflecting negatively during the quarter. I'm curious if that was in line with expectations and what kind of contributed to the softness there. Yeah, no, that that was certainly in line with expectations. And, you know, part of the reason we pull forward the reset is we can see the advantages that will have for us on having a bigger impact on later in the year. But as we continue to, you know, clean up promotions that I like to call empty calorie, that that is kind of self induced.
Speaker Change: Then another question on category sales was just.
Speaker Change: For consumables without inflicting negatively during the quarter I'm curious if that was in line with expectations and what kind of contributed to the softness there.
Speaker Change: Yes.
Speaker Change: Certainly in line with expectations.
Speaker Change: And.
Speaker Change: Part of the reason we pulled forward. The reset is we can see the advantages that will have for us on having a bigger impact on later in the year, but as we continue to clean up promotions that.
Speaker Change: I'd like to call empty calorie that that is kind of self induced but we're really pleased with the margin profile and how we're continuing to get that business back on track.
Sabrina Simmons: But we're really pleased with the margin profile and how we're continuing to get that business back on track. Thank you. You're welcome.
Speaker Change: Thank you.
Speaker Change: Youre welcome.
Steve Forbes: And your next question today will come from Steve Forbes with Guggenheim. Please go ahead.
Speaker Change: And your next question today will come from Steve Forbes with Guggenheim. Please go ahead.
Jake Nivas: Hey, guys, this is Jake Nivas on for Steve. Yeah, quick question on, you know, I guess thinking through your wallet share opportunities here. So, you know, help us frame maybe help us frame up, you know, I guess, what are your most loyal customer cohorts looking for here? You know, it sounds like you guys have a lot of, you know, done a lot of work on and some exciting opportunities up ahead here, but maybe, you know, help us frame, you know, why, you know, maybe in order of magnitude, you know, what the you know, what your loyal cohorts are looking for here.
Speaker Change: Hey, guys. This is Jake knee Bhatia on for Steve a quick question on I guess thinking through your wallet share opportunities here. So it.
Speaker Change: Help us frame, maybe help us frame up I guess, what are your most loyal customer cohorts looking for here. It sounds like you guys have a lot of <unk>.
Speaker Change: <unk> done a lot of work on some exciting opportunities up ahead here, but maybe help us frame.
Speaker Change: Maybe in order of magnitude.
Speaker Change: What what Youre loyal cohorts are looking for here. Thank you very much.
Jake Nivas: Thank you very much.
Joel Anderson: Yeah, look, I think you'll hear more about that from us as we complete our North Star work. We're right in the middle right now of really understanding the customer segments that we believe we can not only win, but grow. And so the stage we're in with our North Star work is really doing some qualitative and quantitative analysis of that. And, you know, with that, that'll really inform everything we do as we focus on growth, in the back half of the year, but it's, it's too early yet here to, you know, give you some specifics on the segmentation.
Speaker Change: Yes.
Speaker Change: I think you'll hear more about that from us as we complete our Northstar work, we're right in the middle right now of really understanding.
Speaker Change: The customer segments that we.
Speaker Change: We believe we can not only win but grow and so the stage. We're in with our Northstar work is really doing some qualitative and quantitative analysis of that and with that that will really inform everything. We do is we focus on growth in the back half of the year, but it's it's too early yet to give you.
Speaker Change: Some specifics on.
Speaker Change: The segmentation piece of it.
Joel Anderson: Thank you. You're welcome.
Speaker Change: Got it thank you.
Speaker Change: Youre welcome.
Oliver Wintermantel: And your next question today will come from Oliver Wintermantel with Evercore. Please go ahead. Yeah, thanks very much. I had a question on your leverage ratio in your deck. You said that you want to achieve below two times.
Speaker Change: And your next question today will come from Oliver Winter mental with Evercore. Please go ahead.
Oliver Winter: Yes, thanks very much.
Oliver Winter: Had a question on your leverage ratio in the deck, you said that you wanted to achieve below two times.
Sabrina Simmons: Can you give us a little bit more details on the timing and what you expect the free cash flow to look like this year? Yes, so that is a very important goal that will take some time. And the first step forward is the focus on profitability that we've articulated. So as we increase profit, that will clearly bring the ratio back into a better position where we want it. The advantage of driving to this profitability goal is also that it improves free cash flow, obviously. So we're very focused on both. But the profitability is the most important piece of achieving our goals, both on bringing down the leverage ratio and expanding our cash flow over time.
Oliver Winter: Can you give us a little bit more details on the timing and what do you expect the free cash flow to look like this year.
Oliver Winter: Yes, so that is a very important goal that will take some time and the first step forward is to focus on profitability that we've articulated so as we increased profit that will clearly bring the ratio back into a better position, where we want it.
Oliver Winter: The advantage of driving profitability goal is also that it improved free cash flow. Obviously, so we're very focused on both but the profitability is the most important piece of achieving our goal both on bringing down the leverage ratio and expanding.
Oliver Winter: Our cash flow over time.
Sabrina Simmons: Got it.
Oliver Winter: Got it.
Sabrina Simmons: And then on the comp, can you maybe talk a little bit about what the drivers were? Was it mostly transactions or was there some AUR offsets just to level set us there? Thank you. Yes, the strongest driver in the comp this quarter was UPP. and the drag the offset was mostly in transactions. So that's where we'll be really focused as we evolve the marketing message that Joel was talking about in driving traffic back into the store once we have this new setup, add new assortment, then roll out more exciting marketing. That's the big lever that we want to see improve is transactions.
Speaker Change: And then on the comp can you can you maybe talk a little button, but whats the driver school or was it mostly transactions or was it or was there some AUR offsets.
Oliver Winter: Just to level set us too thank you.
Oliver Winter: Yes, the strongest driver in the comp this quarter with <unk>.
Oliver Winter: The drag the offset with mostly in transaction. So that's where we'll be really focused as we evolve the marketing message that Joe was talking about in driving traffic back into the store. Once we have this new setup add new assortment.
Oliver Winter: Then rollout more exciting marketing.
Oliver Winter: That's the big lever that we want to see improve its transactions.
Sabrina Simmons: Thanks very much and good luck.
Speaker Change: Got it thanks, very much and good luck.
Speaker Change: Okay.
Sabrina Simmons: And your final question today will come from Peter Benedict with Barrett. Please go ahead. Hey guys, thanks for taking the question. I'm curious just your view on inflation and pricing, what the view is over the balance of this year, what's kind of baked in, whether it be on the karate front, the food front, or I know you have a ton of tariff exposure, but just on those items, what's the outlook in terms of pricing? Thank you. Look, you heard our forecast, and that forecast includes us embedding the tariff impact, and I think the tariff aside, it's been relatively stable, and it's something we're watching consistently, but we haven't seen any strong spikes in inflation year to date, but we're certainly watching that piece and seeing where tariffs play out.
Speaker Change: And your final question today will come from Peter Benedict with Baird. Please go ahead.
Peter Benedict: Oh, Hey, guys. Thanks for taking my question I'm curious just your view on inflation and pricing.
Speaker Change: What's the deal with over the balance of this year, what's kind of baked in whether it be on the commodity front.
Speaker Change: In front.
Speaker Change: Sure.
Speaker Change: Tariff exposure, but just on those items.
Speaker Change: What's the outlook in terms of in terms of pricing. Thank you.
Speaker Change: Look.
Speaker Change: You heard our forecast.
Speaker Change: That forecast includes.
Speaker Change: US embedding the tariff impact.
Speaker Change: I think the tariff aside it's been relatively stable and it's something we're watching.
Speaker Change: Consistently but we haven't seen any.
Speaker Change: Strong spikes in inflation.
Speaker Change: Year to date.
Speaker Change: We're certainly watching that piece and seen where tariffs play out yeah, and just to reiterate a little bit what I said.
Sabrina Simmons: Yeah, and just to reiterate a little bit what I said, Our approach and strategy around pricing started long before any of the choppiness and the noise and the macro. So we are always going to balance what is best for our customer with what is best for our business. And any action we take in pricing, whether up or at times down, is going to be surgical and focused on hitting that balance for both our customers and our business. Okay, that's helpful.
Speaker Change: Our approach and strategy around pricing started long before any of the choppiness and the noise in the macro so.
Speaker Change: We are always going to balance what is best for our customer with what is best for our business and any action, we take pricing by their app or at times down is going to be surgical and focused on getting that balance for both our customers and our business.
Speaker Change: Okay. That's helpful. And then maybe just a follow up on I think <unk>.
Joel Anderson: Then maybe just a follow-up on, I think Simeon may have asked about price gaps, you mentioned that earlier, I was a little unclear. Have you identified price gaps, places where maybe you were off sides or have you addressed those? Just curious to maybe expand a little more on the price gap comment that you had earlier. Thanks so much. Yeah, no, look, we, I think Sabrina said in her comment, we're down looking at the skewed level and not just at the category level. And so we've identified opportunities where we took price down. We've identified opportunities where we think there was an opportunity to take some price up.
Speaker Change: Asked about pricing you mentioned that earlier I was little unclear have you already identified price gaps places, where maybe you were off sides were.
Speaker Change: Just curious to maybe expand a little more on the price gap comment that you had earlier thanks so much.
Speaker Change: Yeah, No look we.
Speaker Change: I think Sabrina said in her comments were down looking at the SKU level not just at the category level and so we've identified opportunities.
Speaker Change: Where we took price down we've identified opportunities.
Speaker Change: We think there was an opportunity to take some price up but.
Joel Anderson: But, you know, as Sabrina said, reiterate, you know, this has been part of our, you know, holistic look at improving the retail fundamentals of the business more than it just being a tariff exercise. But we feel really good about the progress we've made on price and making sure we're able to still deliver value for our customers. It was a really good quarter for us. We feel really good on the long-term strategy. The progress we've made with leadership team, with phased approach is really working and I think the Q1 results are a great example of that.
Speaker Change: Sabrina said reiterate.
Speaker Change: This has been part of our holistic look at improving the retail fundamentals of the business.
Speaker Change: More than it just being a tariff exercise, but we feel really good about the progress we've made on price and making sure we're able to still deliver value for our customers. It was a it was a.
Speaker Change: Really good quarter for us.
Speaker Change: We feel really good on the long term strategy.
Speaker Change: The progress we made with the leadership team.
Speaker Change: Phased approach is really working and I think the Q1 results are a great example of that.
Joel Anderson: Yep, understood. Thank you.
Speaker Change: Understood. Thank you and good luck.
Unknown Executive: Good luck. Thank you.
Speaker Change: Thank you.
Tina Romani: concludes our question and answer session.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Tina Romani for any closing remarks.
Tina Romani: I would like to turn the conference back over to Tina Romani for any closing remarks. Fantastic. Thank you, Joel and Sabrina. And thank you, everyone, for your time and your questions. As always, feel free to reach out to the IR team for any follow ups. And that concludes today's call. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Tina Romani: Fantastic. Thank you, Joe and Sabrina and thank you everyone for your time and your questions.
Tina Romani: As always feel free to reach out to the IR team for any follow ups and that concludes today's call.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Yeah.