Petco Health & Wellness Company, Inc. Q4 FY2024 earnings call

Phases of Strategy - Phase one: Improving operating model, giving stores a voice, restoring retail fundamentals. Progress made on all fronts. - Phase two: Implementing and executing to strengthen retail fundamentals, focusing on merchandising gross margin improvement, driving efficiencies in SG&A, optimizing customer support infrastructure, and e-commerce. - Phase three: To begin late 2025, focusing on revenue growth initiatives like customer and product work, North Star project, store fleet productivity, omnichannel capabilities, and services. ### Leadership Team - New leadership team with expertise in retail, including Sabrina Simmons as CFO, Michael Romancho as Chief Customer and Product Officer, Jack Stout as Chief Merchant, Joe Venezia as Chief Revenue Officer, Dan Calista as Chief Strategy and Transformation Officer, and Holly May as Chief Human Resources Officer. ### Financial Priorities - Focus on gross margin improvement, SG&A leverage, and return on invested capital to improve profitability and free cash flow.

In the fourth quarter, Petco delivered revenue of $1.55 billion, in line with prior outlook. Adjusted EBITDA was $96.1 million. Fourth quarter comparable sales were up 50 basis points year over year. Net sales for the quarter were $1.55 billion. Gross profit decreased about 3% to $589 million, with gross margin increasing 180 basis points to 38%. Total SG&A was $571.9 million or 36.8% of net sales, an increase of approximately 60 basis points versus last year.

• Full year 2025: Expect overall net sales to be down low single digits to last year. Expect adjusted EBITDA to be between $375 and $390 million. Expect to close between 20 to 30 net locations. - First quarter 2025: Expect net sales to be down low single digits versus prior year and adjusted EBITDA to be between $82 million and $83 million, up approximately 9% year over year at the midpoint. - Capex: Approximately $130 to $140 million with greater focus on ROIC.

• Economic and consumer environment risks. - Competition risks. - Potential impact of tariffs, with indirect exposure in national brands and direct exposure in own brands (about 5% of merchandise cost of goods sold).

Q: Steve Forbes asked about infrastructure and larger moves needed for phase three.

A: Joel Anderson said focus is on implementation and execution to get costs under control, not significant infrastructure investments. Sabrina Simmons added about 40% of CapEx is expansion capital, including IT infrastructure and testing.

Q: Steven Zaccone asked about low-hanging fruit and margin opportunity.

A: Sabrina Simmons said it's fundamental retail back, focusing on gross margin expansion, SG&A leverage. Joel Anderson talked about merchandise improvement, working on in-stock and discretionary items.

Q: Michael Lasser asked about sacrificing sales and market share for profitability.

A: Joel Anderson said it's a disciplined approach, with phase three focusing on growth levers. Sabrina Simmons said SG&A is about leverage not touching customer-facing activities.

Q: Oliver Wintermantel asked about EBITDA to free cash flow conversion and mix shift.

A: Sabrina Simmons said improved profitability is a big lever, working on working capital levers. Stated not relying on mix shift into supplies out of consumables for guidance.

Q: Simeon Gutman asked about price in Vital Care.

A: Joel Anderson said price is in a good spot, with ongoing membership program enhancements.

Q: David Lantz asked about Q2 to Q4 shape and store closures.

A: Sabrina Simmons said goal is to expand gross margin every quarter year over year. Joel Anderson said store closures timing is rough estimate.

Q: Peter Benedict asked about store fleet and merchandise differentiation.

A: Sabrina Simmons said net closures are part of optimizing assets. Joel Anderson talked about fresh frozen and broader merchandise efforts.

Q: Kendall Toscano asked about assortment differentiation.

A: Joel Anderson said focus is on phase two implementation, not open discussion yet.

Q: Seth Basham asked about EBITDA guidance building blocks.

A: Sabrina Simmons said gross margin expansion and SG&A leverage are big levers. Mentioned store closures impact.

Q: Chris Bottiglieri asked about inflation and promo.

A: Joel Anderson said promotional environment is steady. Sabrina Simmons said managing promos to avoid stacking while offering value.