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Good afternoon, and welcome to the Petco Fourth Quarter 2025 Earnings Conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Roxanne Meyer, Investor Relations. Please go ahead.

Good afternoon, and welcome to Petco's fourth quarter and fiscal 2025 earnings conference call. Joining me on the call today are Joel Anderson, Petco's Chief Executive Officer, and Sabrina Simmons, Petco's Chief Financial Officer. In addition to the earnings release, we've posted a slide presentation on our website at ir.petco.com. 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 filings. In addition, on today's call, we will refer to certain non-GAAP financial measures. Reconciliations of these measures can be found in our earnings release, presentation, and SEC filings. With that, I'll turn the call over to Joel.

Thanks, Roxanne, and good afternoon, everyone. Thank you for joining us to discuss our fourth quarter and full year results, where I'm pleased to share that Q4 sales were in line with our outlook and we performed better than our Adjusted EBITDA quarterly goal. Looking back on 2025, we successfully delivered on our robust agenda to strengthen our economic model and improve retail fundamentals, which resulted in significantly higher cash flow and profitability year-over-year. Specifically, for the year, we achieved a 21% increase in Adjusted EBITDA and a 77% increase in operating cash flow. Our healthier EBITDA and opportunistic debt paydown drove a meaningful reduction in our leverage ratio at year-end, allowing us to start the year with greater financial flexibility. This was no small feat, and I'm exceptionally proud of our team.

We collaborated across the organization, we strengthened our culture, we communicated expectations, and we acted with urgency and decisiveness. It's important to note that the majority of our senior leadership team, which is exceptionally well tenured and talented, has only been together for about one year. We enter 2026 with a running start, something we didn't have in 2025. Some of the most recent additions to the team include Sabrina Simmons, CFO, who many of you already know, Michael Romanko, Chief Customer and Product Officer, and Joe Venezia, Chief Revenue Officer. The entire team's work has been transformative, and yet we are just getting started. In addition to strengthening our financial foundation in 2025 and rebuilding the leadership team, we completed our Petco North Star strategy, including a comprehensive customer segmentation and needs analysis.

This work is already shaping how we prioritize assortment, services, and experiences, and it also informed our updated brand positioning, Where the Pets Go to Live their Best Lives. One key takeaway from the segmentation work is the identification of who our most important engaged customers are. That segment we call Passionate Explorers. These are pet parents who are highly invested in their pets and seek innovation, expert support, and a welcoming shopping experience across the full pet journey. In 2026, we are informed by this strategy work and execution will center on four growth pillars, which I will review in detail later on this call. They are, number one, compelling product driven by increased newness, brand launches, and own brand expansion. Number two, services at scale, leveraging our wholly owned vet, grooming, and training ecosystem. Number three, trusted store experience focused on driving traffic, engagement, and basket.

Finally, number four, an integrated omni-channel model, improving convenience, loyalty, and repeat behavior. With that, I'll now turn it over to Sabrina to provide details on our fourth quarter financial performance and our 2026 outlook. Following her remarks, I will discuss the specifics of our growth strategy for 2026, and we'll then open it up to your questions.

Thank you, Joel. Good afternoon, everyone. As we've discussed, our primary goal all year was improving profitability and cash generation through our economic model, namely expanding gross margin rate, leveraging expense, and expanding operating margin. We're glad to report that we achieved this goal each and every quarter. For the full year 2025, we expanded our gross margin rate 66 basis points to 38.7%, leveraged SG&A 124 basis points to 36.6%, improved our operating profit by $113 million, and expanded our operating margin by 190 basis points.

Increased Adjusted EBITDA 21.3% to $408 million with a margin of 6.8%, and we delivered positive GAAP net income for the year. Additionally, free cash flow improved 276% versus the prior year to $187 million. These results enabled significant progress in achieving our goal of lowering our leverage ratio. Our net debt to EBITDA improved from 4.2x when we entered the year to 3x at the end of 2025. Now turning to the fourth quarter results, which reflect another quarter in which we delivered on our commitments while building a stronger foundation. In line with our outlook, net sales were down 2.4% to $1.52 billion, with comp sales down 1.6%.

As expected, the decline reflects our decision to move away from unprofitable sales, which was our strategy throughout 2025. As a reminder, the difference between total sales and comp is driven by the 25 net store closures in 2024 and the additional net 16 closures in 2025. The number of 2025 closures came in a bit favorable to our expectations, driven by a combination of improved store performance and favorable rent negotiations that supported improved unit economics for those locations. We ended the quarter with 1,382 stores in the U.S. Fourth quarter gross profit dollars were $581 million, while our gross margin rate expanded 37 basis points to 38.3%, including the sequential increase in tariff impact, which we anticipated. Moving to SG&A.

For the quarter, SG&A was $549 million or 36.2% of net sales, leveraging 62 basis points. The $23 million decline in year-over-year expenses was partially driven by lapping last year's consulting costs. Marketing expenses increased $7 million in the quarter. For Q4, our expanded gross margin and expense leverage resulted in operating margin expansion of 98 basis points, and our operating profit increased $14 million or 83% in the quarter. Adjusted EBITDA increased 10.6% or $10 million to $106 million, and our adjusted EBITDA margin expanded 82 basis points to 7% of sales. Moving to the balance sheet and cash flow. Q4 ending inventory was down 9.7% versus our 2.4% decline in Q4 sales.

We continue to manage inventory with discipline, which is one of the drivers of our improved cash flow profile. For the year, free cash flow was $187 million, an increase of $137 million or 276% versus last year. Our ending cash balance was $257 million, an increase of $91 million versus last year, including having voluntarily paid down $95 million of debt. As many of you have heard me state, our approach to our debt refinancing was opportunistic, and we're pleased to have executed the refinancing with favorable terms. We replaced a fully variable debt structure with a more optimal mix of fixed and floating, and extended our maturities to 2031, providing us ample flexibility.

On our first call together last March, we stated our goal of reducing our leverage ratio to 2x or less. We are thrilled with the progress we've made in just one year. As we said, we started fiscal 2025 at over 4x, and in just a single year, we have reduced that to 3x, enabled by our focus on driving improved profitability and cash flow. With our retail and financial fundamentals strengthened, we are well-positioned to turn more of our focus to regrowing top line and driving sustainable, profitable growth over the long term. Now turning to our outlook. We are starting the year from a position of strength while continuing to navigate a bumpy macro backdrop. Of note, our guidance assumes that fuel prices normalize by the end of the quarter.

For the first quarter, we expect net sales to be down 1% to flat versus the prior year, with comp sales roughly flat at the midpoint of the range as we begin to build into the growth initiatives Joel will outline in a minute. We expect Adjusted EBITDA to be between $92 million and $94 million. Now, turning to the full year, we expect net sales to be flat to up 1.5% growth versus last year as our growth initiatives take hold and build over the course of the year. Of note, similar to 2025, we expect net store closures between 15 and 20 in 2026. As is typical, store closures are weighted toward the back half of the year. We estimate the full year spread between total sales and comp sales to be about 50 basis points, though it will vary somewhat by quarter.

This expectation implies positive comp sales for the year. We expect Adjusted EBITDA to be between $415 million and $430 million, with an overall goal of delivering on our economic model for the full year. To provide additional color on other line items, for the full year, we expect net interest expense to be about $125 million. Capital expenditures of about $140 million, with an ongoing focus on ROIC, which we improved in 2025 by 3 percentage points. Depreciation and amortization to be about $200 million, similar to last year. Finally, to be helpful with your models, we expect stock comp to increase by a low double-digit % versus last year. As a reminder, stock comp will remain well below years prior to 2025.

In closing, I wanna thank our teams for executing on our transformation with great discipline, resulting in our significant growth in profitability and cash flow. Now I'll turn the call back over to Joel.

Thank you, Sabrina. With our foundation firmly in place, I'm energized to walk you through the specifics of our 2026 strategy that will drive our expected growth. As you know, we outlined a three-phased approach to our turnaround. We laid the foundation in phase one and phase two, and we are now entering phase three, which is about driving sustainable top-line growth. Internally, this phase three strategy is called Reach for the Sky, which is all about looking up and driving forward, leveraging our competitive advantages and capitalizing on the growth opportunities we see across our business. It is also about the opportunity I see for Petco to be reimagined and broadened beyond primarily being a commodity-driven business. It is about the blue sky opportunities Petco has to engage with pet families through the ups and downs and the real-life experiences of raising a pet.

Our team has tenaciously driven cost savings, and now we'll continue with that same rigor while driving sales and reaching for the sky. Petco is the only national, fully integrated and comprehensive pet care ecosystem. Our vision for the Reach for the Sky strategy is centered around leveraging our differentiated store-based model to bolster our competitive positioning, increase relevance, and improve store productivity. We plan to fuel our growth by offering product newness and differentiation, as well as further strengthening our community of pets and their humans through our unique store experiences, integrated omni-channel model, and wholly owned services. We are in the early innings of capitalizing on the significant opportunities that we see to gain share of wallet across all our businesses. The groundwork in 2025 has served us well. We expect these initiatives to grow sales and become more impactful as they materialize throughout 2026 and beyond.

Now, I'll outline the detailed framework of our Reach for the Sky plan to drive sales within each of our four pillars. I'll begin with our compelling product offering, specifically within consumables. This is roughly half of our business today, and in the U.S. alone, it's a $54 billion market. I'll talk about four key catalysts within consumables to jumpstart growth beginning this year. First, fresh food is one of our biggest opportunities. We've been a primary destination for fresh food for a long time and are continuing to build on that foundation by expanding the assortment. This category at Petco experienced healthy growth in 2025, and we expect the momentum to continue in 2026. This is an example of a category that exemplifies the significant advantage our store ecosystem brings.

Beginning in Q1, we're adding additional freezers, amounting to over 1,000 incrementally over the course of the year, which will enable us to expand our range of offers meaningfully. Our focus on driving share of wallet in the fresh food category is intentional. Of note, those that buy fresh food from us make over four more trips per year and spend over 50% more annually than dry food-only dog customers. Secondly, we will launch new national brands. This area starts with communication. I have personally met with the leaders of several of our key consumables partners. They are aligned with our goals and objectives and excited about the renewed energy and focus of growth at Petco. At the center of our strategy, we'll be infusing a high degree of newness, including a significant number of new brands and flavors being added this year.

The majority of these are launching in the first half. We expect these to generate excitement and customer interest, and we look forward to discussing these with you in future quarters. Third, we are increasing the frequency of product drops. Historically, we set consumables merchandise annually with one big cat and dog food reset. As you can imagine, this didn't provide our customers with multiple reasons to see what's new at Petco, and often we were the last to roll out a new innovation or flavor. We are changing this approach meaningfully by continuously layering in product newness throughout the year, both in consumables and supplies. This is designed to create excitement and freshness of product and will entice our customers to walk our aisles more frequently. Fourth, we are ramping our own brands business. This is within consumables and supplies.

Own brands account for about 20% of our sales today and have the potential to become more meaningful over time. As part of our own brand strategy, we will anchor our focus on our strongest seven private labels, which already account for a significant percentage of our own brand sales. Therefore, leveraging the strength of these brands and increasing their presence and relevance. This focus on own brands is intended to allow us to go faster and fill in voids our national partners don't have visibility to. In terms of key initiatives, in consumables, we plan to offer new formulas and packaging in dog food. In supplies, we'll expand our own brands business across categories and offer newness and innovation more broadly, such as in beds, bowls, collars, leads and toys. As we've mentioned prior, the margins of own brands are significantly above that of national brands.

In the supplies and the companion animal category specifically, we are introducing new assortments that we believe will further differentiate us from competitors. An example is newness in insects, such as jumping spiders and tarantulas, which we see as a newer pet trend in the United States. This customer basket is also likely to include ancillary supplies and consumables. Additionally, we launched Gardening with Your Pet this month, a new category for us in nearly all of our stores. It includes gardening products and plants that provide customers with pet-friendly options. Moving on to our services pillar. We also see abundant opportunities to continue growing our wholly owned services business, which is a key aspect of our differentiated model. Services include vet hospitals, vaccination clinics, grooming and dog training. This business was a strong performer in 2025, and we are expecting continued growth in 2026.

While we took a purposeful pause in constructing new vet hospitals last year, we've been laser-focused on improving productivity of our existing locations. In 2025, we optimized a significant number of our approximately 300 hospitals, and we'll work on increasing the productivity of the still roughly 25 underutilized locations this year. Know that even after we complete these, there is still a sizable runway for driving higher sales and productivity improvements from these 300, and we will be focused on maximizing their potential. Bottom line here is that we are committed to the vet business as a key growth engine and are in the early innings of assessing the longer-term opening cadence and growth opportunity. That said, you should expect us to start growing our hospitals in 2027. We will keep you updated on plans as they come together.

I'd like to emphasize that our key competitive advantage in this space is that our vet hospitals are wholly owned and are part of the store. We uniquely have the opportunity to capitalize on retail traffic and to share customer information. As we've discussed prior, the opportunity is twofold. Grow the vet business as well as become a full-service pet needs provider by cross-selling food, prescriptions, and supplies. I'm pleased to announce that we are adding technology and functionality beginning later this year and into 2027 to better enable this. The goal is to drive incremental trips and increase sales per customer. We are now operating on a scale that gives us the depth of expertise, breadth of coverage, and overall respect of the industry to be a desired employer of choice for veterinarians and vet techs to grow their careers at Petco.

The third pillar of growth opportunity I want to discuss is our key competitive moat, our differentiated high-touch store ecosystem. Our stores represent a significant portion of our total sales, and so they remain a key focus for us. We have changed leadership, reorganized how we operate, and unified our center-of-store operations with our services. We have also physically brought our stores and services leadership together three times in less than 12 months so that communication can be cascaded with one voice and expectations are clearly aligned. Our goal is to leverage stores to build community, excitement, and customer loyalty through frequent newness, higher levels of customer engagement, such as holding fun events for families and pets, and through wholly owned services that promote repeat visits. The end goal is to drive both traffic and basket.

Our marketing efforts will be centered around driving traffic to our stores by building awareness for our product newness and in-store experiences. We will also capitalize on a more engaged customer in stores by focusing on increasing basket size. Specifically, we launched a major training initiative in February for all district and regional managers to promote cross-selling opportunities. This initiative is being cascaded to all stores this quarter. We estimate that successful cross-selling can drive one to two additional trips, as well as a higher sales per customer over a six-month period. An example of this is a focus on converting grooming customers to purchase merchandise by giving groomers access to a customer's purchase history across the store. To give a sense as to how impactful this initiative could be, about half our dog customers currently don't buy dog food from us.

You can imagine the opportunity to capture a much greater share of their wallet. What backs our confidence in the long-term viability of the store model is that shopper demographics are also on our side. Industry data tells us that 34% of Gen Z customers shop exclusively in stores. Interestingly, this group's preference for an in-store experience is much higher than Gen X or Millennials and is virtually in line with Boomer preferences. We see this as a huge long-term opportunity, with the Petco model well-positioned to capture Gen Z's desire for experiences and connections. Our field leaders are excited about these opportunities, and we will have more to share with you as the year progresses. The final pillar of our Reach for the Sky's initiative is centered around integrated omni-channel.

We call it integrated omni-channel because a significant portion of customer transactions leverage a combination of our digital capabilities and our stores. We made great progress in 2025, fixing our foundation, including minimizing unprofitable sales, improving e-commerce fill rates, fixing page load time, and adding new capabilities. While we will keep making improvements, it is time we start to grow our digital capabilities in 2026. One of the biggest opportunities we have is to turn up the dial in marketing. We have overhauled our media buying mix, which is taking hold in Q1. Our new branding, Where the Pets Go, will become more pronounced as our creative is reimagined to better support this fun, loving energy our physical stores bring to life. Additionally, we will relaunch the loyalty program later this year.

Our goal is to offer a more personalized and relevant loyalty experience that is seamlessly integrated within our app. Our results from this initial pilot, which concluded in December, were encouraging. The next wave of our pilot began last week and will run through the spring season. We look forward to sharing an update on our Q1 call. A second key omni-sales growth initiative we're excited about is the ability for our repeat delivery customers to now pick up their orders in-store, which encourages our fresh food customer to visit our stores more often. This is an example of us leveraging omni-channel model to maximize our growth opportunity. We believe this will aid in growing traffic, conversion, as well as basket size.

In conclusion, I'm proud of the long-term strategy we implemented last year to rebuild the foundation of our economic model, recruit an amazing team, and complete a comprehensive customer strategy to fully understand how we can win at Petco. We delivered significant financial improvements, and it is with this backdrop that I'm confident in the actions we are taking to drive sustainable sales growth and profitability. We expect to start to see benefits beginning in Q1 and growing throughout the year. Specifically, the outlook that Sabrina provided implies a flat comp in Q1 at the midpoint. This would mark an inflection from the negative comp in Q4. For the full year, our outlook assumes our comps will be positive, with increases modestly above our total sales growth. Importantly, we believe our ability to gain market share is not entirely reliant on a cooperative macro environment or pet industry sales growth.

Our Reach for the Sky initiatives are in many ways self-help in nature and designed to further differentiate Petco's merchandise and services versus our peers. We are approaching 2026 the same way we did in 2025. We develop a strategy, we assign leaders, we track milestones, and we execute. As the months go by, I'm confident you will continue to appreciate how driven we are to deliver on our commitments, and I trust that 2025 is a great proof point for what's to come in 2026. I want to thank our teams for their dedication and hard work. While it's hard to single out any one team, the milestones our field teams achieved were truly incredible. We asked a lot of them, and they responded positively to every challenge. Our stores are the heart and soul of Petco, and it's great to see them playing offense.

Collectively, we are well positioned for our Reach for the Sky's plan, and I'm excited about its potential. Petco truly is where the pets go to live their best lives. I'd now like to open it up for your questions. Operator?

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. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Michael Lasser with UBS. Please go ahead.

Good evening. Thank you so much for taking my question. Joel, you provided a lot of great information on the strategy, focus. How are you thinking about what is going to lead Petco's growth from here? Is it gonna be consumables first, which will then translate to the other parts of the business? Is it gonna be services led, which will then translate to other parts of the business? And how have you thought about the need to make further price investments, promotional investments, and other discounts in order to generate the in-store sales growth over time? Thank you very much.

Yeah, thanks Michael, and really great question. A lot to unpack there. I think it's less about which one is gonna lead. What I hope you took away from what I just took you all through is, whereas last year we were telling you what we were going to do to deliver growth, on this call, I showed you how we're gonna do it. We gave, as you said, specific examples in all four pillars. We are working simultaneously, Michael, on all four of them. Having said that, product probably takes the longest because you have your existing product that you have to sell through, and then the new product will begin to come in. I can tell you we have about 25 new brands or flavors coming this year, as well as resets throughout all of supplies and many of the other areas like companion animals.

All of that'll take time throughout the year and it'll happen actually starting this quarter. I'm really pleased that in all four of those pillars, you're gonna begin to see change starting right now in Q1. As for your pricing comment, you know what? We started in on that back in 2024 and we really feel like we got our pricing right throughout 2025. It is something that's dynamic, and we are watching it closely, and we'll continue to adjust as necessary, but feel like we've got our pricing in good shape for now.

Yeah, I'd just add to that, Michael, that we're definitely focused on delivering healthy margins for the year. It's an important focus, and we will stay competitive, we will stay adaptable, but we have still, you know, nice levers at our disposal to deliver on the healthy margins. We'll continue to look, as Joel just said, at pricing where needed. We'll participate in promos for sure to help drive traffic where appropriate. Remember, we have this whole initiative of mix, where we're moving toward our own brands, and that should also support delivering on healthy margins.

Thanks, Michael.

Understood. Thank you so much.

The next question is from Oliver Wintermantel from Evercore ISI. Please go ahead.

Thanks very much. My first question is about the drivers of the increase of the gross margins. As a follow-up, maybe the first one is for Sabrina and Joel for you on the growth initiatives. Inventories were down this year, which obviously helped free cash flow. With all these, you know, four pillars of initiatives, do you expect inventories then to increase this year? And what's the impact of for that on your free cash flow outlook? Thank you.

Yeah. I'll just go through that gross margin levers one more time. We are very focused on delivering healthy margins, and we're gonna continue to use and review our pricing. We're gonna deliver on promos where appropriate and they make sense and they help us drive traffic in, et cetera, and we're focused on mix. Those are the big levers that will help us deliver on our goal of keeping those gross margins really healthy. With regard to inventory, yes, we did a lot of cleanup in 2025 on inventory. Some of the silver lining, if you will, of the tariff imposition in the spring last year was that it kind of forced us to get very disciplined about cutting off the unproductive tail of SKUs. We're past that now.

As we look forward to 2026 for growth, we definitely wanna invest inventory behind that. The important thing to us is that we remain disciplined in managing that inventory. Even as we invest in inventory, we will look to keep the growth in inventory at or below sales growth and keep that relationship very tight.

I think you captured it all.

Thank you very much. Good luck.

Yep. Thanks, Oliver.

Thank you.

The next, excuse me, the next question is from Kaumil Gajrawala with Jefferies. Please go ahead.

I thank you, first of all, for all the detail on, you know, the plans for 2026. I guess there's been some, you know, oscillation over the years between you being specialty and premium and being mainstream. You mentioned a lot of national brands, which sort of would make me imply perhaps more of a mainstream look. Curious, you know, when you think about the brand of Petco and what its assortment says about the retailer, how are you thinking about what that assortment is gonna say from a branding perspective?

Yeah, look, you're absolutely right. I think in prior years, we narrowed our aperture. I think as I look forward, we got to be there for all customers. As a new pet parent adopts a pet, they go through several stages of that life. You know, one of those stages might be, "I just need to get my dog fed." As that dog becomes part of the family, they might decide to, you know, upgrade what their dog's being fed for food, and they focus on health and nutrition. The focus we've done over the last couple of years is really to widen the aperture.

One of the unique advantages of being a specialty retailer is that we are able to carry that specialty premiumization unique product, but we are also there, you know, for the customer that, you know, affordability is their primary need. I think we really have widened, and I feel really good about where the assortment is today.

Okay, got it. You said something fascinating earlier on, you know, Gen Z's preference to, you know, shop in person, looking similar to baby boomers. Do you have a sense of why that is or what has changed, that generation versus the generations prior?

I mean, obviously, that is a bigger statement than just as it relates to pets. You know, like any good retailer, you have to understand your core customer, and we did the research. Part of that research, we studied you know, what the makeup was of the age of our customer, and then that, you know, coveted 18-34, that younger customer, we skew about five percentage points higher than some of the other pet retailers. That happens to work out nicely because what also is a characteristic of that demographic is they like shopping in stores. I think, there's been more of a return to stores. That serves us well with who our demographic is.

You know, as we did the customer segmentation work, we took advantage of that, and that's something we're really focused on going forwards. It worked out to be nice fit with who our customer is.

The next question is from Steven Forbes with Guggenheim Securities. Please go ahead.

Good afternoon, Joel and Sabrina.

Hi, Steve.

Given the goal of services at scale, I was curious, like you did with dog food, if you can frame, you know, what percentage of your customers today engage in services in some form or fashion. Given the customer segmentation work you did around the Passionate Explorers, curious if you can maybe expand on, you know, what you're sort of focused on in 2026 to make sure that specific cohort is engaging.

Yeah. Let me take that cohort first. What we really learned about the Passionate Explorer is that they value discovery, they look for expertise, which plays in nicely to our services side. They seek innovation. They're also somebody that shops more frequently and spends more with us. Our new merchandise strategy is certainly gonna resonate with them. Frequency and newness, innovation, the store events, and it also acts as a halo for all the other segments. Services are a really important part of the Passionate Explorer. Obviously, we still have a lot of room to grow in services. As an example, you know, the hospital side of it, the vet side of it's only in about, you know, 20% of our chain, you know, roughly 300 stores. Lots of room to grow there.

Grooming is in all our stores. You know, that's an area we've talked about on a couple three calls now that we've been improving the technology. We've been making it easier to make appointments, and so I see a lot of growth opportunities there as well. You know, one of the reasons I you know said it many times, services is our moat. It's a point of differentiation for us, and we're gonna keep leaning in on services.

What I'll add to that, Steve, is that what's really important to us is to leverage the whole ecosystem. Because what we know is, the NSPAC for a customer who engages in more than one channel or in services is five times higher than our other customers. It's really just expanding our relationship with our customer wherever they wanna shop and making sure we're getting that loyalty, retention, and higher spend.

The next question is from Simeon Gutman with Morgan Stanley. Please go ahead.

Hi, this is Lauren Ng for Simeon. Thanks for taking our questions. First, you mentioned 50% of dog customers don't buy dog food from Petco. Curious what parts of your strategy outlined today will capture these customers if they're already loyal to, you know, certain brands and platforms. Will you be able to leverage your private label for this?

Yeah. Great pickup from our prepared remarks. Probably the main reason I shared that with you is, you know, it's always easier to grow if you start with your current customers. As part of our, you know, deep dive into who our customer is, where they shop with us, how they buy from us, that was a real big aha for us. As an example, you know, prior to just recently, our groomers had no knowledge of whether a customer, a dog customer bought food from us. Now we've enabled our groomers with technology to see every customer that comes in, when's the last time they bought dog food from us? What type of dog food are they buying? Is it helping their sensitive skin or some sort of skin problem they have?

That's just one example of us being able to cross-sell. We believe, you know, the first place we're gonna see growth is, you know, as Sabrina just alluded to, you know, NSPAC, you know, really growing the net spend per average customer. I think we have a real opportunity with our dog customers that aren't buying food from us today.

Great. Thank you. Just quickly following up, you talked about entering phase three today. Can you share how much of phase three is currently implemented versus maybe how much room there is to grow?

Yeah. I would say from what the customer sees, very little has been implemented yet. From a strategy and teamwork internally, we have work streams on every one of those I outlined for you today, plus a few others. They're in various elements of being lit up for the customers. You know, product may be being shipped right now. Some may not come till second or third quarter, but very little of it. And you can see from our guide that, you know, we expect comp store growth to gain as the year goes by.

Again, if you have a question, please press star then one. The next question is from Peter Benedict with Baird. Please go ahead.

Hey, guys. Thanks for taking the question. So, two questions. One, I just didn't know, Sabrina, if you could expand on kind of the fuel cost comment you made. I think you said something about a fuel cost normalized. Just help us understand the variability with all the macro stuff going on with oil, etc. And then, my second question's on your expanded fresh effort. You mentioned more freezers. I'm just trying to understand, is it you're expanding the frozen fresh product? How about the refrigerated or chiller based fresh? And I'm curious, is it new brands? Are you expanding with existing brands? Maybe just expand on that effort around fresh a little more, if you would. Thank you so much.

Sure. I'll start with the fuel comment. It's been a bumpy ride the last week or so. We were just trying to be helpful with regard to, you know, our base assumptions in our forecast. Here's how fuel impacts us, and it's similar to every retailer out there. We have our inbound ocean, and that sort of lags. It comes in later into our P&L through cost of goods sold. Then we have our outbound from our DCs to our stores, a lot of it trucking, that can impact more rapidly. Then we have our parcel shipping. That can also be impacted. We've incorporated in our scenarios in the range we gave, absorbing some of the volatility we've seen in gas prices over the last week or so.

You know, the base assumption is that things start to normalize after Q1.

Good. You know, as it relates to fresh and frozen, you know, we look at that as one, and it ebbs and flows. Some of it's dependent on when our vendor partners are bringing out new product. I think the most important fact you should take away from that is I'm not just telling you we're gonna grow fresh. You're seeing that we are making capital investments. In this case, the example was the additional freezer coolers, but we also expect fresh to grow as well. There are several new lines coming out middle of this year. That's a category that grew significantly in 2025, and we see more growth coming in 2026. You know, some customers use it as a topper. Some customers use it as a full meal.

you know, sometimes you need fresh and sometimes you need frozen, depending on how you're using it with your respective pet. big growth area for us, we're really excited about it.

The next question is from Zachary Fadem with Wells Fargo. Please go ahead.

Hey, guys. This is David Lantz for Zach. Thanks for taking our questions. I guess first one for me, within the 2026 outlook for top line growth, what are you assuming for the broader category, and how did your, you know, performance stack up relative to peers in Q4 from a share perspective?

Well, look, we're not gonna break it down by, you know, specific areas. I think the focus on our end is to grow overall top line growth, and some of that'll come from consumables obviously, 'cause that's over 50% of our business. You know, we're really, as you can tell from my comments, we've got initiatives in all aspects of the business, services, consumables, companion animal supplies. You know, obviously with us intentionally reducing unprofitable sales last year, you know, we gave up some market share, and with our growth this year, we'll start to gain that back.

Yeah. I would just add to that. You know, this year is really more about another self-help year as we look to grow sales. We're not overly reliant. We're not counting on big tailwinds from the sector. I mean, we feel like we have all of these opportunities that Joel outlined, and these initiatives are gonna really support our outlook. You know, as for how we think about our share, even though, yeah, we gave up a little top line in 2025, we really grew a lot of bottom line. We've cleaned up the business. We're coming from a strong foundation. There's an opportunity, as Joel said, to first grow share of wallet with our current customers.

I think the next opportunity to pick off is sort of small independents and small chains who have about 4 percentage points of market share in the pet sector. There's lots of opportunities for us to go after without being overly reliant on any tailwind.

Got it. That's really helpful. One more. Within Q1 and the midpoint of the guide being flat comps, is there anything we should keep in mind that's embedded within that for stimulus and/or, you know, store closures from winter storms here quarter to date?

Yeah. You know what? We've taken into account. There's so many pluses and minuses in this kind of noisy macro we're living through. Sure. I mean, on the plus side, you've got, like the tax refunds coming in at all, you know, can only be a positive. On the minus side now, you know, as we just talked about, you have some fuel price pressure. We've kind of tried to bake those scenarios within our guidance, and we haven't been overly reliant on any of those levers because again, even with the taxes, one doesn't know how much will go to savings versus spending, et cetera. Now, what we like about this environment or what we like about our customers, I should say, is our customers skew to the higher end of the income spectrum.

That's good news for us because that end of the spectrum can obviously withstand macro changes without it being as large of a percentage to their overall well-being.

As far as weather goes, you know, first quarter is always volatile. It was volatile last year, volatility in it this year. The way I think about a big picture is by the time the quarter's done, the volatility kind of evens out with pluses and minuses, and that's kind of how we've thought about it in the guide for this year.

This concludes our question and answer session. I would like to turn the conference back over to Roxanne Meyer for any closing remarks.

Great. I wanna thank everyone for joining the call today, and we look forward to updating you on our progress.

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

Good afternoon, and welcome to the Petco Health and Wellness Company, Inc. Fourth Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Roxanne Meyer, Investor Relations. Please go ahead.

Good afternoon, and welcome to Petco Health and Wellness Company, Inc.'s Fourth Quarter Fiscal 2025 Earnings Conference Call. Joining me on the call today are Joel Anderson, Petco Health and Wellness Company, Inc.'s Chief Executive Officer, and Sabrina Simmons, Petco Health and Wellness Company, Inc.'s Chief Financial Officer. In addition to the earnings release, we have posted a slide presentation on our website at ir.petco.com. I would 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 filings. In addition, on today's call, we will refer to certain non-GAAP financial measures. Reconciliations of these measures can be found in our earnings release, presentation, and SEC filings. With that, I will turn the call over to Joel.

Thanks, Roxanne, and good afternoon, everyone. Thank you for joining us to discuss our fourth quarter and full year results. I am pleased to share that Q4 sales were in line with our outlook and we performed better than our adjusted EBITDA quarterly goal. Looking back on 2025, we successfully delivered on our robust agenda to strengthen our economic model and improve retail fundamentals, which resulted in significantly higher cash flow and profitability year over year. Specifically, the year, we achieved a 21% increase in adjusted EBITDA, a 77% increase in operating cash flow. Our healthier EBITDA and opportunistic debt paydown drove a meaningful reduction in our leverage ratio at year end, allowing us to start the year with greater financial flexibility. This was no small feat, and I am exceptionally proud of our team. We collaborated across the organization. We strengthened our culture. We communicated expectations, and we acted with urgency and decisiveness. It is important to note that the majority of our senior leadership team, which is exceptionally well tenured and talented, has only been together for about one year. We enter 2026 with a running start, something we did not have in 2025. Some of the most recent additions to the team include Sabrina Simmons, CFO, who many of you already know; Michael Romanco, Chief Customer and Product Officer; and Joe Venizia, Chief Revenue Officer. The entire team's work has been transformative, and yet we are just getting started. In addition to strengthening our financial foundation in 2025 and rebuilding the leadership team, we completed our Petco North Star strategy, including a comprehensive customer segmentation and needs analysis. This work is already shaping how we prioritize assortment, services, and experiences, and it also informed our updated brand positioning: where the pets go to live their real life. One key takeaway from the segmentation work is the identification of who our most important engaged customers are. That segment we call Passionate Explorers. These are pet parents who are highly invested in their pets and seek innovation, expert support, and a welcoming shopping experience across the full pet journey. 2026 will be informed by this strategy work, and execution will center on four growth pillars I will review in detail later on this call. They are, number one, compelling product driven by increased newness, brand launches, and own brand expansion; number two, services at scale, leveraging our wholly owned vet, grooming, and training ecosystem; number three, trusted store experience, focused on driving traffic, engagement, and basket; and finally, number four, an integrated omnichannel model improving convenience, loyalty, and repeat behavior. With that, I will now turn it over to Sabrina to provide details on our fourth quarter financial performance and our 2026 outlook. Following her remarks, I will discuss the specifics of our growth strategy for 2026, and we will then open it up to your questions.

Thank you, Joel. Good afternoon, everyone. As we have discussed, our primary goal all year was improving profit and cash generation through our economic model, namely expanding gross margin rate, leveraging expense, and expanding operating margin. We are glad to report that we achieved this goal each and every quarter. For the full year 2025, we expanded our gross margin rate 66 basis points to 38.7%, leveraged SG&A 124 basis points to 36.6%, improved our operating profit by $100,000,000 and expanded our operating margin by 190 basis points, increased adjusted EBITDA 21.3% to $408,000,000 with a margin of 6.8%, and we delivered positive GAAP net income for the year. Additionally, free cash flow improved 276% versus the prior year to $187,000,000. These results enabled significant progress in achieving our goal of lowering our leverage ratio. Our net debt to EBITDA improved from 4.2x when we entered the year to 3.0x at the end of 2025. Now turning to the fourth quarter results, which reflect another quarter in which we delivered on our commitments while building a stronger foundation. In line with our outlook, net sales were down 2.4% to $1,520,000,000 with comp sales down 1.6%. As expected, the decline reflects our decision to move away from unprofitable sales, which was our strategy throughout 2025. As a reminder, the difference between total sales and comp is driven by the 25 net store closures in 2024 and the additional net 16 closures in 2025. The number of 2025 closures came in a bit favorable to our expectations, driven by a combination of improved store performance and favorable rent negotiations that supported improved unit economics for those locations. We ended the quarter with 1,382 stores in the U.S. Fourth quarter gross profit dollars were $581,000,000 while our gross margin rate expanded 37 basis points to 38.3%, including the sequential increase in tariff impact, which we anticipated. Moving to SG&A, for the quarter, SG&A was $549,000,000 or 36.2% of net sales, leveraging 62 basis points. The $23,000,000 decline in year-over-year expenses was partially driven by lapping last year's consulting costs. Marketing expenses increased $7,000,000 in the quarter. For Q4, our expanded gross margin and expense leverage resulted in operating margin expansion of 98 basis points, and our operating profit increased $14,000,000 or 83% in the quarter. Adjusted EBITDA increased 10.6% or $10,000,000 to $106,000,000, and our adjusted EBITDA margin expanded 82 basis points to 7.0% of sales. Moving to the balance sheet and cash flow, Q4 ending inventory was down 9.7% versus our 2.4% decline in Q4 sales. We continue to manage inventory with discipline, which is one of the drivers of our improved cash flow profile. For the year, free cash flow was $187,000,000, an increase of $137,000,000 or 276% versus last year. Our ending cash balance was $257,000,000, an increase of $91,000,000 versus last year, including having voluntarily paid down $95,000,000 of debt. As many of you have heard me state, our approach to our debt refinancing was opportunistic, and we are pleased to have executed the refinancing with favorable terms. We replaced a fully variable debt structure with a more optimal mix of fixed and floating, and extended our maturities to 2031, providing us ample flexibility. On our first call together last March, we stated our goal of reducing our leverage ratio to 2.0x or less. We are thrilled with the progress we have made in just one year. As we said, we started fiscal 2025 at over 4.0x, and in just a single year, we have reduced that to 3.0x, enabled by our focus on driving improved profitability and cash flow. With our retail and financial fundamentals strengthened, we are well positioned to turn more of our focus to regrowing top line and driving sustainable profitable growth over the long term. Now turning to our outlook. We are starting the year from a position of strength while continuing to navigate a bumpy macro backdrop. Of note, our guidance assumes that fuel prices normalize by the end of the quarter. For the first quarter, we expect net sales to be down 1% to flat versus the prior year, with comp sales roughly flat at the midpoint of the range, as we begin to build into the growth initiatives Joel will outline in a minute. We expect adjusted EBITDA to be between $92,000,000 and $94,000,000. Now turning to the full year, we expect net sales to be flat to up 1.5% versus last year as our growth initiatives take hold and build over the course of the year. Of note, similar to 2025, we expect net store closures between 15 and 20 in 2026. As is typical, store closures are weighted toward the back half of the year. We estimate the full year spread between total sales and comp sales to be about 50 basis points, though it will vary somewhat by quarter. This expectation implies positive comp sales for the year. We expect adjusted EBITDA to be between $415,000,000 and $430,000,000, with an overall goal of delivering on the economic model for the full year. To provide additional color on other line items, for the full year, we expect net interest expense to be about $125,000,000, capital expenditures of about $140,000,000 with an ongoing focus on ROIC, which we improved in 2025 by three percentage points, depreciation and amortization to be about $200,000,000, similar to last year, and finally, to be helpful with your models, we expect stock comp to increase by a low double-digit percent versus last year. As a reminder, stock comp will remain well below years prior to 2025. In closing, I want to thank our teams for executing on our transformation with great discipline, resulting in our significant growth in profitability and cash flow. I will now turn the call back over to Joel.

Thank you, Sabrina. With our foundation firmly in place, I am energized to walk you through the specifics of our 2026 strategy that will drive our expected growth. As you know, we outlined a three-phased approach to our turnaround. We laid the foundation in phase one and phase two, and we are now entering phase three, which is about driving sustainable top-line growth. Internally, this phase three strategy is called “Reach for the Sky,” which is all about looking up and driving forward, leveraging our competitive advantages, and capitalizing on the growth opportunities we see across our business. It is also about the opportunity I see for Petco Health and Wellness Company, Inc. to be reimagined and broadened beyond primarily being a commodity-driven business. This is about the blue-sky opportunities Petco Health and Wellness Company, Inc. has to engage with pet families through the ups and downs and the real-life experiences of raising a pet. Our team has tenaciously driven cost savings and now will continue with that same rigor while driving sales and reaching forward. Petco Health and Wellness Company, Inc. is the only national fully integrated and comprehensive pet care ecosystem. Our vision for the Reach for the Sky strategy is centered around leveraging our differentiated store-based model to bolster our competitive positioning, increase relevance, and improve store productivity. We plan to fuel our growth by offering product newness and differentiation as well as further strengthening our community of pets and their humans through our unique store experiences, integrated omnichannel model, and wholly owned services. We are in the early innings of capitalizing on the significant opportunities that we see to gain share of wallet across all our businesses. The groundwork in 2025 has served us well. We expect these initiatives to grow sales and become more impactful as they materialize throughout 2026 and beyond. Now I will outline the detailed framework of our Reach for the Sky plan to drive sales within each of our four pillars. I will begin with our compelling product offering, specifically within consumables. This is roughly half of our business today, and in the U.S. alone, it is a $54,000,000,000 market. I will talk about four key catalysts within consumables to jump-start growth beginning this year. First, fresh food is one of our biggest opportunities. We have been a primary destination for fresh food for a long time and are continuing to build on that foundation by expanding the assortment. This category at Petco Health and Wellness Company, Inc. experienced healthy growth in 2025, and we expect the momentum to continue in 2026. This is an example of a category that exemplifies a significant advantage our store ecosystem brings. Beginning in Q1, we are adding additional freezers amounting to over 1,000 incrementally over the course of the year, which will enable us to expand our range of offers meaningfully. Our focus on driving share of wallet in the fresh food category is intentional. Of note, those that buy fresh food from us make over four more trips per year and spend over 50% more annually than dry-food-only dog customers. Secondly, we will launch new national brands. This area starts with communication. I have personally met with the leaders of several of our key consumables partners. They are aligned with our goals and objectives and excited about the renewed energy and focus of growth at Petco Health and Wellness Company, Inc. At the center of our strategy will be infusing a high degree of newness, including a significant number of new brands and flavors being added this year. The majority of these are launching in the first half. We expect these to generate excitement and customer interest. We look forward to discussing these with you in future quarters. Third, we are increasing the frequency of product drops. Historically, we set consumables merchandise annually with one big cat and dog food reset. As you can imagine, this did not provide our customers with multiple reasons to see what is new at Petco Health and Wellness Company, Inc., and often, we are the last to roll out a new innovation or flavor. We are changing this approach meaningfully by continuously layering in product newness throughout the year, both in consumables and supplies. This is designed to create excitement and freshness of product and will entice our customers to walk our aisles more frequently. And fourth, we are ramping our own brands business. This is within consumables and supplies. Own brands account for about 20% of our sales today and have the potential to become more meaningful over time. As part of our own brand strategy, we will anchor our focus on our strongest seven private labels, which already account for a significant percentage of our own brand sales, therefore leveraging the strength of these brands and increasing their presence and relevance. This focus on owned brands is intended to allow us to go faster and fill in voids our national partners do not have visibility to. In terms of key initiatives in consumables, we plan to offer new formulas and packaging in dog food. In supplies, we will expand our own brands business across categories and offer newness and innovation more broadly, such as in beds, bowls, collars, leads, and toys. And as we have mentioned prior, the margins of owned brands are significantly above that of national brands. In the supplies and the companion animal category specifically, we are introducing new assortments that we believe will further differentiate us from competitors. An example is newness in insects, such as jumping spiders and tarantulas, which we see as a newer pet trend in the United States. This customer basket is also likely to include ancillary supplies and consumables. Additionally, we launched “gardening with your pet” this month, a new category for us in nearly all of our stores. It includes gardening products and plants that provide customers with pet-friendly options. Moving on to our services pillar, we also see abundant opportunities to continue growing our wholly owned services business, which is a key aspect of our differentiated model. Services include vet hospitals, vaccination clinics, grooming, and dog training. This business was a strong performer in 2025, and we are expecting continued growth in 2026. While we took a purposeful pause in constructing new vet hospitals last year, we have been laser focused on improving productivity of our existing locations. In 2025, we optimized a significant number of our approximately 300 hospitals, and we will work on increasing the productivity of the still roughly 25 underutilized locations this year. Know that even after we complete these, there is still a sizable runway for driving higher sales and productivity improvements from these 300, and we will be focused on maximizing their potential. Bottom line here is that we are committed to the vet business as a key growth engine and are in the early innings of assessing the longer-term opening cadence and growth opportunity. That said, you should expect us to start growing our hospitals in 2027. We will keep you updated on plans as they come together. I would like to emphasize that our key competitive advantage in this space is that our vet hospitals are wholly owned and are part of the store. We uniquely have the opportunity to capitalize on retail traffic and to share customer information. As we have discussed prior, the opportunity is twofold: grow the vet business, as well as become a full-service pet needs provider by cross-selling food, prescriptions, and supplies. I am pleased to announce that we are adding technology and functionality beginning later this year and into 2027 to better enable us. The goal is to drive incremental trips and increase sales per customer. We are now operating at a scale that gives us the depth of expertise, breadth of coverage, and overall respect of the industry to be a desired employer of choice for veterinarians and vet techs to grow their careers at Petco Health and Wellness Company, Inc. The third pillar of growth opportunity I want to discuss is our key competitive moat, our differentiated high-touch store ecosystem. Our stores represent a significant portion of our total sales, and so they remain a key focus for us. We have changed leadership, reorganized how we operate, and unified our center-of-store operations with our services. We have also physically brought our stores and services leadership together three times in less than twelve months so that communication can be cascaded with one voice and expectations are clearly aligned. Our goal is to leverage stores to build community, excitement, and customer loyalty through frequent newness, higher levels of customer engagement—such as holding fun events for families and pets—and through wholly owned services that promote repeat visits. The end goal is to drive both traffic and basket. Our marketing efforts will be centered around driving traffic to our stores by building awareness for our product newness and in-store experiences. We will also capitalize on a more engaged customer in stores by focusing on increasing basket size. Specifically, we launched a major training initiative in February for all district and regional managers to promote cross-selling opportunities. This initiative is being cascaded to all stores this quarter. We estimate that successful cross-selling can drive one to two additional trips as well as a higher sales per customer over a six-month period. An example of this is a focus on converting grooming customers to purchase merchandise by giving groomers access to a customer's purchase history across the store. To give a sense as to how impactful this initiative could be, about half our dog customers currently do not buy dog food from us, so you can imagine the opportunity to capture a much greater share of their wallet. What backs our confidence in the long-term viability of the store model is that shopper demographics are also on our side. Industry data tells us that 34% of Gen Z customers shop exclusively in stores. Interestingly, this group's preference for an in-store experience is much higher than Gen X or millennials and is virtually in line with boomer preferences. We see this as a huge long-term opportunity, with the Petco Health and Wellness Company, Inc. model well positioned to capture Gen Z's desire for experiences and connections. Our field leaders are excited about these opportunities, and we will have more to share with you as the year progresses. The final pillar of our Reach for the Sky initiative is centered around integrated omnichannel. We call it integrated omnichannel because a significant portion of customer transactions leverage a combination of our digital capabilities and our stores. We made great progress in 2025 fixing our foundation, including minimizing unprofitable sales, improving e-commerce fill rates, fixing page load time, and adding new capabilities. While we will keep making improvements, it is time we start to grow our digital capabilities in 2026. One of the biggest opportunities we have is to turn up the dial in marketing. We have overhauled our media buying mix, which is taking hold in Q1, and our new branding, “Where the Pets Go,” will become more pronounced as our creative is reimagined to better support this fun-loving energy our physical stores bring to life. Additionally, we will relaunch the loyalty program later this year. Our goal is to offer a more personalized and relevant loyalty experience that is seamlessly integrated within our app. Our results from this initial pilot, which concluded in December, were encouraging. The next wave of our pilot began last week and will run through the spring season. We look forward to sharing an update on our Q1 call. A second key omni sales growth initiative we are excited about is visibility for our repeat delivery customers to now pick up their orders in store, which encourages our fresh food customer to visit our stores more often. This is an example of us leveraging the omnichannel model to maximize our growth opportunity. We believe this will aid in growing traffic, conversion, as well as basket size. In conclusion, I am proud of the long-term strategy we implemented last year to rebuild the foundation of our economic model, recruit an amazing team, and complete a comprehensive customer strategy to fully understand how we can win at Petco Health and Wellness Company, Inc. We delivered significant financial improvements. It is with this backdrop that I am confident in the actions we are taking to drive sustainable sales growth and profitability. We expect to start to see benefits beginning in Q1 and growing throughout the year. Specifically, the outlook that Sabrina provided implies a flat comp in Q1 at the midpoint. This would mark an inflection from the negative comp in Q4. For the full year, our outlook assumes our comps will be positive, with increases modestly above our total sales growth. Importantly, we believe our ability to gain market share is not entirely reliant on a cooperative macro environment or pet industry sales growth. Our Reach for the Sky initiatives are in many ways self-help in nature and designed to further differentiate Petco Health and Wellness Company, Inc.'s merchandise and services versus our peers. We are approaching 2026 the same way we did in 2025. We developed a strategy. We assigned leaders. We track milestones. And we execute. As the months go by, I am confident you will continue to appreciate how driven we are to deliver on our commitments, and I trust that 2025 is a great proof point for what is to come in 2026. I want to thank our teams for their dedication and hard work. While it is hard to single out any one team, the milestones our field teams achieved were truly incredible. We asked a lot of them, and they responded positively to every challenge. Our stores are the heart and soul of Petco Health and Wellness Company, Inc., and it is great to see them playing offense. Collectively, we are well positioned for our Reach for the Sky plan, and I am excited about its potential. Petco Health and Wellness Company, Inc. truly is where the pets go to live their real life. I would now like to open it up for your questions. Operator?

We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Michael Lasser with UBS. Please go ahead.

Good evening. Thank you so much for taking my question. I feel you have provided a lot of great information on the strategy, the focus. How are you thinking about what is going to lead Petco Health and Wellness Company, Inc.'s growth from here? Is it going to be consumables first, which will then translate to the other parts of the business? Is this going to be services-led, which will then translate to other parts of the business? And how have you thought about the need to make further price investments, promotional investments, and other discounts in order to generate same-store sales growth over time? Thank you very much.

Yeah, thanks, Michael, and really great question. A lot to unpack there. I think it is less about which one is going to lead, and what I hope you took away from what I just took you all through is whereas last year we were telling you what we were going to do to deliver growth, on this call, I showed you how we are going to do it, and we gave, as you said, specific examples in all four pillars. We are working simultaneously, Michael, on all four of them. Having said that, product probably takes the longest because you have your existing product that you have to sell through, then the new product will begin to come in. I can tell you we have about 25 new brands or flavors coming this year, as well as resets throughout all of supplies and many of the other areas like companion animals. All of that will take time throughout the year, and it will happen actually starting this quarter. But I am really pleased that in all four of those pillars, you are going to begin to see change starting right now in Q1. As for your pricing comment, you know what? We started in on that back in 2024, and we really feel like we got our pricing right throughout 2025. It is something that is dynamic, and we are watching it closely, and we will continue to adjust as necessary, but we feel like we have got our pricing in good shape for now.

Yeah, I would just add to that, Michael, that we are definitely focused on delivering healthy margins for the year. It is an important focus, and we will stay competitive, we will stay adaptable, but we have still, you know, nice levers at our disposal to deliver on the healthy margins. We will continue to look, as Joel just said, where needed, we will participate in promos for sure to help drive traffic where appropriate, and then remember, we have this whole initiative of mix, where we are moving toward our own brand, and that should also support delivering on healthy margins.

Thank you so much.

The next question is from Oliver Wintermantel from Evercore ISI. Please go ahead.

My first question is about the drivers of the increase of the gross margins. And then as a follow-up—so maybe the first one is for Sabrina—Joel, for you on the growth initiatives, so inventories were down this year, which obviously helped free cash flow. With all these, you know, four pillars of initiatives, do you expect inventories then to increase this year, and what is the impact of that on your free cash flow outlook? Thank you.

Yes, so I will just go through the gross margin levers one more time. We are very focused on delivering healthy margins, and we are going to continue to use and review our pricing. We are going to deliver on promos where appropriate and they make sense and they help us drive traffic in, etcetera. And we are focused on mix. So those are the big levers that will help us deliver on our goal of keeping those gross margins really healthy. With regard to inventory, yes, we did a lot of cleanup in 2025 on inventory. Some of the silver lining, if you will, of the tariff imposition in the spring last year was that it kind of forced us to get very disciplined about cutting off the unproductive tail of SKUs. We are past that now. As we look forward to 2026 for growth, we definitely want to invest inventory behind that. The important thing to us is that we remain disciplined in managing that inventory. So even as we invest in inventory, we will look to keep the growth in inventory at or below sales growth and keep that relationship very tight.

I think you captured it all. Yep. Thanks, Oliver.

Thank you.

The next question is from Kaumil S. Gajrawala with Jefferies. Please go ahead.

Hi. Thank you, first of all, for all the detail on, you know, the plans for 2026. I guess there has been some oscillation over the years between you being specialty and premium and being mainstream. You mentioned a lot of national brands, which sort of makes me imply perhaps more of a mainstream look. But curious, you know, when you think about the brand of PepsiCo and—or sorry, the brand of Petco Health and Wellness Company, Inc.—and what its assortment says about the retailer, how are you thinking about what that assortment is going to say from a branding perspective? And you said something fascinating earlier on, you know, Gen Z's preference to, you know, shop in person, looking similar to baby boomers. Do you have a sense of why that is or what has changed, that generation versus the generations prior?

Yeah. Look. You are absolutely right. I think in prior years, we narrowed our aperture, and I think as I look forward, we have to be there for all customers. And as a new pet parent adopts a pet, they go through several stages of that life. And, you know, one of those stages might be, I just need to get my dog fed. And as that dog becomes part of the family, they might decide to, you know, upgrade what their dog is being fed for food, and they focus on health and nutrition. And so the focus we have done over the last couple years is really to widen the aperture, and so one of the unique advantages of being a specialty retailer is that we are able to carry that specialty, premiumization, unique product, but we are also there, you know, for the customer that, you know, affordability is their primary need. And so I think we really have widened, and I feel really good about where assortment is today. As for Gen Z, I mean, obviously that is a bigger statement than just as it relates to pets. But, you know, like any good retailer, you have to understand your core customer, and we did the research, and part of that research, we studied, you know, what the makeup was of the age of our customer, and then that, you know, coveted 18 to 34, that younger customer—we skew about five percentage points higher than some of the other pet retailers. And so that happens to work out nicely because what also is a characteristic of that demographic is they like shopping in stores. And so I think there has been more of a return to stores that serves us well with who our demographic is. And, you know, as we did the customer segmentation work, we took advantage of that, and that is something we are really focused on going forward. But it worked out to be a nicely nice fit with who our customer is.

The next question is from Steven Forbes with Guggenheim Securities. Please go ahead.

Hi, Joel. Given the goal of services at scale, I was curious—like you did with dog food—if you can frame what percentage of your customers today engage in services in some form or fashion. And then, given the customer segmentation work you did around the Passionate Explorer, curious if you can maybe expand on, you know, what you are sort of focused on in 2026 to make sure that specific cohort is engaging.

Yeah, let me take that cohort first. What we really learned about the Passionate Explorer is that they value discovery, they look for expertise—which plays in nicely to our services side—they seek innovation, and they are also somebody that shops more frequently and spends more with us. So our new merchandise strategy is certainly going to resonate with them: frequency of newness, innovation, the store events, and it also acts as a halo for all the other segments. And services is a really important part of the Passionate Explorer. Obviously, we have a lot of room to grow in services. As an example, you know, the hospital side of it, the vet side of it, it is only in about, you know, 20% of our chain—roughly 300 stores—so lots of room to grow there. Grooming is in all our stores, and, you know, that is an area we talked about on a couple, three calls now, where we have been improving the technology, we have been making it easier to make appointments, and so I see a lot of growth opportunities there as well. But, you know, one of the reasons I have said it many times: services is our moat, a point of differentiation for us, and we are going to keep leaning in on services.

And what I will add to that, Steve, is that what is really important to us is to leverage the whole ecosystem, because what we know is the NSPAC for a customer who engages in more than one channel or in services is five times higher than our other customers. So it is really just expanding our relationship with our customer wherever they want to shop and making sure we are getting that loyalty, retention, and higher spend.

The next question is from Simeon Gutman with Morgan Stanley. Please go ahead.

Hi, this is Lauren Ng on for Simeon. Thanks for taking our questions. First, you mentioned 50% of dog customers do not buy dog food from Petco Health and Wellness Company, Inc. Curious what parts of your strategy outlined today will capture these customers if they are already loyal to, you know, certain brands and platforms? Will you be able to leverage your private label for this? And just quickly following up, you talked about entering Phase III today. Can you share how much of Phase III is currently implemented versus maybe how much room there is to grow?

Yeah, great pickup from our prepared remarks. Probably the main reason I shared that with you is, you know, it is always easier to grow if you start with your current customers. And as part of our, you know, deep dive into who our customer is, where they shop with us, how they buy from us, that was a real big insight for us. And so, as an example, you know, prior to just recently, our groomers had no knowledge of whether a customer—a dog customer—bought food from us. And now we have enabled our groomers with technology to see every customer that comes in: when is the last time they bought dog food from us, what type of dog food are they buying, is it helping their sensitive skin or problem they have? And so that is just one example of us being able to cross-sell. And we believe, you know, the first place we are going to see growth is, you know, as Sabrina just alluded to, you know, NSPAC, you know, really growing the net spend per average customer. And I think we have a real opportunity with our dog customers that are not buying food from us today. As for Phase III, I would say from what the customer sees, very little has been implemented yet. From a strategy and teamwork internally, we have workstreams on every one of those I outlined for you today, plus a few others. So they are in various elements of being lit up for the customers. You know, product may be being shipped right now. Some may not come till second or third quarter. But very little of it, and you can see from our guide that, you know, we expect comp store growth to gain as the year goes by.

Again, if you have a question, please press star then one. The next question is from Peter Benedict with Baird. Please go ahead.

Hi, guys. Thanks for taking the question. So I wanted to—well, two questions. One, I just—Sabrina, if you could expand on kind of the fuel cost comment you made. I think you said something about fuel costs normalized. Just maybe help us understand maybe the variability with all the macro stuff going on with oil, etcetera. And then my second question is on your expanded fresh effort. You mentioned more freezers. I am just trying to understand, is it you are expanding the frozen fresh product? How about the refrigerated or chiller-based fresh? And I am curious, is it new brands, or you are expanding with existing brands? Maybe just expand upon that effort around Fresh a little more, if you would. Thank you so much.

Sure. I will start with the fuel comment. So it has been a bumpy ride the last week or so, so we were just trying to be helpful with regard to, you know, our base assumptions in our forecast. But here is how fuel impacts us, and it is similar to every retailer out there. We have our inbound ocean, and that sort of lags. It comes in later into our P&L through cost of goods sold. And then we have our outbound from our DCs to our stores, a lot of it trucking—that can impact more rapidly. And then we have our parcel shipping that can also be impacted. So we have incorporated in our scenarios in the range we gave absorbing some of the volatility we have seen in gas prices over the last week or so. But, you know, the base assumption is that things start to normalize after Q1.

Good. And then, you know, as it relates to fresh and frozen, you know, we look at that as one, and it ebbs and flows, and some of it is dependent on when our vendor partners are bringing out new product. And I think the most important fact you should take away from that is I am not just telling you we are going to grow fresh. You are seeing that we are making capital investments, and in this case, the example was the additional freezer coolers. But we also expect fresh to grow as well, and there are several new lines coming out middle of this year. So that is a category that grew significantly in 2025, and we see more growth coming in 2026. And, you know, some customers use it as a topper, some customers use it as a full meal, and so, you know, sometimes you need fresh and sometimes you need frozen depending on how you are using it with your respective pet. But big growth area for us. We are really excited about it.

The next question is from Zachary Fadem with Wells Fargo. Please go ahead.

Hey, guys. This is David Lantz on for Zack. Thanks for taking our questions. I guess, first one for me, within the 2026 outlook for top-line growth, what are you assuming for the broader category, and how did your performance stack up to peers in Q4 from a share perspective? And then one more: within Q1 and the midpoint of the guide being flat comp, is there anything we should keep in mind that is embedded within that for stimulus and/or, you know, store closures from winter storms here quarter to date?

Well, look. I am not going to break it down by, you know, specific areas. I think the focus on our end is to grow overall top-line growth, and some of that will come from consumables, obviously, because that is over 50% of our business. But, you know, we are really—as you can tell from my comments—we have got initiatives in all aspects of the business: services, consumables, companion animal, supplies. And, you know, obviously, with us intentionally reducing, you know, unprofitable sales last year, you know, we gave up some market share. And with our growth this year, we will start to gain that back.

Yeah, and I would just add to that, you know, this year is really more about another self-help year as we look to grow sales. We are not overly reliant—we are not counting on big tailwinds from the sector. I mean, we feel like we have all of these opportunities that Joel outlined, and these initiatives are going to really support our outlook. And, you know, as for how we think about our share, even though, yeah, we gave up a little top line in 2025, we really grew a lot of bottom line. So we have cleaned up the business. We are coming from a strong foundation. There is an opportunity, as Joel said, to first grow share of wallet with our current customers. I think the next opportunity to pick off is sort of small independents and small chains who have about four percentage points of market share in the pet sector. So there are lots of opportunities for us to go after without being overly reliant on any tailwinds. And on Q1, you know what? We have taken into account—there are so many pluses and minuses in this kind of noisy macro we are living through. So, sure, I mean, on the plus side, you have got, like, the tax refunds coming in—all, you know, can only be a positive. On the minus side now, you know, as we just talked about, you have some fuel pressure. So we have kind of tried to bake those scenarios within our guidance, and we do not—we have not been overly reliant on any of those levers because, again, even with the taxes, one does not know how much will go to savings versus spending, etcetera. Now what we like about this environment—or what we like about our customers, I should say—is our customers skew to the higher end of the income spectrum. So that is good news for us because that end of the spectrum can obviously withstand macro changes without it being as large of a percentage to their overall well-being.

Then as far as weather goes, you know, first quarter is always volatile. It was volatile last year, volatility in it this year. The way I think about it big picture is by the time the quarter is done, the volatility kind of evens out with pluses and minuses, and that is kind of how we thought about it in the guide for this year.

This concludes our question and answer session. I would like to turn the conference back over to Roxanne Meyer for any closing remarks.

Great. I want to thank everyone for joining the call today, and we look forward to updating you on our progress.

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