Release Date: September 10, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Petco Health and Wellness Co Inc (WOOF, Financial) reported net revenue of $1.52 billion for Q2 2024, with comparable sales up 30 basis points year over year.
- Services and other revenue grew by 3%, with services specifically up 10%, driven by strength in vet hospitals, mobile clinics, and grooming.
- The company has a strong liquidity position with $655 million, including $128 million in cash and cash equivalents and $528 million available on its revolving credit facility.
- Petco Health and Wellness Co Inc (WOOF) is focused on improving profitability through a disciplined approach to costs, including merchandising, operational efficiencies, and marketing recalibration.
- The company is committed to delivering meaningful near-term improvements to cash flow and enhanced EBITDA performance, with a target of $150 million in run-rate savings by the end of 2025.
Negative Points
- Net revenue was down 50 basis points year over year, indicating a slight decline in overall sales.
- Gross profit decreased by 210 basis points from the prior year, with gross margin down 60 basis points, driven by softness in discretionary categories.
- SG&A as a percentage of revenue increased by 80 basis points year over year, primarily due to planned one-time investments in store labor.
- Adjusted EBITDA for Q2 2024 was $83.5 million, with an adjusted EBITDA margin rate of 5.5%, reflecting a decline from the prior year.
- Adjusted EPS was negative $0.02 compared to $0.06 per share in the prior year, indicating a decline in profitability.
Q & A Highlights
Q: Joel, as you think about strategic direction going forward, how do you balance investing in growth pillars like vet services and stores while simplifying the business and taking costs out of the system?
A: Our number one priority is improving profitability. We need to strengthen retail fundamentals, focusing on merchandise excellence, service-driven business, and efficiency. We must get these fundamentals in order before focusing on growth again.
Q: Brian, can you clarify the Q3 guidance, particularly around margins? Are you expecting a significant improvement in gross margin or a reduction in SG&A expenses?
A: Our Q3 guide reflects the best view of what we know today. We don't expect much fundamental difference in SG&A from Q1 and Q2. The focus remains on improving profitability and driving free cash flow improvement.
Q: Peter Benedict, Baird: Why is the Q3 adjusted EBITDA outlook lower than Q2, and what has changed versus your thought process 90 days ago?
A: Q2 came in slightly better than expected, particularly in gross margin due to cost initiatives and services business improvement. The Q3 guide reflects the current dynamic retail environment.
Q: What are you seeing in terms of pet food pricing and vendor behavior?
A: We have seen relative consistency. The customer remains choiceful and seeks value. Consumables were positive for the quarter, and we saw modest improvement in discretionary categories.
Q: Steven Forbes, Guggenheim: Can you rank order the profit improvement opportunities and the time frame for execution?
A: Merchandising is the greatest opportunity, followed by marketing and store labor efficiencies. We are committed to $150 million in run rate savings exiting 2025.
Q: Seth Basham, Wedbush: Can you provide more details on the biggest opportunities in merchandising?
A: We need to improve our assortment, pricing, in-stock metrics, and vendor partnerships. We are conducting an end-to-end review of our total assortment to better leverage it and deliver EBITDA performance.
Q: Michael Lasser, UBS: What caused Petco to lose its way, and how do the elements of your plan address those shortcomings?
A: My focus is on fixing the issues rather than diagnosing past problems. We are on the right track with the right strategy, and now we need to execute.
Q: How does the company's financial leverage position influence your strategy, and could there be significant store closures?
A: We do not foresee a mass closing of stores. We are looking under every rock, and if a store isn't profitable, we'll close it. However, a large group of EBITDA-negative stores is not expected.
Q: Kaumil Gajrawala, Jefferies: Are there any notable refinements in the current strategy or areas you want to press ahead?
A: We need to move faster, cut costs, prioritize projects, and focus on meaningful initiatives. Speed and execution are more critical than changing the strategy.
Q: Steven Zaccone, Citi: Do you see a bigger opportunity to gain market share with existing customers or drive new customer growth?
A: We need to articulate our points of differentiation and deliver them. Initially, growth will come from leveraging our current store base, improving services, and enhancing the in-store experience.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
