Petco Q1 2025 slides: Profitability improves despite sales decline

Introduction & Market Context

Petco Health and Wellness Company Inc (NASDAQ:WOOF) presented its first quarter 2025 earnings results on June 5, 2025, highlighting improved profitability metrics despite ongoing sales challenges. The pet retailer reported adjusted EBITDA of $89.4 million, exceeding prior guidance as the company’s efforts to strengthen retail fundamentals begin to take hold. Petco shares, which closed at $3.56 (up 2.53%), showed additional strength in aftermarket trading with a 0.84% increase to $3.59.

The company is executing a multi-phase strategy focused on strengthening fundamentals, improving operational execution, and eventually returning to growth. This approach comes after a challenging period for the pet retailer, which has been navigating a difficult consumer spending environment, particularly in discretionary categories.

Quarterly Performance Highlights

Petco reported Q1 2025 net sales of $1.49 billion, representing a 2% year-over-year decline. While sales decreased across most categories, the company achieved significant improvement in profitability metrics, with adjusted EBITDA increasing by $13.8 million to $89.4 million and adjusted EBITDA margin expanding to 6.0% from 4.9% in the prior year period.

As shown in the following chart of quarterly net sales performance by category:

The data reveals that consumables net sales declined 2% year-over-year, while supplies and companion animal categories experienced a steeper 4% decline, reflecting continued softness in discretionary spending. However, services and other categories delivered positive net sales growth, demonstrating the resilience of Petco’s service-based offerings. The company closed 5 net stores during Q1 2025, following 25 net closures in fiscal year 2024, as part of its fleet optimization strategy.

Petco’s Q1 2025 financial results show notable improvement in profitability metrics:

The adjusted EBITDA increase of $13.8 million represents a significant step forward in the company’s efforts to strengthen its financial position. Net debt decreased by 2% year-over-year to $1.46 billion, while liquidity improved by 5% to $648 million, providing the company with additional financial flexibility.

Strategic Initiatives

Petco outlined its three-phase strategy for 2025, which focuses on strengthening fundamentals, implementing operational improvements, and returning to sustainable growth:

The company reported significant progress in Phase 1, having completed the build-out of its senior leadership team with proven retail executives. Petco is now advancing into Phase 2, focusing on merchandising excellence, enhanced customer experience, driving efficiencies, and increasing the productivity of its services offerings. The ultimate goal is to return to offense and drive sustainable profitable growth over the long term in Phase 3.

Petco’s economic model emphasizes several key priorities:

The company is focused on expanding gross margin rate, leveraging expenses through operational excellence and renewed cost discipline, improving return on invested capital (ROIC), generating strong free cash flow, and achieving a debt-to-EBITDA leverage ratio below 2 times. These priorities align with management’s commitment to strengthen Petco’s financial foundation while positioning for future growth.

Detailed Financial Analysis

Petco’s Q1 2025 results reflect the company’s progress in improving profitability despite top-line challenges. The key takeaways from the quarter highlight this progress:

The improvement in adjusted EBITDA ahead of prior outlook demonstrates that Petco’s efforts to strengthen retail fundamentals are beginning to yield results. The company’s focus on expanding gross margin, leveraging SG&A expenses, and prioritizing ROIC has positioned it to drive double-digit adjusted EBITDA growth in 2025, according to management.

Free cash flow for the quarter was negative at $(44) million, slightly worse than the $(41) million reported in Q1 2024. This reflects ongoing investments in the business as Petco continues to execute its transformation strategy. The company’s net debt position improved slightly year-over-year, decreasing by 2% to $1.46 billion.

Forward-Looking Statements

Petco provided guidance for both Q2 and the full year 2025, maintaining its previous outlook despite ongoing challenges:

For Q2 2025, Petco expects net sales to decline in the low single digits year-over-year, with adjusted EBITDA projected between $92 million and $94 million. For the full year 2025, the company anticipates net sales to decline in the low single digits, with adjusted EBITDA between $375 million and $390 million.

The company reaffirmed its 2025 net sales and earnings outlook, which includes estimated tariff headwinds as of June 5, 2025. Management expressed confidence in Petco’s ability to drive double-digit adjusted EBITDA growth in 2025 despite these challenges, highlighting the effectiveness of its strategic initiatives focused on strengthening retail fundamentals.

Capital expenditures for 2025 are projected at $125 million to $130 million, with depreciation and amortization expected to be approximately $200 million. Net interest expense is forecasted at approximately $130 million, reflecting the company’s significant debt position.

As Petco continues to execute its multi-phase strategy, investors will be watching closely for signs of stabilization in sales trends and continued improvement in profitability metrics, which will be crucial for the company’s long-term success in the competitive pet retail market.

Full presentation:

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