Steven Shemesh

Steven Shemesh sought to reconcile the strong Q2 exit comp rate with the more conservative 3% Q3 guide and asked what merchandising changes have enabled gross margin to outperform despite higher supply chain costs.

Answer

EVP and CFO Robert Helm explained the 3% Q3 guide reflects their typically conservative approach but signals confidence and momentum. President and CEO Eric van der Valk attributed the strong merchandise margin to increased size and scale, which enhances buying power. CFO Helm added that better operational execution, lower markdowns, and a positive shrink trend were also contributing factors.

Steven Shemesh from RBC Capital Markets posed two questions regarding the pending Breeze acquisition: why Breeze stores have lower sales per unit than Valvoline's, and whether integration costs could disrupt the plan to return to SG&A leverage.

Answer

CEO Lori Flees explained the sales-per-store gap is due to the Breeze network's relative immaturity and different levels of marketing and fleet investment, which she views as a long-term value creation opportunity. On costs, she stated that because the Breeze business model is very similar, she does not anticipate any major capital investments or stumbling blocks that would prevent a return to SG&A leverage.

Steven Shemesh inquired about the cadence of comparable sales throughout the quarter and quarter-to-date amid consumer uncertainty, and asked about any gross margin benefits from base oil deflation.

Answer

CFO Mary Meixelsperger noted consistent performance outside of a weather-impacted February, with strength continuing into May. CEO Lori Flees emphasized the industry's resilience, seeing no customer trade-down. Regarding base oil, Meixelsperger stated that benefits from lower crude prices have not yet flowed through to product costs, a point Flees supplemented by noting offsets from franchisee pass-throughs.

Steven Shemesh inquired about the same-store sales outlook for Q2, given tougher comparisons on pricing and non-oil change revenue, and asked for an update on the full-year gross margin forecast after a strong Q1.

Answer

CFO Mary Meixelsperger acknowledged continued momentum early in Q2 but noted it has been choppy due to weather. She highlighted a significant negative 120 basis point impact from lapping leap day in Q2. CEO Lori Flees added that non-oil change revenue (NOCR) will remain a positive contributor, though its growth will decelerate. Regarding margins, Meixelsperger stated that while Q1 was strong, the full-year guidance is unchanged as they expect some deleverage from refranchising transactions.

Steven Shemesh from RBC Capital Markets asked about the quarter-to-date sales trend, the potential lift from hurricane-deferred services, and what specific factors could cause a quarterly comp to fall below the 5-7% annual guidance.

Answer

CFO Mary Meixelsperger noted that Q1 was trending in line with expectations for a strong quarter, benefiting from weather-related recovery and lapping a weaker prior-year period. CEO Lori Flees explained that a quarterly comp could fall below the annual guide if promotional activity from competitors outside the quick lube segment intensifies, which would pressure new customer acquisition rates more than anticipated.

Steven Shemesh from RBC Capital Markets asked for details on the improving trend in the discretionary supplies and companion animals segment and inquired about pet adoption trends.

Answer

Executive Joel Anderson noted a 200 basis point sequential improvement in the discretionary segment, attributing future success to innovation and newness. Regarding adoptions, he stated the market appears flat but emphasized that Petco is in a 'self-help' situation, where its own operational improvements will drive results without reliance on market growth.