Zach Fadem

Zach Fadem asked for color on the magnitude of operating margin performance in the first half versus the second half of the fiscal year, and the expected glide path for product and distribution inflation pressures to abate.

Answer

Brian Niccol, Chairman and CEO, and Catherine Park, CFO, explained that operating margins are expected to improve in the back half of the year. This is due to the anniversarying of Green Apron Service investments in Q4, the realization of savings from the $2 billion cost program, and the anticipated abatement of coffee price and tariff headwinds peaking in Q2. Sales leverage from continued top-line momentum is also a key factor.

Zach Fadem requested color on the expected magnitude of operating margin performance in the first half versus the second half of the fiscal year, and the anticipated glide path for product and distribution inflation pressures to abate.

Answer

Brian Niccol, Chairman and CEO, and Cathy Smith, Executive Vice President and Chief Financial Officer, explained that inflation (coffee, tariffs) is expected to peak in Q2 and abate in the back half of the year. Margin improvement will also be driven by anniversarying Green Apron service investments in Q4, the realization of savings from the $2 billion cost program in the back half, and sales leverage from continued top-line momentum, weighting performance more to the second half.

Zach Fadem asked for a quantification of the impact of moving away from less profitable sales and de-emphasizing the member program in Q3, and how these factors might influence the Q4 comp. He also sought a level-set for 2026 sales growth, including category performance and the impact of Petco's initiatives and store changes.

Answer

Sabrina Simmons, Petco's Chief Financial Officer, noted the broad Q4 range. Joel Anderson, Petco's Chief Executive Officer, explained that the impact is evident in growing EBITDA market share despite lower sales, by eliminating 'empty calorie' transactions and focusing on lifetime value. He stated it's too early for specific 2026 details but expects a return to growth in consumables and supplies, building on services growth. Simmons added that 2026 would see a gradual ramp and fewer net store closures than the 20 expected in 2025.

Zach Fadem asked to quantify the impact of moving away from less profitable sales and de-emphasizing the member program in Q3, and how these factors might influence the expected Q4 comp step-down. He also sought a general framing of broader category performance (dog/cat food, supplies, services) for 2026, layering in initiatives and net store openings/closings to achieve total sales growth.

Answer

Sabrina Simmons, Petco's Chief Financial Officer, noted the broad range for Q4's implied comp. Joel Anderson, Petco's Chief Executive Officer, explained that the impact of moving away from unprofitable sales is evident in growing pet EBITDA market share (sales down, EBITDA up), by identifying 'empty calorie' transactions. He stated it's too early to spell out 2026 specifics but expects a return to growth in consumables and supplies, with services already growing. Simmons added that 2026 sales growth would be a gradual ramp, with fewer net store closures than the approximately 20 in 2025.

Zach Fadem asked for more color on the improving pro survey sentiment, including its trend throughout the year, its reliability as a leading indicator, and the drivers behind the recent improvement. He also inquired about early margin scenarios for FBM and ADG in both a status quo environment and one with potential tax stimulus and lower interest rates.

Answer

Marvin Ellison (Chairman and CEO) and Joe McFarland (EVP of Stores) noted the small to medium pro business remains stable, with pros confident in job prospects, credit access, and hiring. They highlighted the 'flywheel effect' of the Transform Pro offering, including MyLowe's Pro Rewards, enhanced digital experience, Pro Extended Aisle, and fulfillment investments. Marvin Ellison also mentioned integrating FBM into the Pro Extended Aisle for efficient fulfillment. Brandon Sink (EVP and CFO) detailed FBM/ADG margin impact: 20 basis points dilution in 2025 (split evenly), and an annualized 50 basis points in 2026 (30 basis points wrap), primarily weighted towards gross margin.

Zach Fadem asked for more details on the improving pro survey sentiment, including its trend throughout the year, its reliability as a leading indicator, and the factors driving this recent improvement. He also inquired about early margin scenarios for FBM and ADG in both a status quo environment and one with potential tax stimulus and lower interest rates.

Answer

Marvin Ellison, Chairman and CEO, stated that the small to medium pro business remains stable, with 75% of pros confident in job prospects and focusing on smaller repair projects. Joe McFarland, EVP of Stores, attributed continued pro growth to the 'Transform Pro' offering, MyLowe's Pro Rewards, enhanced digital experience, Pro Extended Aisle, and investments in fulfillment. Marvin Ellison added that integrating FBM into the Pro Extended Aisle platform will significantly enhance fulfillment for large orders like drywall. Brandon Sink, EVP and CFO, clarified that FBM and ADG are expected to dilute operating margin by 20 basis points in 2025 and 50 basis points on an annualized basis in 2026, with the majority of the 2026 impact weighted towards gross margin.

Zach Fadem asked about the financial benefit from sale-leasebacks in Q1 and for an update on new store productivity.

Answer

CFO Kurt Barton reported a $17 million sale-leaseback gain in Q1. He stated that new store productivity remains strong at 62% on a rolling 12-month basis, which is near the company's historical target, and noted that new stores face the same macro headwinds as comparable stores. He also confirmed the Allivet acquisition is contributing as expected.