Executive Summary

Record Q1 2024 execution: Net sales $308.4M (+6.2% YoY), gross margin 24.2% (+280 bps YoY), diluted EPS $0.48, and Adjusted EBITDA $35.3M, all at or above guidance; manufactured brands drove outsized share gains and mix uplift .
Guidance raised: FY 2024 net sales to $1.135–$1.185B and Adjusted EBITDA to $112–$117M; Q2 2024 guidance set at net sales $325–$335M and Adjusted EBITDA $34–$36M; management also raised FY free cash flow outlook to >$50M from >$45M .
Services optimization and operations: 149 wellness center closures in 2H23 are yielding improved segment margins (Services gross margin +810 bps in Q1); company expects FY margin expansion “75+ bps” versus prior 50 bps guide, aided by manufactured mix and plant efficiencies .
Balance sheet/seasonality: Inventory elevated due to planned seasonal build; liquidity $150.4M and net leverage 3.6x in Q1 (expected peak for year), normalizing through mid-2024; sale of Mark & Chappell closed 4/30 with ~$1.7M loss expected in Q2 .
Catalyst: Guidance raise, accelerated manufactured brand consumption (supplements, flea/tick, dental), and visibility into marketing ROI (front-loaded +$10M in 1H) set up Q2/Q3 narrative; watch sequential margin cadence given ~$6M incremental Q2 spend and normalization of seasonality .

What Went Well and What Went Wrong

What Went Well

Broad-based product strength: Manufactured brands net sales +14.3% YoY with share gains across channels; supplements +51.2% YoY, flea/tick up double-digits and dental treats outperforming category (Minties +48% growth) .
Margin expansion and profitability records: Gross margin up 280 bps YoY to 24.2%; record Adjusted EBITDA margin 11.4% (+80 bps YoY) and record net income $14.9M; management expects FY margin expansion of “75+ bps” .
Services optimization results: Services gross margin expanded 810 bps and net sales held flat (+0.2% YoY) despite 149 closures; vet population recovery in mobile clinics supported operational improvements .

What Went Wrong

Working capital drag: Q1 operating cash flow used ($85.1M) driven by seasonal receivables/inventory build and timing; inventory higher than normal, expected to normalize by mid-2024 .
EPS disclosure discrepancy: 8-K shows Adjusted diluted EPS $0.58, while management remarks cited ~$0.53; clarify modeling impacts from convertible notes (potential 4.8M dilutive shares in certain quarters) .
Services closures reduce revenue base: Services closures remove ~$52M revenue and ~$8M Adjusted EBITDA annually (inclusive in guidance), limiting segment scale near term; Q2 will include ~$1.7M loss on Mark & Chappell sale .

Financial Results

Metric	Q1 2023	Q4 2023	Q1 2024
Revenue ($USD Millions)	$290.5	$219.9	$308.4
Gross Profit ($USD Millions)	$62.3	$44.0	$74.5
Gross Margin %	21.4%	20.0%	24.2%
Diluted EPS ($USD)	$0.32	$(0.60)	$0.48
EBITDA ($USD Millions)	$26.7	$8.5	$32.2
EBITDA Margin %	9.2%	3.9% (calc context: EBITDA/Revenue; company disclosed 5.5% Adj)	10.4%
Adjusted EBITDA ($USD Millions)	$30.7	$12.0	$35.3
Adjusted EBITDA Margin %	10.6%	5.5%	11.4%

Segment Net Sales

Segment	Q1 2023	Q4 2023	Q1 2024
Products ($USD Millions)	$259.0	$191.3	$276.9
Services ($USD Millions)	$31.5	$28.6	$31.6
Total ($USD Millions)	$290.5	$219.9	$308.4

Key KPIs

KPI	Q1 2023	Q4 2023	Q1 2024
SG&A % of Net Sales	14.9%	19.4%	16.3%
Adjusted SG&A %	13.5%	18.5%	15.3%
Cash & Equivalents ($USD Millions)	$25.4	$116.4	$25.4
Total Debt ($USD Millions)	$443.9 (context: Q1’24)	$445.2	$443.9
Liquidity ($USD Millions)	N/A	$241.4	$150.4
Net Leverage (x)	4.5x (YoY Q1’23 reference)	2.9x	3.6x

Note: S&P Global Wall Street consensus estimates for PETQ were unavailable at the time of analysis; comparison vs estimates could not be provided.

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Net Sales ($USD Billions)	FY 2024	$1.130–$1.180	$1.135–$1.185	Raised
Adjusted EBITDA ($USD Millions)	FY 2024	$109–$114	$112–$117	Raised
Free Cash Flow ($USD Millions)	FY 2024	>$45	>$50	Raised
Net Sales ($USD Millions)	Q2 2024	N/A	$325–$335	New
Adjusted EBITDA ($USD Millions)	Q2 2024	N/A	$34–$36	New
Net Sales ($USD Millions)	Q1 2024	$290–$310	Actual $308.4	Met/High-end
Adjusted EBITDA ($USD Millions)	Q1 2024	$31–$33	Actual $35.3	Beat

Management commentary indicates FY margin expansion expectation increased to “75+ bps” vs prior “50+ bps” directional guide (qualitative guidance) .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q3 2023, Q4 2023)	Current Period (Q1 2024)	Trend
Manufactured brands momentum	Q3: OTC flea/tick season strongest in ~10 years; share gains and mix aided margins ; Q4: manufactured product growth +36% YoY; increased A&P	Manufactured brands +14.3% YoY; share gains across top customers; supplements +51.2%	Improving: continued outperformance, broader categories; margin uplift
Marketing/investment cadence	Q3: incremental A&P; plan to invest for awareness ahead of 2024 ; Q4: incremental ~$3M A&P in Q4	$12M incremental in 2024; ~$10M front-loaded in 1H; +$6M in Q2	Increasing spend early-year to drive brand awareness and conversion
Services optimization	Q3: announced 149 closures to improve profitability ; Q4: closures pressured gross margin	Services gross margin +810 bps; mobile clinics scaled; vet population ~3,500	Margin improving; revenue stable; operational efficiency gains
Margin outlook	Q3: efficiency and mix improved margins +200 bps ; Q4: GM ~20% due to closures	GM 24.2% (+280 bps YoY); FY margin expansion “75+ bps” expected	Positive trajectory despite spend/mix dynamics
Seasonality/flea & tick	Q3: strong weather bolster category ; Q4: set up for start of 2024	Year modeled “5/10” now tracking ~“6” with category +4–5%	Slightly favorable season vs plan
Rocco & Roxie expansion	Q3: grew 10.1%, exited noncore; pilot expansions	+23.4% growth; supplement launch late Q1 to impact Q2+	Expanding distribution and category presence

Management Commentary

“We’ve started 2024 off well with broad-based growth… profitability above our first quarter outlook. Our step-up in brand building and marketing initiatives are increasing pet parent awareness… pleased to raise our 2024 financial outlook.” — Cord Christensen (CEO) .
“Adjusted EBITDA increased 15%… exceeding our guidance… highest adjusted EBITDA margin in the company's history of 11.4%… pleased to raise our guidance for 2024 net sales, adjusted EBITDA and free cash flow.” — McCord Christensen .
“We had a fair bit of operational improvements… we had previously guided 50 bps plus of margin improvement. We think it's more like 75 plus now… feel really good about the trajectory of our margins.” — Zvi Glasman (CFO) .
“We expect to spend $6 million more in brand building and marketing initiatives than we did in Q2 last year.” — McCord Christensen .
“We are raising our guidance for annual free cash flow from an excess of $45 million to an excess of $50 million.” — Zvi Glasman .

Q&A Highlights

Margin sustainability: Mix and manufacturing efficiencies, plus Services optimization, underpin margin trajectory; management now expects ~75+ bps FY expansion versus prior 50+ bps, though quarterly cadence not linear .
Category health and consumer behavior: Despite broader pet category pressure, pet health spend remains resilient; manufactured brands gaining share without cannibalization of distributed business; new and lapsed customers reentering categories .
Seasonality: Flea/tick season tracking “slightly favorable” vs plan (modeled 5/10, tracking ~6/10) with category +4–5% growth expected; consistent trends projected through year .
Marketing spend cadence and ROI: ~$12M incremental 2024, ~$10M in 1H, ~$6M in Q2; emphasis on front-of-funnel awareness driving consumption and share; ROI evidenced by above-expectation brand performance .
Services operations: Vet population in mobile clinics recovered (~3,500 vs ~800 at COVID peak), supporting lower cancellations and improved gross margins; closures targeted underperformers with reinvestment into higher-return areas .

Estimates Context

S&P Global Wall Street consensus estimates for Q1 2024 (EPS, Revenue, EBITDA) were unavailable for PETQ at the time of analysis; comparisons versus consensus could not be provided. Company results were at the high end of internal guidance (revenue $308.4M vs $290–$310M; Adjusted EBITDA $35.3M vs $31–$33M) .

Key Takeaways for Investors

Guidance raised across net sales, Adjusted EBITDA, and free cash flow; narrative remains one of durable growth and margin expansion, with manufactured brands leading .
Expect sequential margin dynamics: Q2 bears ~$6M incremental marketing spend and flea/tick seasonality; monitor Adjusted EBITDA delivery within $34–$36M and gross margin resilience .
Mix and efficiency tailwinds: Manufactured product growth and plant efficiencies are key drivers of the +280 bps YoY gross margin; Services optimization adds stability and margin .
Working capital normalization in 2Q–3Q: Elevated Q1 inventory/receivables should revert by mid-year; liquidity of $150.4M and undrawn ABL provide flexibility .
Portfolio expansion: Supplements and dental treats are scaling fast; Rocco & Roxie distribution adds premium exposure; expect Q2 impact from late-Q1 launches .
Watch Q2 Mark & Chappell sale accounting: ~$1.7M expected loss in Q2; non-core asset divestiture streamlines focus .
Longer-term thesis: Margin uplift (“75+ bps” FY), brand-led growth, and disciplined reinvestment into high-ROI areas support multiple expansion potential; continue tracking category momentum and share gains .

PetIQ, Inc. (PETQ)·Q1 2024 Earnings Summary