Executive Summary

Q3 FY2025 revenue declined 19% YoY to $53.0M as management intentionally pulled back advertising during a highly promotional holiday period; gross margin expanded 80 bps YoY to 28.1% on lower discounting and favorable mix, and adjusted EBITDA reached $2.0M vs $0.9M a year ago .
Sequentially, revenue fell vs Q2 ($59.6M → $53.0M) while margins compressed modestly (29.1% → 28.1%) but remained above Q1 levels; adjusted EBITDA held near Q2 levels despite lower top line as cost actions reduced G&A by ~20% YoY to $10.8M .
Management reiterated transformation priorities (marketing reset, tech stack modernization, SKU optimization, last-mile delivery), citing 63k new shipped customers, AI-enabled call center productivity, and replatformed AutoShip; Q4 will see stepped-up marketing and CX investments, with no formal quantitative guidance provided .
Balance sheet remains debt-free with $50.1M cash; inventory reduced to $11.8M and turns improved (1.5 in Q3 vs 1.1 in Q2), supporting working capital discipline; a shareholder rights plan adopted in Dec-2024 provides takeover defense during the turnaround .

What Went Well and What Went Wrong

What Went Well
- Margin and EBITDA resilience: Gross margin expanded 80 bps YoY to 28.1% and adjusted EBITDA improved to $2.0M (vs $0.9M YoY) despite lower sales, reflecting lower discounting and operating cost reductions .
- Cost discipline: G&A fell to $10.8M (-19.7% YoY), aided by lower stock-based comp and payroll; CEO highlighted a $2.6M YoY G&A reduction and progress toward ~$5M annualized PetCareRx integration savings .
- Operational/tech execution: Replatformed AutoShip in mid-Nov, launched updated mobile apps and BNPL, implemented AI for workforce management, and improved Inventory turns to 1.5 (Q3) from 1.1 (Q2) and 0.9 last year; gross and shipped AOV increased YoY to $108 and $97, respectively .
What Went Wrong
- Top-line contraction: Net sales declined 19% YoY to $53.0M (and sequentially from $59.6M in Q2), largely due to an intentional ~$2.8M reduction in gross ad spend and a highly promotional holiday environment .
- Volume/traffic conversion: Despite improved visits and PDP views post-refresh, conversion lagged; management cited competitive intensity and prioritized margin over promotions during the quarter .
- Macro/category pressure: Ongoing consumer pressure, fewer vet visits, and lower prescription compliance weighed on demand; management is pivoting to capture younger cohorts but acknowledged this will take time .

Financial Results

Metric	Q3 2024 (Prior-year)	Q1 2025	Q2 2025	Q3 2025
Revenue ($M)	$65.317	$67.952	$59.570	$52.984
Net Income ($M)	$(2.027)	$3.754	$2.326	$(0.707)
Diluted EPS ($)	$(0.10)	$0.18	$0.11	$(0.03)
Gross Profit ($M)	$17.883	$17.971	$17.311	$14.909
Gross Margin (%)	—	~26.4% (derived from Q2 +270 bps sequential lift)	29.1%	28.1%
Adjusted EBITDA ($M)	$0.925	$(1.537)	$2.098	$2.002
Advertising Expense ($M)	$5.762	$6.990	$4.606	$2.987

Notes: Q1 gross margin approximated using CFO’s statement that Q2 margin of 29.1% was up 270 bps sequentially (29.1% - 2.7% ≈ 26.4%) .

KPIs and Operating Metrics

KPI	Q1 2025	Q2 2025	Q3 2025
New Customers (with shipped orders)	n/a	~77,000	~63,000
Gross AOV (YoY)	n/a	n/a	$108 (+7% YoY)
Shipped Order AOV (YoY)	n/a	n/a	$97 (+4.3% YoY)
Inventory ($M)	$25.520	$13.092	$11.795
Inventory Turns	n/a	1.1 (Cited)	1.5
Cash & Equivalents ($M)	$45.992	$52.045	$50.101
Debt	None (CFO)	None (CFO)	None (CFO)

Non-GAAP reconciliation highlights (Q3): Adjusted EBITDA of $2.002M adds back $0.452M SBC, $1.586M D&A, $0.465M taxes, and $0.209M severance, among other items, to GAAP net loss of $(0.707)M .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenue/Top-line	FY25/Q4	None provided	No quantitative guidance; management plans to “increase investments” in customer acquisition and CX in Q4	n/a
Gross Margin	Q3–Q4	None provided	CFO noted seasonal/promotional pressure; historically Q3 is lower margin; Q4 spending to increase (qualitative)	n/a
Marketing Spend	H2 FY25	Qualitative: reset foundation	Intend to step up spend in Q4 after Q3 pullback	Qualitative increase
Last-mile/Logistics	H2 FY25	n/a	Increased focus/investments to meet 1–2 day delivery expectations	New strategic focus
Dividend	FY25 to date	Q2 FY24 dividend $0.30/sh	No dividend declared in Q1–Q3 FY25	Suspended (versus prior year run-rate)

No formal quantitative guidance ranges were issued for revenue, margins, opex, OI&E, or tax rate .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q1–Q2 FY25)	Current Period (Q3 FY25)	Trend
Marketing strategy	Q1: emphasize retention and ops upgrade; Q2: prepared to increase gross marketing; heavy promos pressuring consumer; directional increase ahead	Pulled back ~$2.8M gross ad spend amid intense holiday promos; reset strategy; plan to re-accelerate in Q4	Reset in Q3, re-accelerate in Q4
Tech modernization	Q2: modernized website relaunch; brand refresh; AI recs and BNPL planned; mobile app updates	Site/app refresh executed; BNPL live; AutoShip replatformed; AI workforce tool in call center ; Ordergroove partnership (Nov)	Execution delivered; early KPI improvements
Consumer/macro	Q2: pressured consumer; conversion improves with promos; lower vet compliance/visits	Continued pressure; reduced vet visits and Rx compliance; mix shifts to opening price points	Persistent headwind
SKU/inventory	n/a (Q1–Q2)	Eliminated ~4,000 underperforming SKUs; inventory turns 1.5; inventory down to $11.8M	Efficiency gains
Last-mile delivery	n/a	Focused investment to meet same/next/2-day delivery expectations	New investment priority
Governance	Rights plan adopted Dec-2024	No new governance change this quarter	Stabilized

Management Commentary

“For the third quarter, we achieved $2 million in Adjusted EBITDA… while successfully reducing G&A expenses by $2.6 million compared to last year.” — Sandra Campos, CEO .
“Net sales were $53 million… a 19% decline primarily driven by a 34% reduction in gross advertising as we rebalanced for profitability… Gross profit… 28.1%… an 80 basis point improvement… due to a favorable sales mix and lower discount activity.” — Robyn D’Elia, CFO .
“We executed a full website refresh in November… relaunched our iOS and Android mobile apps… implemented buy now pay later… launched pethealthmd.com… improvements led to 84,000 gross new customers or 63,000 new customers that had orders shipped.” — Sandra Campos .
“We made the strategic decision to prioritize margin protection over aggressive promotions, ending the quarter with $2.8 million less in gross advertising spend year-over-year.” — Sandra Campos .

Q&A Highlights

New customer metrics: Management clarified ~63k new customers with shipped orders in Q3; gross new customers ~84k .
SKU rationalization: Removal of ~4,000 underperforming SKUs had minimal impact on sales given drop-ship mix; focus on consistently selling products .
Market dynamics: Consumer remains pressured; vet visits and Rx compliance down; promotions drive conversion across competitive set .
Cost synergy roadmap: PetCareRx integration Phase II to further consolidate technology; execution to span “a couple of quarters” .
Capital allocation: With ~$50M cash and no debt, company will invest in CX (last mile) and plans to step up marketing once foundations are set .

Estimates Context

Wall Street consensus (S&P Global) could not be retrieved at this time due to access limitations; therefore, we cannot provide a comparison of Q3 FY2025 results vs consensus for revenue or EPS. We will update when S&P Global data is available.

Key Takeaways for Investors

Top-line pressure near-term as PETS prioritized profitability over holiday discounting; margin resilience and cost takeout supported EBITDA despite lower revenue .
Marketing engine reset should position Q4 for increased customer acquisition spend; watch for revenue reacceleration signals vs Q3 pullback .
Tech stack upgrades (site/app, BNPL), subscription replatform (Ordergroove), and AI-enabled service operations are early but show improving engagement and operational KPIs .
Working capital discipline (inventory down to $11.8M; turns 1.5) and no debt provide flexibility to fund last-mile delivery and growth initiatives .
Structural consumer headwinds (promotional intensity, fewer vet visits/Rx compliance) persist; messaging targets younger cohorts, but share gains may take multiple touchpoints and time .
No dividend in FY25 to date (vs prior-year payouts); Board adopted a rights plan in Dec-2024, signaling defense of strategic plan amid perceived undervaluation .
Near-term trading skew: sensitivity to marketing inflection and Q4 conversion, plus any tangible uplift in AutoShip/retention metrics; medium-term thesis hinges on sustained margin discipline, efficient CAC, and CX/logistics investments translating into stabilized growth .

Supporting Detail

Q3 FY2025 8‑K/press release and financials: revenue $52.984M, gross profit $14.909M, GM 28.1%, net loss $(0.707)M, adj. EBITDA $2.002M; G&A $10.786M; Advertising $2.987M .
Q2 FY2025: revenue $59.570M; GM 29.1%; net income $2.326M; adj. EBITDA $2.098M; CFO noted seasonal margin pressure into Q3 .
Q1 FY2025: revenue $67.952M; net income $3.754M (benefit from $8.7M stock comp reversal); adj. EBITDA $(1.537)M .
Balance sheet: cash $50.101M at Dec 31, 2024; no debt; inventory $11.795M .
Operational initiatives: AutoShip replatform (Nov), call center AI/WFM, site/app refresh, BNPL, pethealthmd.com, SKU optimization (~4k eliminated) .

PETMED EXPRESS INC (PETS)·Q3 2025 Earnings Summary