Petco Health and Wellness Company - Earnings Call - Q2 2026
August 28, 2025
Transcript
Speaker 8
Good afternoon and welcome to the Petco Health and Wellness Company Inc. second quarter 2025 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad, and to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Tina Romani, Head of Investor Relations and Treasurer. Please go ahead, ma'am.
Speaker 4
Good afternoon, everyone, and thank you for joining Petco Health and Wellness Company Inc.'s second quarter 2025 earnings conference call. In addition to the earnings release, there is a presentation available to download on our website at ir.petco.com. On the call with me today are Joel Anderson, Petco Health and Wellness Company Inc.'s Chief Executive Officer, and Sabrina Simmons, Petco Health and Wellness Company Inc.'s Chief Financial Officer. Before we begin, I'd like to remind everyone that on this call, we will make certain forward-looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties include those set out in our earnings materials and SEC filing. In addition, on today's call, we will refer to certain non-GAAP financial measures. Reconciliations of these measures can be found in our earnings release, presentation, and SEC filing.
With that, let me turn it over to Joel.
Speaker 7
Good afternoon, everyone, and thank you for joining us today. I'm incredibly proud to share the progress we are making in strengthening the foundation of our operating model and improving our retail fundamentals while positioning Petco Health and Wellness Company Inc. for sustainable, profitable growth. We are continuing our transformation journey, and, pleased, we have the confidence to raise our earnings outlook. In addition to the progress we are making on our transformation, this month marks the 60th birthday of Petco Health and Wellness Company Inc., celebrating our rich heritage. In our six-decade history, Petco Health and Wellness Company Inc. has been where the pets go, for consumables, for grooming, for veterinary care, for pharmacy, and more. I'm honored to be leading Petco Health and Wellness Company Inc. along a talented team as we embark on the next 60 years.
As I complete my first year on the ground at Petco Health and Wellness Company Inc., it is gratifying to watch Petco Health and Wellness Company Inc. regain confidence and relevancy in the pet sector. I will spend a few minutes later in my prepared remarks outlining what this means and where I'm seeing progress. Looking to our financial performance in Q2, sales were in line with our outlook, and we meaningfully improved our profitability, increasing operating income by over $40 million and generating more than $50 million in free cash flow. For the quarter, we delivered $114 million in adjusted EBITDA. This is a true testament to the hard work all the teams at Petco Health and Wellness Company Inc. have leaned into.
As we enter the back half, we continue to execute on phase two of our transformation and expect to make improvements to our bottom line and overall performance versus last year. It is with this confidence in our ability to deliver improvements that we are able to raise our guidance and, at the same time, begin thoughtful reinvestment behind the business as we set the stage for phase three of our journey, returning to profitable sales growth. As part of this work, our leadership team has been engaged in a North Star project to reimagine every key element of Petco Health and Wellness Company Inc. We've uncovered so many positive aspects about our heritage and identified the details of what our customers expect us to improve and have honed in on Petco Health and Wellness Company Inc.'s differentiated positioning in the marketplace.
From a marketing perspective, it quickly became obvious we needed to bring back a more emotional element to how we go to market and connect with pet parents. Our research has told us that we have an amazing heritage that resonates with our customers still today. As part of our 60th celebration, we reintroduced our beloved "Where the Pets Go" tagline, returning to the heart and soul of our brand with a fresh approach designed to increase relevancy. The campaign started in July and fully launched in August. Initial results indicate it is resonating with strong feedback and positive reactions from our customers. As part of the campaign relaunch, we reintroduced unique in-store events and experiences for all members of pet families.
In July, we hosted several experiences like free pet food tasting and "Meet the Critters," where families had the opportunity to meet our companion animals while learning from our knowledgeable and friendly pet experts. Personally, one of my favorites, in honor of Shark Week, we hosted a "Feed the Sharks" event, allowing families to get up close and personal with our freshwater fish. Petco truly is where the pets go in real life. The key for us to successfully move to phase three, a return to growth, is to bring this to life through compelling marketing, improved merchandising, engaging creative, and stronger store execution, giving customers a reason to step away from their screens and shop with their pets.
While certainly acknowledging we are still in the early days, I'm pleased to share that we have seen positive customer sentiment and engagement around these events on our social channels and sequential increases in our NPS score since the end of last year. Survey respondents highlighted partner friendliness and helpfulness, with an average satisfaction rating above 90%, which speaks to our ability to deliver experiences that pets and their people aren't getting anywhere else. In addition, several of our store managers reported people waiting outside our doors before we open for in-store events. This is simply evidence the marketing message is breaking through the clutter, and our pet parents want to engage and have in-store experiences with our store partners. Now, as I look to Q3, I mentioned earlier that we are going to begin to test our way into phase three and invest back into the business.
An important step towards cementing our brand for the future is to invest internally, and next month I'm looking forward to bringing leaders across the organization together for our leadership summit. This is an opportunity for our support center and store leaders to come together to not only celebrate our 60th anniversary, but to launch our updated values and, most importantly, align on what a reimagined Petco means for our customers and our plans to execute on that vision. Throughout my career, I found that company culture is the baseline for success. Since joining Petco, I've been incredibly proud of the culture that exists today centered around pets first. We are harvesting that cultural heritage with an equal focus on operating disciplines and a winning mindset.
It has been rewarding to watch the collective commitment and energy grow as we instill a "One Petco Way" attitude across the entire organization and set the foundation for the next stage of our journey. Alongside culture, driving operational improvements remains in focus, and that was a success story in Q2. During the quarter, we continue to take steps towards strengthening our retail fundamentals. For example, our operations, merchandising, and supply chain teams work together to simplify and optimize our processes that drive inventory accuracy, four-wall in-stock, and ultimately improve on-shelf in-stock of our entire assortment. These efforts were a contributor to our improved Q2 adjusted EBITDA performance. Additionally, we continue to see improvements in both inventory per store and sales per square foot. In addition to operations, merchandising excellence remains at the forefront of our work.
You've heard me talk about allocating more space to our higher productivity SKUs, adding capacity on shelf, and improving end-cap displays, all of which just launched over the last few months and are contributing to improved store performance. We're also focused on bringing in product newness. For example, we launched our very first product category aimed at humans, online and in stores selectively, in response to a customer survey where 90% of pet parents shared that they are interested in buying pet-themed products. Priced under $20, products are designed to be giftable, affordable, and impulse-worthy, celebrating the bond between pets and the people who love them. This is just one example of the merchandise overhaul we are making to reinvent Petco's overall product offering.
Over time, you will begin to see newness throughout our entire assortment that will differentiate us from others and surprise our customers with unexpected ideas for their pets. Moving on to marketing, last quarter I spoke to you about the relaunch of our loyalty program, which is a great example of the work that is ongoing to implement a more sophisticated approach to customer segmentation. The new program will feature personalized rewards with a retention focus designed to strengthen long-term relationships throughout the pet life cycle. More to come in 2026, but I'm pleased with the strategic customer insights our teams are utilizing to guide the development of the program and the enhanced customer experience it will ultimately deliver.
As we've talked, we do not expect progress to be linear, and it's also important to note that some of the early top-line progress is masked by areas where we still have opportunity for improvement or the need to further sunset prior behaviors and implement new Petco-defined go-forward operating principles. For example, in-store services growth is stronger than the total reported figure as we temporarily deprioritize our paid loyalty program ahead of the relaunch in 2026. Similarly, consumables performance in stores is stronger than the total reported figure as underlying improvements in stores are offset by the softness in e-comm as we retool that channel. Finally, as we look to Q3, it's important to remember we are lapping our toughest comparer from a comparable sales perspective.
Most importantly, we believe our stores, together with our comprehensive services offering, are Petco's differentiator in the market long term, and this is where our initial transformation efforts have been concentrated and our success has been seen. That said, while we have intentionally concentrated our phase two efforts on improving our physical store fleet, given they represent the vast majority of our sales, we have a tremendous opportunity to continue to enhance our omnichannel customer experience. We recently welcomed a new leader for our e-commerce channel, and he has already identified several opportunities. I look forward to spending more time personally with the digital team to eliminate barriers and drive improvements with the goal of delivering a seamless omni experience that our customers are excited about. We can then increase our marketing efforts to invite new customers back to Petco.com.
Before I wrap up my thoughts and turn to Sabrina to share our financial details, I want to specifically comment on phase three growth. While our strategy thus far has been intentional to give up certain sales, these decisions are making us more profitable, which allows us to begin to invest back into the business. The speed at which everyone worked to get us to this point is gratifying, and the work I'm seeing internally for the future is promising. Growing sustainable sales the right way takes time, and it also takes a company that has discipline, a positive attitude, a winning can-do mindset, and a commitment to merchandise differentiation. I have shared examples of each with you today. We have begun to order new merchandise and are working now to sell through our existing inventory.
I'm confident you'll be excited about what is coming, and please know that while our merchandise overhaul is happening, all the wheels are in motion with our marketing, operations, services, and digital teams to move ahead with speed and rigor. While this is in motion, we expect the bottom line improvements to continue and further provide the necessary strengths to return Petco Health and Wellness Company Inc. to growth. In closing, I'm incredibly proud of the work teams have accomplished in my first year at Petco Health and Wellness Company Inc., while acknowledging at the same time more work is ahead. I'm looking forward to our national meeting next month and engaging directly with our store general managers, vet leadership teams, and leaders throughout our support centers. We are bringing everyone together to make sure the message is consistent, the focus is sharp, and the urgency is universal.
We must be known as a company that celebrates amazing pet experiences, creates great strategies, and delivers on our promises both internally as well as externally. We'll accept nothing less. The initiatives planned for the back half will continue to move our transformation forward, and I look forward to sharing updates as we progress. With that, I'll hand the call over to Sabrina, take you through the specifics of our strong second quarter results, and share the details of what we plan to accomplish over the balance of 2025. Sabrina?
Speaker 6
Thank you, Joel. Good afternoon, everyone. I'm pleased to share our continued progress on strengthening our economic model. As we've discussed with you previously, and in line with our goals laid out at the start of the year, we are executing with intention to build a strong foundation from which to grow. This means expanding our gross margins and leveraging SG&A, resulting in improved profit, cash flow, and overall returns. Our teams are moving with urgency as we execute against this phase of our transformation, and our second quarter results reflect our continued progress. In line with our outlook, net sales were down 2.3%, with comparable sales down 1.4%. As a reminder, the difference between comparable sales and net sales is driven by the 25 net store closures in 2024 and the additional 10 net closures year to date, bringing our U.S.
store count at the end of the second quarter to 1,388. It's worth noting, on a two-year basis, comparable sales improved 130 basis points from Q1 to Q2, driven by improvement in our store performance. Our top-line results primarily reflect the decisions we are making to move away from unprofitable sales, shifting instead to disciplined promotional strategy, better retail execution, and enhanced customer experience. This work resulted in gross margin expansion of more than 120 basis points versus last year to 39.3%, with gross margin in both products and services expanding once again this quarter. Similar to Q1, gross margin expansion was driven by a more disciplined approach to both average unit cost and average unit retail, including stronger guardrails and the deployment of more disciplined processes to effectively manage our pricing and promotional strategies. It's also worth noting that there was minimal tariff impact in the second quarter.
Moving to SG&A, for the quarter, SG&A decreased $36 million below last year and leveraged more than 150 basis points. As we've discussed previously, our management of expenses is not simply a one-time cost-cutting exercise, but rather a fundamental shift in mindset around how we operate, and that new rigor is evident in our results. A little over a quarter of the $36 million improvement year over year came from employee benefits optimization work. Over the last several months, we conducted a comprehensive review that resulted in meaningfully improved actuarial results. We recognized the benefit of all this work as we trued up our reserves to the semi-annual actuarial report in the second quarter. More efficient store labor and operations expense, along with expense management across the board, drove the remainder of the improvement, though notably, marketing expenses were about flat on a year-over-year basis in the quarter.
While there's more work ahead, we're pleased with the progress we've made to adopt a more disciplined mindset. Our expanded gross margin and expense leverage resulted in a $41 million increase year over year in operating profit to $43 million. Adjusted EBITDA increased $30 million to $114 million and expanded nearly 220 basis points to 7.6% as a percent of sales. Moving to the balance sheet and cash flow, inventory continues to be well managed, with ending inventory 9.5% below last year, all while achieving higher in stocks for our customers. Free cash flow for the quarter was over $50 million, and year to date was about $10 million. Both the quarter and year to date were well above the prior year. We ended the quarter with a cash balance of $190 million and total liquidity of $684 million, including the availability on our undrawn revolver.
Now, turning to our outlook for the full year, we are raising our adjusted EBITDA outlook for 2025. We now expect adjusted EBITDA to be between $385 million and $395 million, an increase of roughly 16% at the midpoint. For the full year, we continue to expect overall net sales to be down low single digits to last year, which includes the impacts of store closures in 2024 and 2025. It's important to note that the impacts of tariffs will become sequentially more meaningful as we move through the back half. Additionally, the significant progress we've made during the first half against strengthening our economic model and improving our earnings profile provides us the flexibility to selectively invest behind the business where it makes sense as part of our ongoing efforts to set the stage for phase three, a return to profitable sales growth.
For the third quarter specifically, it's important to keep in mind that over the last five years, adjusted EBITDA in the third quarter has been sequentially lower than the second quarter. In line with that historical seasonality, we expect adjusted EBITDA to be between $92 million and $94 million, up nearly 15% year over year at the midpoint. We expect net sales to be down low single digits versus the prior year. As an important reminder, we are lapping the toughest sales compare of the year in the third quarter. With regards to other guidance items, for the full year, we expect depreciation to be about $200 million, net interest expense of approximately $130 million, about 25 net store closures, and approximately $125 million to $130 million of capital expenditures with a greater focus on ROIC.
In closing, Joel spoke about the energy inside the organization, and I wanted to also take a moment to thank all of our teams for the incredible work accomplished to date, the output of which is clearly evident in our strengthening bottom line results. With that, we welcome your questions.
Speaker 8
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Michael Lasser with UBS. Please go ahead.
Speaker 1
Good afternoon. Thank you so much for taking my question. It sounds like you're moving closer to phase three. Joel, when is a reasonable expectation for us to hold the firm accountable for generating a positive comp? Is that by the fourth quarter of this year, or is that more likely a 2026 outcome?
Speaker 7
Thanks, Michael. As I think both of us mentioned, Tina went into detail, or sorry, Sabrina went into detail. Third quarter is our hardest compare of the year. Like I outlined earlier, we are smack in the middle of phase two, Michael. While we are beginning to seed ideas and test and learn, as we like to call it, for phase three, the results will begin to show up in 2026 as it relates to a positive comp. We will start to work on ideas right now, Michael.
Speaker 1
Okay. My follow-up question is, it sounds like the gross margin gains came in part from eliminating some promotional and unproductive activities. Were those mostly online, and is that what drove the weakness in the online segment? If you were to take away the online channel, would Petco have generated a positive comp in the stores business?
Speaker 7
Yeah, Michael, I don't want to get into specific segments, but as you can tell from my remarks, we've really been focused on the stores. It is where the majority of our sales are, and therefore, it was intentional that that's where we start. We see it as the biggest opportunity long term for us, and we wanted to get that underway. Not only are we pleased in the results the stores are making, but the traction we're getting on e-comm is working as well. That's been more focused on the bottom line.
Speaker 6
To add a little bit to that, Michael, I would say everything Joel said about the stores, ditto. Online last year did have much more promo and stacking that we needed to clean up. We have, if you think about it, if you want to think about it between stores and e-comm, there was more cleanup to be done on the e-comm side to be helpful.
Speaker 1
That's very helpful. Thank you very much, and good luck.
Speaker 7
Thank you.
Speaker 6
Thank you.
Speaker 8
The next question will come from Steven Zaccone with Citi. Please go ahead.
Speaker 2
Hi. Good afternoon. Thanks very much for taking my question. I want to follow up on Michael's question on gross margin. Could you just dig a little bit more detail there, how that performed relative to your own expectations? It looks like a big B. It sounds like there's some timing aspect with tariffs. Could you just elaborate on that a little bit more, how we should think about gross margin rate in the back half of the year?
Speaker 6
Yes. We have been super focused. You know, from our first call together, we've talked about the economic model and how one of the most important tenets of that is expanding our gross margin on a year-over-year basis for the full year to get our business healthy so that when we do regrow sales, it has a nice flow-through on healthy margins. We have been working every lever, AUR, AUC, within those, you know, every lever, promo, pricing, clearance, markdown, to deliver on that gross margin expansion. We're really pleased how it came through on both merchandise and services in the second quarter. When you look forward, those fees, for sure, tariffs start to impact. We had almost no tariff impact in Q2. There was some, but it's like, let's call it rounding.
As we go to Q3, it becomes meaningful, and then it becomes even much more meaningful in the fourth quarter.
Speaker 2
Okay. Understood. I guess the follow-up then on that is just how do we think about, you know, mitigation efforts? Maybe as it relates to the top line specifically, how did pricing perform in the second quarter and what's your view on pricing as we get into the back half of the year?
Speaker 6
We have been doing pricing all year long. Maybe different than a lot of retailers who perhaps are reacting to the second half tariffs, we have been using this vehicle as we came together as a new leadership team from the get-go. There is less of a change in the second half, but will we be using that lever? Of course, we will, but it will be with a consumer-first lens. We are very focused on delivering on a value proposition to our customer. No change there, but yes, it will continue to be used.
Speaker 2
Okay. Understood. Thanks very much. Best of luck on the back half.
Speaker 6
Thanks.
Speaker 8
The next question will come from Steven Forbes with Guggenheim Securities LLC. Please go ahead.
Speaker 0
Hey, guys. This is Jake Nebosh on for Steve. Thanks for the time. Two questions for me here. One, I think you guys mentioned last time that you were working on some planogram resets, and I wanted to circle back to see if you could provide some updates on the work there, and then I have a follow-up.
Speaker 7
Yeah. I think we were specifically talking about our dog and cat reset back then. Think about my prepared remarks where I talked about on-shelf availability, better in stocks, making it easier for our store associates to fill the shelves, which therefore makes them more productive, which makes our stores more profitable. It was very successful. We've completed those resets. You'll continue to see more of those as we move through this year and into next year in other categories. It's just a great example of the diligence the teams are making to improve the profitability in the stores, improve on-shelf in stock for our customers, and make our stores more customer-friendly.
Speaker 6
Yeah. Just to tag on to that, as you heard me say, part of our SG&A savings was store labor and operations. That is exactly what Joel's talking about, that we got a lot of operational benefits that are flowing through in our expense savings.
Speaker 7
You had a follow-up, Steve?
Speaker 0
Yes, perfect. Just a follow-up here.
Speaker 7
Oh, Jake?
Speaker 0
I know, Ben, hey, you touched on this a little bit, but curious if you guys can share some more detail around the North Star initiative that you guys have been working on. Maybe it's too early, but curious if you have any updates there.
Speaker 7
Yeah. I think, you know, we'll certainly give you a more detailed outlook on that as we get into the specifics of phase three and growth. I can tell you, as we think about phase three, there are really four main pillars to it. It's all about delivering an amazing store experience. You know, our partners are pet-first, and that's what sets us apart. It's delivering services at scale. You know, services aren't easy. In many ways, I think of that as our moat. That clearly showed up in our North Star work of how important our services were. The ecosystem of interacting between grooming, hospital, and center of store is something Petco only can do. Third pillar, merchandising differentiation. I've alluded to that, gave you several examples in my prepared remarks, but you're going to see more newness out of us, more surprise and delight.
We have to be relevant. No more of set it and forget it. You know, seasonal categories, pricing, that all comes into the merchandise differentiation. Finally, number four is, over time, winning with omnichannel. Those are kind of some of the pillars that are coming out of our North Star work that's going to drive our growth down the road. Thanks, Jake.
Speaker 0
Perfect. Thank you very much, guys.
Speaker 8
The next question will come from Kaumil Gajrawala with Jefferies. Please go ahead.
Speaker 1
Hi, everybody. I guess a couple of things. The first is just, you know, where we sort of are in the process of the, you know, the e-commerce sort of pullback and eventual retool. Is that sort of complete? Exactly the same question, I guess, on the inventory side. Inventories came down nicely. Are inventories where you sort of intend them to be now, or is there still more work to do? Really, like, are those two projects kind of, you know, mission complete and time to move on, or still more to get done?
Speaker 7
Yeah, Kaumil, let me take e-comm and then Sabrina, if you want to chime in on inventories. As I said earlier, it was our intentional focus to start on the stores first. In a unique way, by us reducing sales in e-comm, our e-comm channel is actually more profitable today. The work we've been doing is just getting started and is ongoing. We hired a new leader. He's already making a big impact. We're reducing friction, and quite honestly, we're just improving basic retail 101 operating principles, like speed, page load time, appointment scheduling enhancements, improving repeat delivery. Our loyalty program will come in 2026. We think we've got plenty of media buying optimization to do and really improve our targeting and personalization. Those are just several examples. I would say we're in the phase on e-comm of identifying, and now we'll focus on implementing. Sabrina on inventory?
Speaker 6
Yeah. With regard to inventory, yes, we're so proud of the work the teams have done, even in the face of, you know, tariffs, to get the inventory dollars down so far. We're big on continuous improvement. I believe there's always opportunity, but we don't want to push it too far. We pulled off, as I said, a down 9.5% with improving in stocks at the same time. Our goal is to always have a tight relationship between sales and inventory, and inventory below sales, to me, is always a great thing as long as it's not hurting the customers. That's what we'll be focused on continuing to deliver.
Speaker 1
Got it. If I could ask about your commentary on the increasing Net Promoter Scores, if you know, sort of post-mortem, what's behind that? Is it just the marketing? Is it what's happening in store? It just feels, given the way you've laid out the phases, that it's something that you'd expect when you're much further along phase three than you may at this stage. Just curious if there's anything behind that.
Speaker 7
It's a whole host of a lot of improvements. Joe Vinizzi, who leads our stores organization, of the new leadership team's probably been here the longest. He's made traction in many different areas. We've already had one leadership meeting with the leaders of the stores organization. We've got another one I talked about coming up next month with all our store general managers and above. Those are just examples of us reinvesting back in our people and really putting effort into the store experience. It's clearly beginning to resonate with our customers. It's showing up in the metrics I shared with you. I really believe it's really important for Petco to have a great store experience. That's why we really leaned in initially with our store partners.
Speaker 1
Got it. Thank you.
Speaker 7
You bet.
Speaker 8
The next question will come from Kendall Toscano with BofA Global Research. Please go ahead.
Speaker 5
Hi. Thanks for taking my question. The first thing I wanted to ask was just on the comp, if you could comment on any of the transactions versus AUR trends that you saw during the quarter. Thanks.
Speaker 6
Sure. Overall, we're pleased with UPT and Basket. Transactions is a place we are very focused on improving. That is really the biggest opportunity for us. You heard Joel talk about how we're starting these great efforts on events and making the store fun and doing much more marketing. We are looking forward to improvement there, but that was the one that held us back in the quarter. Joel, do you want to add anything?
Speaker 7
I think that really covers it nicely. As we get towards growth, the real focus will be on starting to invite customers back into Petco. We shared with you some examples of that with the store experiences.
Speaker 5
Okay. That's helpful. The other question was just, it sounds like there's been a lot of progress in key areas like inventory and in stocks. Curious just where the biggest remaining execution gaps are that you're working to address before you'd be more confident to shift fully into phase three.
Speaker 7
As I alluded to in my prepared remarks, our back half begins to contemplate reinvesting back in the business. I think it's less about the gaps, and it's more about how pleased we are with the progress we've made to date. That progress gives us the confidence that we will continue to make progress. Sabrina talked about inventory. There are always opportunities there. The teams made such progress that we're beginning to invest. It's now the shift starts to be talking about those four pillars of growth that I alluded to on a couple of questions ago. That's where our focus is.
Speaker 6
To elaborate on what Joel said, we just think there's such a nice runway here, even if you just think about margins alone. We've been really focused, like we said, on AUC and AUR levers, including inventory management, pricing, promo, markdown, and clearance. What's kind of yet to come that we're in the early stages of is we think there's a lot of opportunity in sourcing. We think there's a lot of opportunity in expanding categories like pharmacy, in regrowing over time our supplies business. We still have a lot of levers left in front of us, which makes us very excited.
Speaker 5
Got it. That's really helpful. Thanks again.
Speaker 7
Thank you.
Speaker 8
The next question will come from Simeon Gutman with Morgan Stanley. Please go ahead.
Speaker 3
Hey, Joel. Hey, everyone. Can you talk about the number of pet families? Can you talk about growing, declining? Joel, what are you learning about the families as far as the departments they're shopping, the services they're using you for? Anything that's surprising you from when you started?
Speaker 7
Yeah. Simeon, good question. I would say our industry data is showing that the pet space is relatively flat right now. In fact, for us, as we've intentionally focused on the bottom line rather than the top line, we're really pleased with our performance as we're not giving up that much market share, and at the same time, making significant improvement on the bottom line. As far as the observations we've made from that, I've seen, I've been surprised at how many one-time customers we have. I think that's probably some areas where we were too bottom of the funnel focused on our e-commerce channel as opposed to being more focused on omni customers, lifetime value of customers. Those are some of the changes we'll make. We also have a significant amount of customers that shop us for our services only.
We've got an opportunity there to grow that share of wallet with our customer into some of our other categories, merchandise, improve our repeat delivery capabilities so they use us. Those are just a couple of examples, Simeon, of things we've observed through all our North Star work.
Speaker 3
Okay. You mentioned just toggling some inventory, bringing some new stuff in. Is there any, and I'm sorry if this was asked, is there any inventory movement, markdown risk associated with changing merchandise mix going forward?
Speaker 7
Nothing significant, Simeon. Obviously, when you change inventories, optimize inventory, you can tell, as Sabrina said, our inventory was nearly down double digits. That didn't come with a huge inventory risk at all. We got to be disciplined about it, Simeon, and go at it methodically, but I don't see any big inventory risk on the horizon.
Speaker 6
Yeah. Just to underscore that, the teams are really focused on improving the governance and processes around inventory and buys. We absolutely need more newness for our customers, and we're excited to bring it in. Those buys will be tight and well-controlled, seasonal, and fast-churning. We intend to manage it with a lot of good progress, process, and governance.
Speaker 3
Thank you.
Speaker 7
Thanks, Simeon.
Speaker 8
The last question for today will come from Justin Kleber with Robert W. Baird & Co. Please go ahead.
Speaker 1
Hey, everyone. Thanks for taking the questions. Joel, you've been talking about cleaning up these empty calorie promos for a handful of quarters. I'm curious if you could help us size the drag to the comp from this activity. If we normalize for what you're doing, I mean, is the business comping up, kind of excluding the cleanup of these promotions?
Speaker 7
I don't know. That's probably a little too specific to get into. I think it's more important to look at it in terms of where we're at with the progress. You know, both Sabrina and I commented that Q3 is the toughest compare. What you can glean from that is we started in on this progress in Q4 of last year. We identified more in Q1 and so on. As we continue to find opportunities where there were empty calorie sales, we are offsetting those with some of the growth initiatives that are starting to take place. We still need to get through, especially this Q3 and in the beginning of the holiday season.
Speaker 6
The only thing I'd add to that is what I was just going to add, Justin, what Joel already said in his remarks, which is what we see under the covers is improvement in our store performance. That's really important to us because that's the vast majority of our sales. Just to reiterate, that was our first area of focus, and it's just great to see the improvement there. E-comm is probably six months behind because new leader just started, and as Joel said, identification phase. We will get there because we know all the levers we need to work, but we're very pleased with what's happened in our stores.
Speaker 1
Thank you for that helpful color. Just a follow-up on the implied fourth quarter adjusted EBITDA guide. It looks like at the midpoint, if you do the midpoint of your third quarter guidance, you'd be down 2% year over year. I'm just trying to understand what is driving the decline. Is it more about the tariff headwinds building, or more about your intentional investments back into the business as you set the stage for a return to growth?
Speaker 6
Yeah. I mean, we gave ranges. It kind of depends where you model it in depth. What I will reiterate about the fourth quarter is definitely tariffs have the most meaningful negative impact in Q4. Secondly, we're excited because of our strong performance in the first half. We're excited that we get to keep some powder dry in the second half for areas of investment should we deem them worthy of investing. The only thing we have committed to, by the way, is the leadership summit that Joel talked about. We want to keep that dry powder. Finally, I think it's good to just protect against volatility because I don't think the macro is completely out of the woods. We live in times where there's big news cycles nearly every day. We feel like we've taken a prudent approach to the back half.
Speaker 1
Makes perfect sense. Thank you both for your perspective, and best of luck.
Speaker 7
Thank you, Justin.
Speaker 6
Thank you.
Speaker 8
This will conclude our question and answer session. I would like to turn the conference back over to Ms. Tina Romani for any closing remarks. Please go ahead.
Speaker 4
Perfect. Thank you so much, Joel and Sabrina, and thank you, everyone, for your time and your questions. We're looking forward to seeing many of you next week. With that, that concludes our call.
Speaker 8
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.