Petco Health and Wellness Company - Earnings Call - Q3 2026

Transcript

Speaker 1

Noon, and welcome to the Petco third 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. 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 Tina Romani, Head of Investor Relations and Treasury. Please go ahead.

Speaker 2

Good afternoon, and thank you for joining Petco's Third Quarter 2025 earnings conference call. In addition to the earnings release, there is a presentation available to download on our website at irpetco.com. On the call with me today are Joel Anderson, Petco's Chief Executive Officer, and Sabrina Simmons, Petco'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 filings. 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 filings. With that, let me turn it over to Joel.

Speaker 0

Thanks, Tina, and good afternoon, everyone. Thank you for joining us to discuss our third quarter results, where I'm pleased to share that we delivered another profitable quarter in line with our plan. We've continued to strengthen the foundation of our operating model, improve retail fundamentals, and position Petco for sustainable, profitable growth over the long term. We delivered sales in line with our outlook and meaningfully improved our profitability, increasing operating income over the last year by over $25 million, generating $99 million in adjusted EBITDA and more than $60 million in free cash flow. I want to thank our teams across the organization for their dedication, focus, and execution on our transformation initiatives that are continuing to gain traction, as reflected in our improvement in profitability and cash flow in Q3 and year to date.

You've heard me talk about the importance of culture, and you will continue to hear that as a key theme of our transformation. When I joined Petco, we had a strong culture centered around Pets First. The passion of our 30,000 partners was one of the many things that attracted me to joining. Over the last nine months, as a collective leadership team, we've been building on that culture in two ways. First, through reinstilling retail fundamental discipline, which is driving increased financial rigor and accountability. This is a testament to how the organization has embraced new ways of working with strengthened operating principles and was a large contributor to our results. Second, creating a culture that is playing to win. We are fostering a culture equally focused on operating discipline and a winning mindset.

Last month, I had the opportunity to spend time with our support center and store leaders at our leadership summit. Together, we aligned on what our go-forward values will be for a reimagined Petco and what that means for our customers and our plans to execute on our One Petco Way vision. We are squarely in phase two of our transformation, which is centered on improving profitability and strengthening our foundation from which to grow. The success to date has fundamentally changed the way we think and work to continuously identify future areas of opportunity that will further unlock long-term value. At the same time, we are now strategically shifting resources towards phase three, our return to growth, now that our bottom line has meaningfully been improved. Last quarter, I outlined the four pillars that support Petco's return to growth. First, delivering compelling product and merchandise differentiation.

Second, delivering a trusted store experience. Third, winning with integrated services at scale. Finally, serving our customer with a seamless, omni experience. Let me now provide you more specific color on each pillar. Starting with compelling product and merchandise differentiation, I view this in two categories. On the consumable side, we have improved shoppability with higher in-stock availability. Our customers rely on us to have everyday go-to product. Better integrated assortment planning and merchandising teams have created an improved in-store experience as well as online. On the discretionary side, we are focused on infusing a steady stream of newness in 2026 that complements our evergreen product assortment with more seasonal and trend-driven buys. Previously, there has been a set-it-and-forget-it mentality, which is not a very aspirational shopping experience and one that we are changing.

As we look forward, we see significant opportunity to change our collective merchandise mindset from solely a needs-based business to also a wants-based business by overhauling our product offering and surprising our customers with unexpected ideas for their pets. A great example with the success of our online pilot, our new MyHuman product line was expanded into over 200 stores. This is a small milestone but exemplifies our team's focus and ability to lean into trend-forward impulse purchases. Next, moving to a trusted store experience. Joe Venezia, our Chief Revenue Officer, who joined us just about a year ago, leads our operations and services team. Since joining, he has been focused on store simplification, standardizing processes across our fleet, and taking costs out of our operations. He is now shifting his focus to additionally include revenue-driving KPIs like increasing transaction size, driving sales contests, and increasing customer interactions.

With our passionate partners, strong customer engagement, and a full suite of services, we can create both a fun and convenient experience that pet parents are unable to get anywhere else. Our store partners are a unique differentiator for Petco. We benefit from having long-time, passionate, and knowledgeable partners that serve our pets and our pet parents. Our opportunity today is around making it easier to run our stores, freeing up our store associates to interact with customers and use what we call their superpowers of pet knowledge. Improving these areas will make it easier for us to drive sales growth in 2026. Moving now to services at scale. Our nationwide wholly owned and operated services business continues to be our fastest-growing category and is our competitive moat given its in-person nature, high barriers of entry, and difficulty to replicate.

The holistic ecosystem between grooming, owned hospitals, clinics, and center of store can only be found at Petco. What especially excites me here is the opportunity we have with our existing assets. I think about it in three ways. One, improving utilization through increased staffing and appointment availability. Two, improving engagement through enhanced digital capabilities. Three, improving integration of services and center of store. With regards to veterinarian staffing, I'm pleased to share that we are ahead of our doctor hiring goals that we set at the start of the year with record-high doctor retention. During the quarter, we also promoted two of our long-time leaders to Chief Veterinarians, reinforcing our commitment to growing our veterinary business. Simultaneously, we are fostering a culture of team development, top talent recruitment, and execution of our strategic veterinary initiatives.

All of this is foundational and is critical to increasing the utilization of our hospitals. Additionally, we are increasing access to care by strategically adding hours back on peak client demand and making appointments easier to book. We are standardizing processes across our fleet to secure in-store follow-up bookings. We are increasing efficiency through our refined grooming apprenticeship model, freeing up both appointment availability and increasing volume. Finally, we are enhancing online appointment scheduling to ensure we have better coverage and better flexibility for our customers. Clearly, Q3 has been a busy yet productive time for our services businesses. Let me spend a moment on improving integration between services and center of store, as the opportunity here may not be well understood. Historically, Petco's stores and services operations were run relatively siloed, which was a missed opportunity.

There is a tremendous value unlocked when better integrating our stores and services experience. I'll give you a simple example. Previously, our veterinarians did not have access to customer purchase data. We are in the process of fixing that, and in 2026, our veterinarians will be able to see purchase history and make more informed diet recommendations based on overall pet health and specific needs. Taking that a step further, the veterinarian will be able to direct the customer to the recommended product in store or recommend a store associate to assist. This is a simple example but illustrates how increased integration of services and stores can create a better outcome for pets and improved experiences for our customers. Now, moving on to our fourth and final pillar, seamless omni integration.

Layered onto everything I just discussed are enhanced digital capabilities, a more compelling membership offering, and a frictionless digital store experience to customers wherever they choose to engage. I'm happy to report we are on plan with our improvements, and in fact, we are starting to implement some of these changes in Q4 of this year. For example, we are transitioning the way we buy media, beginning with better targeting and bidding strategies, which we expect to drive efficiencies in our marketing spend as we continue to strengthen Petco's reintroduction of our tagline, "Where the pets go." I'm pleased with the progress on the membership program, and we will begin live testing and pilot the program this quarter in a small handful of districts. Our focus on these four pillars will fuel our growth, which we still expect to see in 2026.

In closing, as you can hear in my voice, this has been a productive quarter at Petco, and I'm pleased with the progress we continue to make on the commitments I outlined at the beginning of the year. As each quarter passes, we get better at celebrating amazing pet experiences, executing our strategies, and delivering on our promises internally and externally. The initiatives planned for the fourth quarter will advance the Petco transformation, and I look forward to sharing updates with you in March. Ahead of the Thanksgiving holiday, I want to personally express my gratitude for our partners who put pets first every day and boldly reflect who we are and what we stand for. Our Petco Love Foundation has demonstrated our longstanding commitment to saving lives, finding loving homes for over 7 million pets to improve the welfare of animals.

With that, I'll hand the call over to Sabrina to take you through the specifics of our third quarter results and outlook for the remainder of the year. Sabrina? Thank you, Joel. Good afternoon, everyone. In the third quarter, Petco once again delivered against our commitments while building a stronger foundation from which to grow. As we've discussed all year, strengthening the health of Petco's economic model has been our top priority. I'm pleased with our progress as demonstrated in our expanding gross margin, expense leverage, and operating margin expansion, not only in the quarter but year to date. In line with our outlook, which reflects our decision to move away from unprofitable sales, net sales were down 3.1% with comp sales down 2.2%.

As a reminder, the difference between total sales and comp is driven by the 25 net store closures in 2024 and the additional 9 net store closures year to date. We ended the quarter with 1,389 stores in the U.S. Gross margin expanded approximately 75 basis points to 38.9%. Similar to the first half, gross margin expansion was primarily driven by a more disciplined approach to average unit retail and average unit cost, including stronger guardrails and more disciplined processes to effectively manage our pricing and promotional strategies. It's important to note that in this quarter, tariffs began to more meaningfully impact our cost of goods sold. Moving to SG&A. For the quarter, SG&A decreased $32 million below last year and leveraged 97 basis points. As we've discussed previously, our shift in mindset and increase in rigor around expense management is evident in our results.

Savings were achieved across the board and especially in G&A areas. Notably, marketing spend was about flat year over year. Our expanded gross margin and expense leverage resulted in operating margin expansion of over 170 basis points. Adjusted EBITDA increased 21% or $17 million to $99 million, and adjusted EBITDA margin expanded nearly 140 basis points to 6.7% of sales. Moving to the balance sheet and cash flow. Q3 ending inventory was down 10.5% while achieving higher in-stocks for our customers. We continue to manage inventory with discipline, which is one of the drivers of our improving cash profile. Free cash flow for the quarter was $61 million, and year to date was $71 million. Both the quarter and year to date were significantly above the prior year. Notably, year to date, cash flow from operations has nearly doubled versus the prior year to $161 million.

We ended the quarter with a cash balance of $237 million and total liquidity of $733 million, including the availability on our undrawn revolver. Now, turning to our outlook for the full year. We are once again raising our adjusted EBITDA outlook for 2025. We now expect adjusted EBITDA to be between $395 million and $397 million, an increase of roughly 18% year over year at the midpoint. For the full year, given we are entering the last quarter, we are narrowing our range for net sales and now expect net sales to be down between 2.5% and 2.8%. For the fourth quarter, we expect net sales to be down low single digits versus the prior year as we continue to execute on the initiatives we have outlined. We expect adjusted EBITDA to be between $93 million and $95 million.

It's important to note that the impact of tariffs is sequentially more meaningful in Q4. Additionally, the significant progress we've made year to date against strengthening our economic model and improving our earnings profile has provided us the option to begin selectively investing behind the business where it may make sense as part of our ongoing efforts to set the stage for phase three, a return to profitable sales growth. With regard to other guidance items, for the full year, we expect depreciation to be about $200 million, net interest expense of approximately $125 million, about 20 net store closures, and $125-$130 million of capital expenditures with a greater focus on ROIC.

In closing, as Joel discussed, we're in a period of significant change, and I want to extend my deepest appreciation to all of our teams for embracing that change to deliver better outcomes for all of our stakeholders. With that, we welcome your questions. 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. In the interest of time, please limit yourself to one question and one follow-up. We will now pause momentarily to assemble our roster. The first question will come from Simeon Gutman with Morgan Stanley. Please go ahead. Hi guys. Hey, Joel.

I was intrigued by something you talked about, some of the wants. Can you talk about, can you frame what mix of the business is wants versus needs today? This may be far out there, but what is the vision? My guess is the wants are not truly wants. I think it is, given your background, there is probably some unique merchandising that is partially wants, but curious how you can frame that and maybe tease it out a little. Yeah. Hey, thanks, Simeon. It is a great question. Yeah, if you think about it in the traditional sense, consumables is traditionally a needs business and is the overwhelming majority of our business. Even that business, Simeon, I think has some elements to it that can be more of a wants in principle.

What I mean by that, and I alluded to it in my prepared remarks, we've just had this set it and forget it mentality for our entire business. If I just focus on consumables for a second, for example, in 2025, our dog food business was largely all surrounded around one big episodic reset in the middle of the year. We are really going to change that in 2025. As our big vendor partners come out with innovation, newness, different types of product, new flavors, cat extensions, we are going to roll that out in line with their timing, not our timing. That is going to make more of a perception of wants rather than just needs in the sense that somebody walks in and is a sense of discovery, and we just have not been good at that in the past, Simeon.

I think the whole business has an opportunity to create more of an exploration throughout our store, not just our supplies business, which is traditionally probably the way you were thinking. There's an element to it in consumables as well. Certainly when we get on the call in March, we'll go through that in more detail. I cut you off, Simeon. No, I cut you off. My follow-up, it's related. You talked about integrating the store functions. You talked about wants versus needs. Then there was a little bit of maybe forward investing, I think Sabrina just mentioned. By the way, the business itself is getting close to lapping whatever tough compares. It seems like it's naturally getting back to positive territory.

What kind of clicks or what's the priority among the things we heard where the top line starts to move, or is it something we haven't heard yet? No, I don't think it's something you heard. I think, look, we're going to approach 2026 from the top line the same way we approached 2025 from the bottom line. In 2024, we came out with the strategies that would fix the bottom line, and then we executed them in 2025. We're doing the same thing for top line growth. I outlined four pillars. We backed it up with building blocks, which I talked about many of them today. We're going to execute against those with the same rigor and discipline. It's not just a cross your fingers and hope. We've got plans around four pillars with a lot of building blocks for each one of them.

I'm really excited about all four of them. I alluded to some of them that we're already testing here in Q4, but all of them are making traction, and some just take longer to implement than others. Teams are all focused, and we got a good plan. Okay. Happy Thanksgiving. Take care. Thanks, Simeon. You bet. Next question will come from Oliver Wintermantel with Evercore ISI. Please go ahead. Yeah, thanks. Joel, what is the realistic timeline for comp stabilization, and which categories or customer behaviors would represent the biggest swing factors there? Yeah. Look, I'm not going to get into 2026 today on this call and the timing of it, but certainly what you should expect from me in March is to not only give you guidance for Q1, but we'll give you an outlook on the full year.

Specifically, I can tell you all four of the pillars I went through today are getting traction. I would expect all four of them to contribute towards comp in 2026. We will outline the timing for you on the March call. Got it. That makes sense. Just on the free cash flow side, strong improvements there year to date and into the quarter. How much of the Q3 working capital improvement is sustainable, and what financial or operational levels continue to support the cash generation for next year? Yeah. I mean, I think we view cash flow and all of its levers as continuous improvement. We certainly are focused on continuing on this path of generating strong free cash. The principal lever, of course, Oliver, is net earnings.

We're going to continue to focus on our bottom line and growing net earnings. We'll continue to focus on inventory discipline. We're not done. We've made huge strides this year in terms of rationalizing our SKUs and reducing our inventory compared to our sales, which is fantastic. I wouldn't say we're best in class in terms yet. We still have a lot of opportunity. We'll be looking at that lever as well as all of our other levers to continue delivering on strong cash generation. Excellent. Good luck and happy Thanksgiving. Thank you. Thank you. Next question will come from Michael Lasser with UBS. Please go ahead. Good evening. Thank you so much for taking my question. Can you size the magnitude of the potential investments that you would make and what forms those are going to come in, whether it's labor, marketing, or promotions?

Are those investments necessary as you look to 2026 in order to drive top line growth? I will just start, Michael, with the framework, and then Joel can chime in on how he feels. He is looking at each one. What we have tried to do, and we are really pleased that we banked so much profit improvement through Q3. This has afforded us, as I said, the option, and it is only an option, to consider investing in areas that we think can drive improvements, both in Q4 but also for our future. Everything you mentioned is on our plate of options. Certainly marketing, certainly looking at labor.

Sure, we'll always continue to look at promos to see if we can do them effectively in a way that brings value to our customer, but also in a way that's very responsible as we continue to manage our margin expansion. Joel, do you want to? Yeah. Sabrina, I think you nailed that pretty good. And when Michael, I look at the four pillars we outlined, I don't think any of them, as it relates to 2026, require any substantial step change from what we're doing today in terms of cash investment or change in OpEx investment or something. It's really you take merchandise. We're selling through our existing merchandise, and we're buying into new. So that's really just a steady flow change. And really don't see any episodic change in 2026 from an investment standpoint, from the runway we're already on today.

I guess the question and the critical point is, can Petco experience the same magnitude of the improvement in their profitability while reversing what seems like some market share losses this year and be on that path next year? Yeah. If I'm hearing you, Michael, and I might want you to repeat the question, but we for sure believe that investments are going to be necessary. Our whole focus, and what I've talked about all year long in terms of the economic model we're pursuing, is delivering leverage on expenses. As you know, if sales improve, you increase operating expenses and still deliver leverage. We are very aware that we need to make some investments. That is why we're talking about in Q4, we may make some of those investments in advance of entering the new year because we've been able to bank so much profitability and leverage.

We will measure our success in meeting our goals and expanding margin and delivering expense leverage on a full year basis. That is another thing we always said. We never said every single quarter in the same way. It is on a full year basis. That is why we have given ourselves the option because we know that the next phase will require investment, and we are prepared to stand behind that in a responsible way that still delivers on our full year goal to deliver the model. Sabrina, could I just clarify? If we look at what the embedded EBITDA margin is in the fourth quarter versus what Petco has experienced over the last couple of quarters, it looks like the pace of improvement is going to moderate.

Should we think about the magnitude of the potential investment, the option for investing would be the difference between what Petco has achieved over the last couple of quarters and what's implied in the fourth quarter. Is that how we should think about quantifying that potential investment? I think that's a fair framework, Michael. I would add to that, as we looked at Q4, as I stated, remember when we think about gross margin, there's more tariff impact. That's just one factor. It's not enormous, as we said, all year. We're pleased that we're in a retail sector that doesn't have mountains of tariffs, but it is an impact. That's one factor. The second impact is that investment that we're talking about and how much we will choose to do and how we'll manage through that in the fourth quarter.

Yes, I think your statement, broadly speaking, is fair. Okay. Thank you very much, and good luck with the holidays. Thank you. Next question will come from Kendall Toscano with Bank of America Global Research. Please go ahead. Hi, thanks for taking my question. Hopefully, you can hear me okay. I was just wondering if you could talk more about the impact of tariffs during the quarter. I know you mentioned they became more meaningful in Q3, but maybe not as much as you're expecting for the fourth quarter. Just curious what you saw in terms of COGS impact, if any, and then in maybe some categories where there was tariff impact on price. What did you see in terms of consumer elasticity? Thanks. Yeah. Thanks, Kendall.

Just to go back to our statement, the first time we saw a tariff impact flow through our P&L, through cost of goods sold, in any meaningful way, is the third quarter because the second quarter had, let's call it, de minimis amounts of that. We had it on our balance sheet. We had it in inventory bias, but it was not flowing through COGS yet. Third quarter is the first quarter of that. My only point was, in the fourth quarter, it becomes a bit more meaningful. It is just a reminder that sequentially, the tariff headwinds are a bit more meaningful. Again, in the broad spectrum of things, it is a very manageable number, which we have managed all year and have been revising guidance upward in the face of it. I think that hopefully helps frame it up.

We also know that it is mostly in the private label supplies area, as we have said in the past. Hopefully, that helps frame it up too. Got it. That is helpful. My other question was just in terms of some self-inflicted headwinds in the services segment as you have deprioritized that program ahead of the planned relaunch. Just curious, as you are now getting closer to relaunching that in 2026, and it sounds like maybe starting to pilot it in the fourth quarter, what kind of tailwind would you expect to see on same-store sales growth or, I guess, just services growth? I think you mean our membership program. That is what it meant. Yes. That is what is combined with services in the way we report services and other. Probably, Joel, if you want to start with the membership program. Yes. Because our paid membership rolls into there.

I think the more important thing to take away from that is, and I alluded to it in my prepared remarks, that we are on track with our new membership program. In fact, here in the fourth quarter, we have begun live end-to-end testing in several markets. We really have not seen any major glitches, in fact, minor at best. That is a really good sign for us. We will then take that to a few more markets and roll out the new marketing attached to it and are still on track for a rollout sometime in 2026 with the rest of the fleet. Membership so far has really come together nicely, and it is a really important element to our growth that is going to begin in 2026. Yeah.

Since you raised it, Kendall, on the services piece, I think you can see that that continues to be not only a strategically important area for us, but it's also an area of nice growth and continues to be. Thank you. Next question will come from Kate McShane with Goldman Sachs. Please go ahead. Hi. Good afternoon. Thanks for taking our questions. We wanted to ask a little bit more of a higher-level question, just your view on where you think the industry is now from a digestion standpoint, where you think the industry can grow in 2026 if we do return to growth in 2026 for the industry, and just what you may have been seeing out of the competitive set this most recent quarter as some of these higher tariff costs and prices have come through. Yeah. Thanks, Kate.

Look, overall, the competitive set really has not changed much from the last quarter. I would say what has changed is the consumer has been probably a little bit more cautious. I mean, obviously, with tariffs and political tensions and interest rates still high, that has really been bogging down their outlook on the economy a little bit. As far as the pet industry goes, it has been pretty stable, flattish in terms of growth. I think the progress we have made on our digital side has really been promising, and that will be very important to us as we turn to growth next year. Overall, we are positioned nicely. Our services business, as Sabrina just talked about, is already growing, and that is an area of growth in the pet industry. We will layer in the focus we have made and the progress we have made on our digital improvements. Overall, it is pretty stable.

Thank you. Thanks, Kate. Next question will come from Chris Batiglieri with BNP Paribas. Please go ahead. Hey, thanks for taking the question. The first one I had was just hoping to know that the free cash flow profile has improved. How do you think about prioritizing the usage of cash? Is it continued debt paydown? Do you think about re-excelling in the veterinary practices? Just curious how you think about that over the next few years. Yeah. Our first priority would always be to invest in our business to sustain growth going forward. That is definitely the priority. That said, we go back to our statement that we have a lot of assets on our books already that really are ramping up now. Vet hospitals, predominantly the number one on the list, that are already on our books, that we are ramping up for better returns.

We do not have to make big capital investments in those. In fact, you will hear us talk about more in the Q4 call, Chris. We have a set of those where we are going to focus on bringing utilization up in 2026 as well without any large capital investments. I view this as really great news because it provides a nice path for return improvement while not having to invest a lot of capital in it. Of course, though, we will be looking at pockets and areas as we move forward, and we finalize what kind of remodel prototype we want to land on, how we will start to bring those into our system.

There is no huge big capital spend necessary in the horizon, likely to increase some in 2026, but no big, enormous, dramatic change overall in profile because we have these assets in our books where we are increasing utilization. Now, beyond that, beyond that priority to first invest in our business, the second, of course, is we are always looking, as I stated on the first call when I talked to you guys, we want to bring down our leverage on an absolute basis. We also want to bring down our ratio. We are doing a terrific job with the growth and profitability of bringing down the ratio. It is quite remarkable. We started the year at over four times debt to EBITDA, and if we hit the midpoint of our new guidance, we should be below three and a half times net debt to EBITDA. Quite a bit of progress.

Indeed, we'll look to opportunities to even potentially do some opportunistic debt paydown. Gotcha. That's really helpful. Your gross margins were, I think, down 20 basis points on the product line. Is that primarily the tariff headwind referring to, or is it also somehow or is the elasticity offsetting the ticket increase, and there's also a headwind on comps? Just curious about tariff headwinds we're referring to there or it's manifesting. Our merch margins expanded both in our products and services. Sorry. I meant quarter on quarter, not year on year. Oh, quarter on quarter, sure. Yeah. I would say that is primarily a little bit of tariff headwind coming in. Year on year, though, we are up in both products and services. Gotcha. Okay. Thank you. Next question will come from Steve Forbes with Guggenheim Securities. Please go ahead. Good afternoon, Joel. Sabrina.

Joel, you spoke about services and stores coming together. I guess my question is, can you help us frame up sort of how you guys see that opportunity internally, whether it be how spending per customer sort of evolves as they engage in services, if they're a store-only customer or vice versa? Any way to sort of talk about how the net sales per customer evolves as they broaden their engagement across the store? Yeah. Look, I think any great bricks-and-mortar retailer has to define their moat, has to define what differentiates them from anybody else. Services is definitely one of our moats, right? It's one of our key elements that is really hard for any other pet retailer to replicate in the way we built out grooming, hospitals, vet clinics, dog walking, dog training, all those elements.

That is obviously an area therefore we have leaned in the most, and we have made incredible progress with our existing assets. Utilization, we have improved. Engagement, we have improved. What you are getting at is the integration with the center of store, with product. What is key to all that, Steve, as I look to 2026, is layering that in with a membership program that really helps us better understand the profile of each one of our customers. How many are using services? How many use services and merchandise? How many are buying in-store and online? You put all those elements together, it starts to create profiles of different customers. We really see, honestly, the better we get at services, the halo effect that has on the overall business just gets stronger because it is something that is hard for anyone else to replicate.

Service is probably the area that we made the most amount of progress. Pleased with the results we're seeing there. You'll continue to see us talk about that. That gives you a little color on how I see it playing out turning into 2026. Maybe if I just do a quick follow-up on that, is there any way to set the baseline here on just sort of what percentage of your customers today actually buy services or any sort of baseline KPI that we could sort of begin to track as we think about your progression in the business? Yeah. Look, I think at this point in time, I'm not going to get into the specifics on it at that level of detail.

I mean, I think the baseline KPI to track as we look into the future will be transactions overall, and then let us manage it at the different elements we have to serve up to the customer. But services will definitely be a key component to it, Steve, as we keep growing. Thank you. Yep. You bet. Thank you. Last question will come from Zach Batham with Wells Fargo. Please go ahead. Hi. Good afternoon. Is there a way to quantify the impact of moving away from less profitable sales and de-emphasizing the member program in Q3? As it seems like you expect your Q4 comp to step down a bit more. I'm curious to what extent you're expecting those items to also impact Q4. Yeah. I mean, I'll just start by it's a pretty broad range, Zach, the implied Q4. So we can land anywhere in that range.

Clearly, what we've stated all year very consistently is our primary focus this year was around expanding our margins, walking those unprofitable sales, and building this very strong foundation upon which to start sales growth in 2026. Joel, I'll let you take it from there if you want to. Yeah. Sabrina, I think you nailed it. I think I'd add to that. You asked, what's the impact? The impact you're seeing quite clearly is we're growing pet EBITDA market share. While sales are down, EBITDA is up. Clearly, I think we've done a really nice job of identifying which sales are really one-time transactions and are empty calorie, as I call them, versus which customers we want to grow lifetime value and be with us for the long term.

You have seen that play out quarter after quarter for us as sales have been down consistently, low single digits, but bottom lines continue to improve. As each quarter goes by, we get better at identifying those, largely or getting them out of our base. You layer in a membership program, more strategic media buying aspect, and all of that will start to lead towards improvement in the top line with the bottom line as well. Thanks, Joel. And then just to level set as we look ahead to 2026, I mean, the expectation is to return to sales growth. I am curious how generally you would frame broader category performance in dog and cat food, supplies, services, etc., and then how you would layer in the impact of both your initiatives and then net store opening and closings to kind of get to that total sales growth.

Yeah. Look, I think it's too early now to spell that out specifically for 2026. I mean, clearly, if you look at what we publish, you can see that consumables and supplies are negative this year, and we're getting growth in services. We expect a return to growth in consumables and supplies going forward. What I've got to just outline for you or translate for you is what I laid out today in terms of four pillars, how does that translate into growth at what time and what period next year. What you guys can't see is all the progress we're making here internally, and then we just got to put the pieces together for you so we can help you think about your model. We haven't—I think I answered on a few questions before. We're approaching 2026 the same way we approached 2025.

Outline the strategies and then execute. The team is just getting better at that as every passing quarter goes by. Yeah. Zach, just to emphasize what Joel's saying, for sure, I think your thinking is in line with ours where you always look at what's your base sales build. Then we layer on all the many initiatives which Joel has been outlining and will continue to get more granular as we go into 2026, but we have all of those building blocks on top of that base, and they layer on throughout the year. What you can count on is it's a gradual ramp. The last thing I'll say as a little bit of a preview is we would expect fewer net closures in 2026 than we had in 2025. The 2025 expectation is about 20 net store closures.

Thanks so much for the time. Thank you, Zach. This concludes our question and answer session. I would like to turn the conference back over to Tina Romani for any closing remarks. Perfect. Thanks so much, Joel and Sabrina. Thanks, everyone, for your time. That concludes our call, and we hope everyone has a wonderful holiday. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.