Profit Improvement Initiatives
Q: What are the key profit improvement opportunities and their timing?
A: Joel Anderson highlighted that merchandising is the greatest opportunity to improve profitability. They are conducting an end-to-end review of their assortment, pricing, and vendor partnerships to enhance margins. Brian LaRose added that they are targeting $150 million in run-rate savings exiting 2025, and are on track to achieve this goal. The savings will come from merchandising improvements, marketing optimization, and operational efficiencies.

Gross Margin Outlook
Q: How do you envision profitability improving over the next two years?
A: The decline in gross margin was due to discretionary categories declining. With modest improvement now and expectations for these categories to return to growth, they see opportunities to improve gross margin. Operational efficiencies, supply chain improvements, and better services margins are contributing to the improvement. They have several initiatives underway, especially in merchandising, to drive profitability.

Financial Leverage and Store Closures
Q: Will financial leverage lead to significant store closures?
A: Joel stated that there are no plans for mass store closures. While they will close unprofitable stores as appropriate, they do not have a large number of EBITDA-negative stores that would require a mass closure. They are focusing on improving profitability and examining every aspect of the business.

Free Cash Flow Drivers
Q: What are the drivers of free cash flow growth in the second half?
A: The four major levers are profitability, accounts payable, inventory, and CapEx. They are maintaining a disciplined approach to CapEx, holding it at $140 million. Improvements in inventory management have begun to show in free cash flow. The primary focus is on improving profitability to drive free cash flow.

Strategic Direction under New CEO
Q: Are there any notable refinements in strategy under your leadership?
A: Joel emphasized the need to move faster, cut costs, and be decisive. The focus is on prioritizing meaningful projects that significantly impact partners and customers. It's about speed and execution rather than changing the strategy in the short term.

Services Business Growth
Q: What is driving the improvement in services gross margin?
A: The improvement is driven by grooming operating at scale, which boosts productivity and margins. Additionally, the maturation of the vet model and the performance of Vetco mobile clinics contribute to higher margins. The services business is strong, with both transactions and basket size improving, particularly in the vet segment.

Industry Outlook
Q: How do you view the current industry trends and pet adoption rates?
A: Adoptions have slowed, but intakes are lower than last year and materially lower than 2019. The company is focusing on profitability and cash flow, positioning themselves to win as the industry returns to its historical mid-single-digit growth in the not-too-distant future.

Merchandising Opportunities
Q: Can you provide more details on merchandising opportunities?
A: They are reviewing the total assortment, focusing on competitive pricing while maintaining margins, and improving in-stock metrics, especially in consumables. Enhancing vendor relationships to leverage unique categories is also a priority. The aim is to better leverage the merchandising assortment to deliver EBITDA performance.

Same-Store Sales Drivers
Q: What drove the positive comp sales in the quarter?
A: The slightly positive comp was more driven by ticket than by traffic. In services, particularly vet, growth was due to improvements in both transactions and basket size.

Funding of Strategic Initiatives
Q: How do you plan to fund the strategic initiatives like merchandising and store labor investments?
A: These initiatives are largely self-funding. They are targeting $150 million in run-rate savings exiting 2025, which will free up capacity to reinvest in the business, improve profitability, and mitigate unforeseen headwinds.