WOOF Q2 2026: Gross Margin Up 120bps, Tariff Headwinds Ahead
- Operational Improvements and Store Focus: Management’s emphasis on enhancing in‐store merchandising, inventory management, and planogram resets has led to improved foot traffic and customer experience. This operational discipline is expected to drive stronger comp performance as the company transitions to a growth phase.
- Disciplined Pricing and Promotion Strategy: The cleanup of excessive promotions and strategic pricing actions have enabled gross margin expansion while maintaining profitability across channels. This disciplined approach should underpin sustainable earnings growth moving forward.
- Investments in Omnichannel and Service Excellence: The company’s commitment to transforming its digital platform, optimizing the omnichannel experience, and enhancing customer loyalty initiatives positions it well for long‑term, profitable growth even as it navigates short‑term comps challenges.
- Sustained weak comparable sales: The executives acknowledged that Q3 is the toughest comparable sales period and that positive comps are more likely to materialize in 2026 rather than imminently, exposing near-term risks to sales recovery.
- Increasing tariff headwinds: While Q2 saw minimal tariff impact, management indicated that tariffs will become “sequentially more meaningful” in Q3 and even more so in Q4, potentially squeezing margins further.
- E-commerce cleanup delays: The cleanup in the online channel is still in its early “identification phase” with a new leader in place, which may continue to weigh on overall performance as the revenue mix remains unbalanced.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Adjusted EBITDA | FY 2025 | $375,000,000 to $390,000,000 | $385,000,000 to $395,000,000 | raised |
Overall Net Sales | FY 2025 | Expected to be down low single digits compared to last year, including the impact of 20 to 30 net store closures | Expected to be down low single digits compared to the previous year, including the impacts of store closures in 2024 and 2025 | no change |
Depreciation | FY 2025 | Approximately $200,000,000 | Approximately $200,000,000 | no change |
Net Interest Expense | FY 2025 | Approximately $130,000,000 | Approximately $130,000,000 | no change |
Capital Expenditures | FY 2025 | $125,000,000 to $130,000,000 | $125,000,000 to $130,000,000 | no change |
Net Store Closures | FY 2025 | no prior guidance | Approximately 25 | no prior guidance |
Adjusted EBITDA | Q3 2025 | $92,000,000 to $94,000,000, up approximately 11% year over year | $92,000,000 to $94,000,000, up nearly 15% year over year | no change |
Net Sales | Q3 2025 | Expected to be down low single digits versus the prior year | Expected to be down low single digits compared to the prior year | no change |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Weak Comparable Sales and Market Share Erosion | Q4 2025: Focused on sacrificing sales and market share to improve profitability and eliminate unprofitable stores. Q3 2025: Mentioned improvements in comparable sales with mixed performance across categories. | Q2 2026: Continued concerns with net sales down and a strategic shift away from unprofitable sales to drive gross margins and improve store performance. | Consistent concern with an ongoing strategic pivot towards profitability rather than pure sales growth. |
Margin Expansion and Cost Management Strategies | Q4 2025: Emphasized restoring the economic model through pricing discipline, promotional strategy, and SG&A leverage. Q3 2025: Reported strong gross margin improvements and structural cost management initiatives. | Q2 2026: Detailed improvements with a 120 basis point gross margin expansion, disciplined pricing, promotional cleanup, and SG&A savings. | Continued focus with even more concrete cost efficiencies and margin gains, reflecting a refined execution. |
Operational Efficiency in Physical Stores | Q4 2025: Focused on improved merchandising, inventory system upgrades, and purposeful store closures to optimize the real estate portfolio. Q3 2025: Highlighted assortment optimization, new inventory systems, and labor model improvements without mentioning store closures. | Q2 2026: Emphasized enhanced merchandising, planogram resets, streamlined inventory management, and explicit store closures to drive operational gains. | An evolving focus combining previous efficiency initiatives with additional actions (planogram resets and targeted closures) to drive profitability. |
Digital Transformation and Omnichannel Investments | Q4 2025: Discussed significant investments in IT infrastructure, digital capabilities, and e-commerce promotional cleanup. Q3 2025: Only briefly touched on automation in online order fulfillment, with limited focus on digital transformation. | Q2 2026: Focus on refining the e-commerce channel with a new leader, reducing friction, and enhancing omnichannel customer experience, along with addressing e-commerce cleanup delays. | An increased and more refined focus on digital and omnichannel transformation, moving from minimal mentions to a leadership-driven agenda. |
Tariff Headwinds Impact | Q3 2025: Minimal exposure to tariffs with little expected negative impact. Q4 2025: Noted limited direct exposure and strong vendor relationships to mitigate risks. | Q2 2026: Although minimal impact in Q2, tariffs are expected to become more significant in Q3/Q4, indicating a rising risk factor. | A rising concern as tariff headwinds shift from negligible in earlier periods to a future risk needing closer monitoring. |
Vet Hospitals and Services Growth Dynamics | Q3 2025: Highlighted strong growth with vet hospitals and related services delivering double-digit revenue and margin improvements. Q4 2025: Focused on optimizing existing vet hospitals rather than aggressive expansion, emphasizing better utilization. | Q2 2026: Mentioned that in‐store services growth is strong and a long‑term differentiator, but with less emphasis and fewer quantitative details compared to earlier periods. | A shift from aggressive growth and expansion to optimization of existing assets, reducing emphasis while still recognizing the strategic value. |
Fresh Frozen and Consumables Category Performance | Q3 2025: Noted strong performance with consumables growing and fresh frozen sales up significantly. Q4 2025: Emphasized fresh frozen as a standout and noted ongoing efforts to optimize the consumables mix. | Q2 2026: Largely not mentioned, with only a brief reference to consumables performance offset by a strategic retooling of the e-commerce channel. | Previously strong and highlighted, this topic is no longer in focus in the current period, suggesting a deprioritization or integration into broader strategies. |
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Q4 EBITDA
Q: What drove the Q4 EBITDA decline?
A: Management explained that expected Q4 EBITDA softness is primarily due to tariff headwinds and cautious reinvestments amid ongoing market volatility, aiming to preserve dry powder for strategic initiatives. -
Comp Recovery
Q: When will comps turn positive?
A: Management indicated that while Q3 remains the toughest compare, the transformation is still in Phase Two and positive comps are expected to begin showing in 2026. -
Margin Outlook
Q: How did margins and tariffs perform?
A: Leaders highlighted a 120+ bps gross margin improvement driven by disciplined pricing; meanwhile, tariffs had minimal impact in Q2 but are set to become more significant in Q3 and Q4. -
Execution Gaps
Q: Which execution gaps remain?
A: The team noted that while strong operational improvements have been made, further opportunities lie in refining inventory management and expanding sourcing capabilities as they prepare to reinvest in growth. -
Promotion Impact
Q: How did promo cleanup affect comps?
A: Management acknowledged that the elimination of “empty calorie” promotions helped tighten margins, though it contributed to a temporary comps drag, particularly evident in Q3. -
North Star Update
Q: What’s the North Star initiative about?
A: They outlined a strategic framework built on four pillars—enhancing store experience, expanding services, merchandising differentiation, and driving omnichannel efforts—to set the stage for future growth. -
Ecom & Inventory
Q: Is ecom retool and inventory work complete?
A: Management stressed that while substantial progress has been made—with inventory down by 9.5%—both ecommerce and inventory initiatives remain ongoing, with a new leader already driving further improvements. -
Markdown Risk
Q: Is merchandise mix change risky?
A: Leaders are confident that disciplined and methodical inventory management will mitigate any significant markdown risk as they optimize product mix. -
Store Reset
Q: What is the status of planogram resets?
A: Management confirmed that the planogram resets, especially for core categories like dog and cat, have been successfully completed, delivering enhanced on-shelf availability and improved operational efficiency. -
Customer Trends
Q: How are pet family behaviors evolving?
A: Observations show a mix of many one-time customers and a notable segment shopping solely for services, presenting an opportunity for increased cross-selling in the future. -
Customer NPS
Q: What drove improved customer NPS?
A: Enhanced store experiences, strong in-store customer service, and renewed focus on employee engagement have collectively boosted NPS scores, with many customers rating satisfaction above 90%.
Research analysts covering Petco Health & Wellness Company.