Petco Health and Wellness (WOOF) 24 Aug 232023 Q2 Earnings call transcript

Good morning, everyone, and welcome to Petco's Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, today's event is being recorded.

At this time, I'd like to turn the floor over to Cathy Yao, Vice President of Investor Relations. begin. may you Cathy,

thank call. joining and XXXX second earnings conference you morning, Petco's for quarter Good

to earnings website addition available our In the to and a results. download infographic presentation on our at summarizing release, ir.petco.com, there is

the Petco's Executive Coughlin, Chief Officer. Officer, are Petco's Chief LaRose, call with Brian On today Financial Ron me and

could subject call, make and certain that forward-looking they would to actual like and will Before cause number remind everyone risks which those filings. earnings differ we such are to out to begin, I that a of materials on and in our SEC materially this These statements. results statements, set uncertainties uncertainties our from include risks

measures and will portion earnings on one call, we that follow-up. can to our addition, one found these today's keep refer release, call, and And today's in you Q&A SEC our the non-GAAP please finally, during to financial filings. presentation, certain ask In we be of measures. of Reconciliations question

let that, to me With over turn it Ron.

you, and welcome, Thank everyone. Cathy,

our every I'd very my topics. of I their providing on to Before I and commitment enduring This day. teams to the focus for partners XX,XXX for our deliver work parents. want I'm Petco the pet like pets proud key to single morning, best begin, remarks thank three

I'll review results. our QX First, briefly

progress XXXX. growth. gross our of profitable continued outline fiscal Second, greater weighting actions of a cost rate run finally, efficiencies margin margin. we're combination will in accelerated roadmap million making the for and And I'll and both a end gross discuss I'll enhancements with from that will $XXX help generate to on the savings, OpEx productivity by drive approximately These

services revenue X% on translated top grew sustained X% billion. For and stack. X%. also a line at solid in This momentum by driven growth. delivered $X.X the standout average in two-year trends was results quarter, basket up Net Comparable sales to year-over-year we growth

is and $XXX run growing again exceptional million once Our services now delivered rate over business. performance, XX% business a

market Our differentiated our We veterinary business vet its both more wellness continues omnichannel offering pet share. our the And long-term long-term and are scale and our our are capturing strength to premiumization trajectory. and is health ecosystem one to right megatrends business and consumables of growth continues the proposition and believe the and fundamental the grooming model pillars capture of unique delivery XXX-degree strategy. of humanization solid value and of

operating not as we to we we environment While our line. growth we yet in the we're ability bottom translating discretionary as demonstrated recognize top we're a I tougher result, forecasted want where to to And line year. the than consumer in grow, us that a entered be

bifurcation the and a remain the continue one businesses hand we With to companion second and pressured relative an see our parents, to more impacting foods with ongoing expectations. than pet year in Our migration to behaviors the animals amongst profitability cohort. also value anticipated, seeking supply more food, for premium our among uptick on

to to year. the companion EPS our color as and ensure pricing actions Brian shortly. will and SKUs, adjusted we're guide on revising businesses, we animals the discretionary adjusted its impact provide undertaking broader competitive as EBITDA and associated products well and we're on our Due more for key the price our on environment are supplies expectations

today's We dynamic. consumer controlling controllables optimally remain focused on navigate relentlessly to our

our targets We we priorities. while progress have to strategic to a plan revised long-term against continue focused make deliver our

actions taking to protect additional First, we're profitability.

which by we've fiscal of cost the working savings tight $XX run the end of programmatic the end are XXXX, controls, implementing efficiency rate a across we to areas $XXX million by year actively Through million cost and of program, are identified and unlock business. and cost in one. We project in multiple initiatives comprehensive savings

our corporate closure leadership of reducing including year, last total headcount approximately our including a cumulative by in we and the roles. of the over field Specifically, open QX, workforce, XX%, adjusted

impact these on of leadership aware are lightly. these actions acutely did have not take decisions As colleagues we deeply that team, a the about. we We care

While business, actions capability matches best leaner for our our organization. to strategy. long-term more as support ensures us our the are position workforce and effective difficult, they These a needed

programmatic medium, digital position us allocation distribution this will merchandise meaningful and further we've capital further. initiatives long shipping to our actions these initiatives enabling improvements include of in efficiencies, confident as our reduction. Beyond including elaborate year, short, vet, debt identified enhance automation, operations. These chain, broader profitability. and G&A while term for We're to better prioritize on such to will and the supply us and key refinements Brian enhancements,

Turning component parents strengthen with second assortment, the in-store with our our to pet actions. experience, of use We'll and positioning of surgical marketing. the value, strategic

customers, actively our value-based align here. rapidly cat trends about, are This care center excited assortment with Naturals. evolving to our come premium We with more both something teams well Diamond are very week, incremental options. we're as will that as our drive franchise. reintroducing offerings Both brand, this supplementing the to pet growing to the number Feast, More and selling customers seeing, food one includes Fancy the

with taken complement thereafter. key will throughout my and impact margin with similar here, gaps they customers, actions unit, targeted pricing competitive moves year the within delivered actions address growth in traffic revenue to driving product and and breakeven SKUs. tenure a several and brands We to have We've times accretion

and expect offset we again, continue expansion to help services digital, to we delivered once pressures. those Additionally, margin mix and within

we continue and in-store. app, our to popular have purchases the enhance additional like we price will and whether for holiday. at program seasonal online, supplies As ensure it's right experience, And we the customer the also Perks to we'll stimulate the back Supplies right products brought customer, programs right into recently on the Halloween lean or

customers. compromising priorities. against with believe differentiating, we'll capability points into our basis progress meaningfully we actions for And long-term growth Our retention this Combined, partner profitable and strategic investments deliver off, without to continue should nearly accelerate labor our pay up year-over-year. to these do XXX our drive on

as to in year-over-year. XX% quarter the are the approach We our services, our year-over-year complimentary turning affordable total a economics X,XXX We an the with a track total mix, expectations year ended become and continue attractive. merchandise hospitals our across routine clinics QX and increased business. support to and to results XX% visits In differentiated omnichannel. increasingly mature, our end. Petco wellness vet on our mobile of remain XXX clinics up outperform pets XXX to hospitals quarter, our hospital Now, to way. hospitals by seen in These clinics of week,

our we total, vets clinic we vets for year transactions, and talent center with continue store including growth year-over-year, XX% into ecosystem our vets, a for in They brought pool. nearly to full-time available also In QX, of vet gain in market, coming our was clinic our of share In XXX market XXX from basis a XX% full-time our remain recruits source up this growing up strong sales. grooming, and fragmented revenue points basket, business. year-over-year,

with nearly by improvement launch well phthalates year-over-year of chemical continued this a products has XXX year, grooming in clean and services momentum parabens, free basis as Grooming's accelerated retention. as earlier a point groomer been and dies,

spending these crates in X% in and the merchandise, key slowed down in supplies apparel, quarter. products. as was which consumers the like Categories toys In challenge remain soft business, our is

over offering targeted nimble response screening and opportunities area value-oriented including expect to are our stabilization We arise. We when actions to in initiatives, time. this in to performance, more drive they improving taking remain the capturing price competitiveness,

flea result XX% nearly a extreme As we leading our year-over-year. were the to able of RX business heat, to drive tick and sales up

QX. supplies year, the will look particularly our in half offerings to we lower the lower from back of As and input costs freight expense, benefit

consumables in the non-premium Looking beyond and both up remain quarter, consumables this, X% up with grew X% solid. In year-over-year. premium year-over-year X% strength

growth XX% are to customer some value with growth XX% Frozen our revenue customers. see Specifically, and of these year-over-year we Fresh continue highest growth strong and

parents model strength Our delivery Nest be Across driven a an the who digital fashion. to meeting basket needs Petco, differentiator by growth prefer business, shop in omnichannel mortar for trends the saw growth. a in growth, X% brick Pac and X% pet to continues and we and of

our same-day to an proposition delivery delivery orders, as supporting player. and Our continued omnichannel BOPIS repeat as revenue did value grow integrated

we online. in-store optimize ahead, to channels, our and marketing all continue Looking investments will across

marketing Specifically, recovery relationships in profitable our driving customers of include our with so growth. the on will This we deepening our and that eventual share discretionary. to million capture XX will tighten for propel existing the dollars traffic positioned we focus well are

Lab footprint A key finally, in program XXX,XXX lever Care Premier to supplies Vital as quarter. customer the customers spend. XXX are of about in is customer spend this to outlay our And of locations, expansion here quarter, from value Vetco already XX,XXX grew XX this triple valuable points, markets, furthers performing decline. Clinics, expectations. These contributed a XX,XXX our total our to ahead locations trips including non-members where what zero to high more think proud we we than These modest members the at increasing Petco. of were announce Lowe's capital partnership rural shop-in-shop touch expanding

the expect partnership line, to enable new capture customers. our profit, positive to accretive dollar be to us to We top incrementally and will our

said, will with I'm last since an model. build-out I blue-chip forge and across this marketing, our satisfied confident five our omnichannel not plan team where the of I'm digital has the As vet deliver. years, right That XXX-degree have that store am experience I proud over of we the aggressive close, we an even we are, Petco we progress execute stronger the product, outlined ensure actions competitiveness, and and plan we today to including and made price evolution have the business. to

it Thank hand with you. that, And over Brian. I'll to

extend to the our wellness build good of to and and and everyone. on dedication also I Ron, To continued thanks morning, pets. Petco my health Ron's Thanks, want partners remarks, to their

strength revenue trends driven an stack. year-over-year in and basket X% on a two-year net was billion, by sustained of year-over-year. X% Comparable quarter, the increase sales, X% average $X.X grew For

while the services of Our growth million $XXX ongoing a and supplies were X% the plus vet animals companion X% up strength driven now strength year-over-year, grew discretionary experienced digital merchandise, in rate in showed in year-over-year exceptional quarter. consumables businesses business. our services and year-over-year. grooming and down quarter, XX% team is under run Total business with X% softness, our leadership the by In year-over-year

XX.X% P&L, services points at gross margin year-over-year. decline down softness in roughly basis year-over-year primarily the and shift XXX Moving gross business in with was was continued and flat quarter strength down categories. to in discretionary The profit was million. $XXX attributable digital the of mix second QX

in our has reminder, while in to enterprise, adjusted a margin of sales, labor term, helpful it's gross long a than the services, lower cost sits so services in As EBITDA.

related to In in one-time QX, points costs reduction. and stock-based driven year-over-year by XX.X%, compensation headcount of percentage a primarily primarily basis revenue increased SG&A XX to an as increase

Excluding our points would a year-over-year. XX percentage of and SG as stock-based compensation A basis and one-time decreased this quarter, revenue costs have

step-up one-time made in $XX per the We payroll retention. to we last to is also we continue increase a as move had from that wage a partners, tangible in expense December hour minimum a increasing invest our

was interest EBITDA EPS prior of XX.X% year-over-year. XXX $X.XX rate decrease rate the a adjusted by year, and adjusted on driven $XXX fully QX an a year-over-year $X.XX, effective margin shares average normalized from with part of increase year EBITDA basis QX XX%. million $X.XX adjusted million X.X%, of points down prior diluted down from tax weighted in in based XXX a was expense,

Turning balance sheet. our to

million Our our have remains and inclusive principal of QX, In million the availability $XX ended million in now we and million paid on our in year. and $XX We target of facility. toward of $XXX last $XXX with another debt equivalents million million $XX paydown credit $XXX date, the million Year cash liquidity quarter week. paid for $XXX down we position down strong. revolving to cash

build-out. was as XX% Our million year-over-year year's CapEx down freezer lapped we $XX of last

touch and we in-stock want with to Overall, also the briefly. inventory remain our turnover remaining performance for strong. inventory I quarter inventory cycle on with pleased improvements

loss a date, the million to months million generated million $XX quarter, Our X% of our six on strategically total a the this in to improvement year-over-year. generated flow, cash free a $XX of environment. underscoring year-over-year, $XX up steering of We cash Year first $XX inventory in million we've dollars XXXX. flow through of $XX business this are enduring free focus down in million

and outlook, we to for implementing profitable focused more strategy remain As To this our in pressures us XXXX our although are position beyond. address humanization also actions will during strategic consumers that I that and premiumization environment. the this, sensitive growth better remains, turn on megatrends are and long-term value we of acknowledge discretionary

Adjusted guidance timing to are fiscal the $XXX billion, outlook of outlined Given strategic consumer our capital expense $XXX for which updated hospitals expect diluted XXX dynamics Interest expected of start million. continue million XX of is $X.XX shares, of current will $XXX cost to which weighted in the million, to XX capital expenditures our add EPS million million primarily and Adjusted to to EBITDA revenue million is EBITDA, billion we in XXXX. $XXX We've above, to approximately lowering and in adjusted $XXX adjusted expenditures, XX to $X.XXX to total fully rural XXXX benefit from unchanged. XXXX, unchanged. of benefits on our of and EPS, which actions, locations. $XXX $X.XX we of $X.XX average million to vet to owned a

updated adjusted margins. EBITDA guide gross anticipates Our pressure on continued

will stabilizes, productivity, prior Given continued the on we discretionary, with are we environment accelerate along of coupled our stabilize. and to outcome gross actions expect mix cost margins and in have from actions When positive returns growth which our pressures we with pricing away undertaking seen discretionary retention, strategic the iterations.

continued e-com margins. seen improvement and gross services we've Importantly, in

on geography margin As business a a sales, which cost has the the of [labor enterprise. and services, gross lower of means reminder, (ph) P&L sits] than

anticipates Our in as out our guide rural updated guidance. provided the CapEx lower locations still of build the in vet

Beyond merchandize, $XXX chain supply run million this efficiencies following. These the and year, on estimated opportunities. broader an initiatives and million XXXX drive sum year $XX the rate fiscal to have one, an programmatic rate split savings identified which a to further costs, by run additional across in of estimated end reduce basis includes G&A and we

distribution streamline expect network on first In and supply leg our chain, of we our long-term optimize the DCs to our further strategy.

so roots that working can ship to DCs and our our optimize are to efficiently further stores. more we automate DCs from We

to we and e-com have additional handheld tasking drive additional down continue extract optimize to also In technologies G&A, further in our will plan input We to rightsizing within by costs. to costs from merchandise, devices shipping opportunities vendors. inventory such PCCs as we labor through savings Zebra our management. our leveraging assist In

marketing locations. long shifting term, prioritize We're our are resources allocation actions opportunities. reduction. vet, real to better we tactical these for of confident debt roles, our short, lower and certain digital, remain and of across and the for we capital estate, allowing initiatives Additionally, to course, key cost medium And to while plan us on us position other

short and leadership term execution entire the disciplined conclude, on I team To focused through Petco in remain environment. the this navigating

are pet while a and term resilient our to and growth positioned cyclical parents and well thoughtfully meet and secularly our for profitable business, impacts We as to the leader business pet committed category to long adapting favorable evolving remaining the current in the delivering

Thank your And you for we’d that, you time. with questions. be take happy to

session. question Ladies begin at Wintermantel question-and-answer gentlemen, Our ISI. from comes your Instructions] and this Evercore with we'll go ahead first question. today the Please time, Oliver [Operator from

maybe Great, that's for you. first thanks. the question -- Brian,

in margin, decrease EBITDA the Looking like line stays the but just top same. EPS

reduction the maybe supplies EBITDA you. on So gross pressures? in the Or is about in also seasonality half? mix the margin? the shift just bit second that And of you see to based is part a from SG&A second more away you that? consumables in Thank If could continued do is, a the then little talk just

Hi, Thanks question. the Ollie. for

on me macro a start Let basis.

as We pressure a Specific discretionary wallets modest and initial consumers' of the us, services have with stabilization that continue see guidance spend And in continue some not result, uncertainty to assumed discretionary gross forward. spend a shift stabilize. a to our year factors half towards seen the on full we dollar year these basis back in further to margin. moving

animal gross that to the reduction categories, the So margin. and is related majority to directly discretionary the supplies the guide our question, the and your related vast reduction change to outlook in specific of in is EBITDA yes, for companion

already have quick those getting from cost some actions team is we place. The energized. actions. wins cost Now We're in do

primarily XXXX will and there some XXXX, be benefit modest they in XXXX. will benefit While

majority the And actions of those impact margin. gross

Correct.

Good very luck. Thanks much.

Oliver. Thanks,

go Our from ahead question. next Zach Please your Fadem from comes question Wells with Fargo.

Hey, taking This on questions. is guys. Zach. David for for Thanks Lance our

competitive. actions discretionary to coming be You noted business your to side and increases me, up the Curious that's pricing price how that could stacks you're of year? you on this taking more talk if about excuse more or price what be

when we that really actions engagement, from value, pricing drive for competitive a Yeah. standpoint, can't looking elaborate Thanks, can We're today customer value. a the in standpoint. But a We we've within year. taken David. taking are cited, consumers Brian perception. address Historically, as that seen drive key say breakeven From product to units. both we've gaps drive it's to actions, the these really categories pricing and traffic

flat XH. That's down And to the then implies in guide helpful. comps

the talk rationale we maybe you quarter. if the could curious trajectory and just exited through of there business the the So as

Yeah.

right. You're

revenue I'll If guidance. you overall macro. look go back to at the

And consumers' discretionary wallets, continued overall, in pressure growth with category in primarily we consumables in half We especially momentum on first see services but see remains pressured. discretionary. and continue the to did that

So given felt that we maintaining that our was appropriate. most revenue environment, like

Thanks. it. Got

Stanley. comes Gutman from with Our go your question from next ahead Please Simeon Morgan question.

wanted if for companion year? should I plan for taking or out the morning. to Good grow flatten being tact for as are next you conservative just the discretionary there's 'XX, for mix you percentage? ask category what's And a of rest assumed of that and extra year

Yeah.

me start, Ron about then turn over talk and XXXX. Simeon Let it I'll to to

said as some discretionary earlier, that assumes in initial our category. I guide stabilization So

we X%. QX, If you look at declined

If expectations in line were what weren't in we Obviously, previously at assumed. we X%. you down look QX with our QX,

the I over QX much we think I talk get X% if to year. the have I'll to And Ron it While specific for minus won't from that into of 'XX. at assumed you not the recovery turn a number, look in balance about

up we're that Supplies not were before. Perks, actions overall mid-single take for we taking versus ’XX on We're in that waiting. -- for actually XX% a action actions. our enrollments we ran are 'XX to We're costs. When when which supplies. We're of will going but current The the Simeon. category Hi, digit stabilization with on Yeah. happens, taking see, projections

have cost on We our favorable progress supplies.

providing We have have freight, flexibility allows value to to which more terms of customers. favorable us in

for at taking a this stabilization in call is supplies. we're Category 'XX actions. point So digits with mid-single

If Thanks. know can. can I follow-up, ask I I if don't one

you curious like -- optimization? pricing actions guess, know, of industry, don't it or is that seems it's promotionality I'm as or plan the how promotions describe the I you ticking I discounting On is half, price up. And it's second it.

demand Yeah. ago. year Supply have and rebalanced question. versus Good a

we're to are looking industry the value, and There's for profit promotions is sure the and making that provide run who's the we for we most returning neutral. So driving promotional a traffic positive, revenue that more dollar it pre-pandemic levels. and part, consumer

So an them, it based to generating really more a tool in in effective We've positive but reactions to is upon being supply it's customers. pre-pandemic promotional demand. seen balance with return now levels

guys. Thanks Okay. Good luck.

Thanks, Simeon.

question Company. next Anna with Needham & comes ahead from go Please Our question. Andreeva from your

Great. guys. follow much. sales the Thanks that Good up the wanted I during morning, quarter. so to you cadence on saw

with I previously think said more XQ. May line had you in was that

mid-single digits. that's So

July in So should seeing well. both had think far what so then a I the we in slowed? as June follow-up you business And and are And August?

thanks Anna. for the question. Hi,

we is the from solid say What our ago. Services linearity, all change. across non-comp weren't we a remains I and of three July, can across terms month-to-month events strong which supplies year driving with is In versus months growth quarter. had June in showed May, noise shifting food happy with or guidance

on we're In of those significant actions. line, shoots haven't green seeing our initial taking August, seen but action, some of change and we're terms in we a some trend

in gross annual Did Okay. a on come just as line with the expectations color the by share for helpful. the your quarter? that puts that margin implied follow-up And could on And gross margins. line the Great. That's guide. on takes any and just you as

year gross trickle some the margin the actions this think, I starting well? had of benefits cost as Ron, from in mentioned are to on you

one, can I Anna. take Yeah, that

terms with expectations coming in in was of overall despite expectations. So gross line in margin, discretionary our with and our that the relatively line not category

is that category. renewed So to we discretionary the our change and on of mentioned, the guide, expectations supplies as primarily related

that cost cost those benefits they weighted of benefit heavily are towards will actions, did XXXX mention and but mostly gross Ron the margin, actions XXXX. On the

that the SG&A we've XXXX of more the some taken. Some line in benefits of are in from headcount the actions

guys. All right. so enough. Fair Thanks much,

Thanks, Anna.

comes your ahead from Guggenheim. question Forbes Steven next go Please Our from with question.

consumer between of X%. morning, the mentioned the you you two Good those given I Brian. some and just comments current how assortment Ron, provide go-to-market a unit think, receivables you're non-premium strategy? Ron, premium volume about X%, subcategories the and you if in business general, about of the and from mix made thinking But curious up color up

Thanks for the question.

We're offerings supplemented we offers demand. in Naturals freight level, more We do continue competitive continue that cost our growth supplies strong launch well. to customers. the allow the enhancements with see Frozen, Fancy the in and which value-seeking our appealing said, to Fresh outperforming. see on additionally, increase like on Acana, weaved to be at Diamond Feast an of a are Orijen, like still We've half cost will That our category value second the bifurcation price and in be seeing on to be as points us And behaviors amongst subsegment. premium to in, products related those

it's end of high increased on a on as side So demand bifurcation, well. the really demand the strong value and story

a to sort then year like you. to you spending on other Maybe with can for level recent set capital expand pertains most some Thank the quick you the it plans automation, through you're spending the comment change? XXXX And as with Brian. initiatives expectations, deprioritizing of of where any strategic balancing capture noted? investment savings capital initial that this growth needs your To on follow-up just

question, Yeah. Good Steve.

address First, let me XXXX.

So XXXX target commitment to we've also out XX about maintained to town build our in of rural of that small And our pay maintained hospitals we've our -- XX. XX and at $XXX $XX million We in our allocation priorities. we million $XX last in debt million down million, another did week. already QX. year of $XX terms did of capital this We're

to gets $XX million. in million QX $XX already So us

to expect terms priorities those of don't I dramatically. capital allocation In XXXX, change

paydown. continue will debt on to focus We

to for high other and working were off priorities. was with strategic ancillary continue not sure the this were areas will strategic in able any We and lean of year adjustment cash trade those to areas capital where managing ROI. into make trade-offs It our of priorities we maintain guide did The our to balance make CapEx appropriately. like some other that we

you. Thank

Thank you.

Our next with comes Wedbush Please question. go Seth question your from Securities. from Basham ahead

some you're My making. just to better Thanks a morning. is price of question merchandising lot the trying and and that good changes understand

typically aren't driving. Now traffic first, supplies

you So Feast have to like the and in back in those Perks decision why secondly, things place? were Supplies to And to invest what's leading then price the and the Fancy first supplies? program, bringing removed

question, the Seth. for Thanks

costs So indication is supplies. let bifurcate. we within find to then grocery are of terms provide that strategic food the we defining didn't me We encouraged drag contribute price traffic. where in why the certain creating we're taking price fact is and freight driver, through. And perception pricing. which costs flowing categories that of can through we're traffic There model lower are is supplies, to coming by a have similar those that What lower a and perception are categories which

some there? remove to decision Supplies Feast previously the program, can give context then the and us Perk And helpful. Fancy you That's Okay.

great into On we today a artificial stores is been win brought decision us is and all for a thing. traffic took Fancy really Fancy for that artificials, driver. for Feast a absolutely reformulated our a eliminated Feast, excited in the We're which customers. Fancy XXXX really products and have Nestle, it's win have it. about are around It's win ingredients, Feast our And back positive a a

Perk for on Seth, programs demand. expectations Supplies pulse we of the tend elasticity and in on our program, based out and those Yeah. to And

tend was pulse to -- just made that dormant not decision very so and And for long, we back in. the we

Thank you.

Seth. Thanks,

Michael Our Lasser next Please question from from ahead with UBS. question. go comes your

taking lot Good question. morning. a Thanks my for

below to EBITDA around now this in it adjusted is level be Petco's basis XXXX. year points So for was expected margin XXX the

you drive why increased how outlook is, relates of competition? And company's the it is? of that to EBITDA As margin long-term changed this margin the of your business inform to much like view external does what though compression? factors at diagnose all what's significant such How

Michael. the Yeah. Thanks for question,

we impact pressure related from to has direct So has have pressure the in confident business. on that gross primarily actions, will that impact a We're with adjusted the confident on that is gross a help that, do XXXX impact discretionary the That cost will stabilize. margin impact growth in We that cyclical million EBITDA. actions to direct our cyclical play margin, of profitable $XXX to stabilize. the stabilizes, we're in coupled gross future. return have that margin cost When EBITDA change

as you at labor sits gross impact remind margin If that I'll for the -- sits you sales. cost well, on look services in services of

If our a XX%. services in gross you actually have quarter, over take our model the of bit out margin little been would

So from on on has that in has QX, materially XXXX, again as up gross XX% impact services grown rate an line. the margin

It's really a of pressure story discretionary highest cyclical profit category, P&L. our the of discretionary. And given the that's on

and comps, into Okay. the holiday. drive what you comp environment, and head to the My upside drive follow-up XQ would macroeconomic would especially XQ, as expectations? comp outlook, you your uncertain What question what is on especially the given those are assuming downside as base for case

We'd We're was revenue of given with not maintaining to consumables tell to continue this that felt Yeah, like Michael, services I'm guide I'll the going up X%, but quarters, that the you -- expect do happy discretionary quarter, strong. be uncertainty. thing would category that that the but appropriate we to the some performance most remains pressure. get under into our revenue

of that you was somewhat what somebody know half back So would deceleration at like the felt we year, as comp. guide asked in of on the based today. earlier if imply, is that best a We look the

luck. good much very you and Thank

Thank you.

from go question. with your comes Our Citi. Zaccone Please Steven next ahead from question

Thanks Great. for my Good question. morning. taking

in which rate hand, other the are But public, gross on you've some the cyclical come a business? perspective. up your hand, follow Because what from services, right, for Michael's premiumization lower yes, you of are in then and think the on to do this food drivers one on So mix question, business is it's discretionary the of optimal growth challenging since businesses. margin

So for the rate couple the it to I'm think of EBITDA do margin what's curious how continues of drivers about over mix time improve discretionary lower, next you optimal trend years? the and margin over if to

our high-margin like business, business, We companion our question. for discretionary Thanks supplies are the animal businesses. they business,

outside our category, customer from the And one of strong in roughly like an help they actually XX% own economic own drive in, brands. have we that our our profitability we're So differentiation and and cycle plus is brands. delighters,

a timeless So attractive it driver for on profit a is very basis. us

like things margin gross labor. in has a things which as driving is the margin enhancements Brian But cited, margin services you that. both silos, dilutive. standpoint, digital, are And within are those impacted offset like we services cases, cited, by help those from gross As

If equivalent you to our equivalent it's look total to term, to at basis in mid it on -- an long the roughly enterprise. EBITDA

follow Okay. that But to up then. on

right think if business So margin you the which the the whether next years? hospital to of side margin Thank about is we Will that's say be can in EBITDA scale, you. EBITDA couple getting some it now, today? business of vet accretive the accretive

it Yeah, Today, thanks is not. for Steve, the question.

So vet with if model you about news great the ahead think along about of is unit or model the cohort. vet to track the economics the continue model, on the our depending

We're of EBITDA as on in the to track gross margin model EBITDA recent two Our on dilutive XX% year in breakeven dollars and ahead first five. cohorts dollars year, year most that. model. path That in are has with roughly a

breakeven means XXX with roughly hospital years, amount. which added is over to cohorts two those is age hospitals that rate If years, over at hospitals, XXX of EBITDA of overall the you look our the average two-plus average in last XXX meaning those just just our we've the of

Now news are with maturing. that the good they is

model that accretive overall mature, And at to inflection our point cost actually be accretive to model. will become EBITDA hospitals that rate. those the enterprise overall As the

Thanks very much. Okay.

you. Thank

Please Greg Sommer go ahead [Operator Instructions] Haskett. from question. question Our next from comes your with Gordon

still wondering just is I on store, of that out from to the store then And mainly you. traffic million Thank if lit you was you're past What that’s of buckets was the the various biggest in quarters? driven? vet vets. seeing that similar laid And then up like center follow-up. out? the [$XXX] just a savings bucket that (ph) wanted to I follow

Thanks for Greg. question, the

like the it the So rest from a has vet standpoint, we of store. the impact really on

a is we standpoint, great revalidated to point put four impact. So store center lift vet, in a lift we've from store which center the a on when five

tangibly terms effective us. traffic, Our are vets very driver the is yes, locations with vets. faster in of traffic than And locations a for growing without

In vet are fact, of to new XX% customers the Petco.

advantages So the of from model. that's that one

line larger Yeah. chain, basis. will the impact And merchandise gross the supply margin buckets are actions, cost cost an the actions on of which on overweight and the in

While have more there's in SG&A, sales. of opportunities in cost opportunities we

And ladies our to be and gentlemen, to with concluding session. back that, over for the turn Ron closing we'll remarks. conference any I'd Coughlin question-and-answer like

your and for you Thank time questions.

well confident pet the capture we want and reiterate that megatrends the current in and plan we category. growing resolute navigate are to environment, Thank I that to the our we're remain we of resilient positioned long-term to close, As you.

Petco's That concludes you. quarter XXXX second conference Thank call. earnings

call presentation. we And today's conference ladies and conclude with gentlemen, and will that,

disconnect may You your now lines.

Goodbye.