Why did Petco's operating profit drop sharply in Q3 2024?

Petco's operating profit dropped sharply in Q3 2024 due to a combination of factors:

1. Revenue Decline: Total revenue for Q3 2024 was $1.49 billion. Although comparable sales increased by 0.3% year-over-year and 3.5% on a two-year basis, the overall revenue fell slightly by 0.5% year-over-year. This decline in revenue, especially in the supplies and companion animal business, which dropped 4.7% versus the prior year, contributed to the decrease in operating profit.
2. Cost Increase: The company's gross margin decreased by 60 basis points from the prior year to 38.1%. This decline in gross margin, coupled with an increase in SG&A as a percentage of revenue by 80 basis points year-over-year, indicates higher operational costs that ate into profits. The occupancy cost for Petco Health was not provided, but the overall cost structure suggests that Petco faced challenges in managing its expenses effectively.
3. Financial Performance: Petco reported a net loss of $24.8 million for Q2 2024, with an adjusted EBITDA of $83.5 million. The decline in EBITDA, which is a measure of operational profitability, suggests that Petco is facing challenges in generating sufficient profits from its operations. This trend would have continued to impact the operating profit in Q3 2024.
4. Strategic Focus: Petco is in the process of focusing on improving profitability and operational efficiency. The transition and strategic shifts within the company could have temporarily impacted the bottom line as they work through restructuring and cost optimization.

In summary, Petco's operating profit drop in Q3 2024 was likely a result of a combination of revenue decline, increased costs, and strategic shifts within the company.