Petco Earnings Call: Strong Profitability Gains, Sales Growth Hurdles Ahead

Petco reported a 2.3% decline in net sales, with comparable sales down 1.4%, due to store closures and tough sales comparisons. Despite this, the company achieved a 220-basis point expansion in adjusted EBITDA to 7.6% and a 120-basis point increase in gross margin to 39.3%. Petco raised its earnings outlook, anticipating adjusted EBITDA between $385 million and $395 million for the full year. The company faces challenges in the third quarter with the toughest comparable sales period ahead and anticipated tariff impacts.

Petco (NASDAQ: WOOF) reported its second quarter 2025 financial results, revealing a 2.3% decline in net sales and a 1.4% decrease in comparable sales. The company attributed these declines to store closures and challenging sales comparisons. Despite these headwinds, Petco achieved a significant 220-basis point expansion in adjusted EBITDA to 7.6% and a 120-basis point increase in gross margin to 39.3%. These improvements were driven by operational efficiency initiatives, including supply chain optimizations, SKU rationalization, and markdown management.

Petco's strategic closure of approximately 25 underperforming stores in 2025 underscores its commitment to optimizing store-level economics and enhancing profitability. This approach aligns with broader industry trends of retail consolidation and fleet rationalization. The company also reported a 7% reduction in selling, general, and administrative costs in 2025, further contributing to its margin expansion.

In addition to operational efficiency, Petco is also focusing on strengthening its omnichannel presence. The company's online sales account for just 7.1% of its revenue, lagging behind competitors like Chewy (NASDAQ: CHWY), which reported a 6.2% adjusted EBITDA margin in Q1 2025. To close this gap, Petco is enhancing its digital ecosystem through app and website upgrades, and expanding its Vital Care membership program, which is set to relaunch in 2026.

Petco's long-term success will depend on its ability to balance affordability with profitability. While the company has shifted toward value-conscious pricing and expanded its assortment of national brands, it must avoid eroding margins through deep discounts. The company's gross margin expansion in Q1 and Q2 2025 was partly driven by markdown optimization, a strategy that could become less effective over time.

Petco's third quarter outlook faces challenges, including the toughest comparable sales period ahead and anticipated tariff impacts. The company maintained its full-year net sales outlook and raised its full-year 2025 earnings outlook, anticipating adjusted EBITDA between $385 million and $395 million. The company's third quarter and full year 2025 outlook assumes that the tariffs on imports into the U.S. from China and other countries as of August 28, 2025 will stay at current or planned levels and do not increase for the remainder of the year.

In conclusion, Petco's Q2 2025 results demonstrate that its strategic initiatives—store closures, cost discipline, and service expansion—are yielding tangible improvements in profitability. However, the company's path to sustained EBITDA growth remains contingent on its ability to adapt to macroeconomic headwinds and outpace competitors in digital innovation.

References:
[1] Petco Reports Second Quarter 2025 Financial Results [https://www.prnewswire.com/news-releases/petco-reports-second-quarter-2025-financial-results-302541392.html]
[2] Petco Posts 36% Profit Jump in Fiscal Q2 [https://www.nasdaq.com/articles/petco-posts-36-profit-jump-fiscal-q2]
[3] Petco's Turnaround Gains Traction: Is This the Inflection Point for a Buy? [https://www.ainvest.com/news/petco-turnaround-gains-traction-inflection-point-buy-2508/]
[4] Petco Q1 2025 slides: Profitability improves despite sales decline [https://www.investing.com/news/company-news/petco-q1-2025-slides-profitability-improves-despite-sales-decline-93CH-4083922]
[5] Petco's Strategic Positioning in the Evolving Pet Care Market [https://www.ainvest.com/news/petco-strategic-positioning-evolving-pet-care-market-2508/]
[6] The Top Retail Trends in 2025 [https://squareup.com/us/en/the-bottom-line/series/foc/retail-trends]
[7] Is Chewy's 6.2% Q1 EBITDA Margin a Turning Point Toward Its Target? [https://www.nasdaq.com/articles/chewys-62-q1-ebitda-margin-turning-point-toward-its-target]
[8] The Future of Pet Retail: Is a Chewy and Petco Merger on the Horizon? [https://growthshuttle.com/the-future-of-pet-retail-is-a-chewy-and-petco-merger-on-the-horizon/]
[9] Petco's Fiscal Q2 Profitability Amid Declining Sales [https://www.ainvest.com/news/petco-fiscal-q2-profitability-declining-sales-testament-operational-efficiency-margin-resilience-2508/]
[10] Petco Plots Growth With A Wholistic Care Approach At Pet Wellness Hubs [https://www.firstinsight.com/greg-petro-forbes-blog/petco-plots-growth-with-a-wholistic-care-approach-at-pet-wellness-hubs]
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[12] Petco's Q1 2025 Earnings: A Glimpse of Turnaround Potential—A Fleeting Spark? [https://www.ainvest.com/news/petco-q1-2025-earnings-glimpse-turnaround-potential-fleeting-spark-2508/]
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