Petco's (WOOF) 2026 Growth Potential Amid Strategic Shift to High-Margin Veterinary Services

Petco Health and Wellness Company (WOOF) has embarked on a transformative journey to reposition itself as a leader in the high-margin veterinary services sector. This strategic pivot, underscored by margin expansion and operational efficiency, raises critical questions about its sustainability and scalability in a competitive retail landscape. As the U.S. pet care market evolves, Petco's ability to leverage its veterinary assets while navigating industry-wide challenges will determine its long-term success.

Margin Expansion: A Foundation for Profitability

Petco's third-quarter 2025 results highlight a disciplined approach to margin management. Gross profit margin expanded by 75 basis points to 38.9% of net sales, driven by improved pricing and promotional discipline. Operating margin also widened by over 170 basis points, supported by SG&A cost reductions. Adjusted EBITDA surged 21% year-over-year to $99 million, with the margin expanding nearly 140 basis points to 6.7% of sales. These gains reflect a strategic focus on profitability, particularly in its services segment, which includes grooming, veterinary care, and other high-margin offerings.

The company's leadership has emphasized that margin expansion is not a short-term fix but a core component of its multi-phase transformation plan. By integrating veterinary services with in-store retail experiences, Petco aims to create a flywheel effect: customers seeking services return for retail purchases, boosting overall profitability. This model is further reinforced by a new membership program, currently in pilot, which is expected to drive recurring revenue and deepen customer loyalty.

Scalability: Leveraging Existing Assets Without Major Capital Investment

A key strength of Petco's strategy lies in its ability to scale veterinary services without significant capital outlays. The company operates over 280 full-service veterinary hospitals and 1,400 mobile clinics weekly, forming a vast network that can be optimized rather than expanded. For instance, Petco has modernized in-store technology, including grooming and veterinary scheduling software, to improve appointment availability and customer convenience. Over 40% of grooming appointments are now booked online, reflecting the success of its digital transformation.

Moreover, Petco's focus on physical footprint optimization-such as closing underperforming stores-frees up resources to reinvest in high-margin services. This approach aligns with broader industry trends, as the U.S. pet care market is projected to grow at a 6% CAGR through 2032, driven by pet humanization and technological innovation. By prioritizing service scalability over retail expansion, Petco is positioning itself to capitalize on this growth while maintaining operational efficiency.

Competitive Dynamics: Navigating a Crowded Market

The veterinary services sector is highly competitive, with rivals like Banfield Pet Hospitals and VCA Animal Hospitals expanding their national footprints. Banfield, for example, reported a 12.1% profit margin in 2025, underscoring the financial viability of corporate veterinary networks. Petco's differentiation lies in its hybrid model: combining retail with in-store services to create a one-stop destination for pet owners. This integration not only enhances customer retention but also allows Petco to cross-sell products, a critical advantage in an industry where service margins often exceed retail margins.

However, challenges persist. The veterinary industry faces pricing pressures, with visit growth slowing to 3% in 2025-a stark contrast to historical averages of 6%. Competitors like PetSmart are adopting value-conscious strategies, while digital insurers such as Fuzzy are addressing cost barriers through pet insurance adoption. Petco's response-enhancing digital capabilities, including a planned loyalty platform and omnichannel integration-aims to strengthen customer engagement and justify premium pricing.

Sustainability and Long-Term Outlook

Petco's financial projections for 2026 suggest a sustainable path forward. The company raised its full-year 2025 adjusted EBITDA guidance to $395–$397 million, reflecting confidence in its transformation strategy. While net sales are expected to decline modestly in 2025, the focus on high-margin services and cost discipline positions Petco to outperform peers in 2026. Goldman Sachs has noted that Petco's unique strength in veterinary services could drive growth, particularly as the sector's CAGR accelerates to 7.59% by 2033.

Yet, sustainability hinges on execution. Petco must continue optimizing its existing veterinary fleet, scaling digital initiatives, and differentiating its offerings in a market where competitors are rapidly adopting telemedicine and AI-powered diagnostics. The company's emphasis on sustainability-aiming to classify 50% of products as "sustainable" by 2025-also aligns with consumer trends, potentially enhancing brand loyalty.

Conclusion

Petco's strategic shift to high-margin veterinary services is a calculated response to evolving market dynamics. By expanding margins through cost control, scaling services via existing infrastructure, and differentiating through retail integration, the company is well-positioned to thrive in 2026. However, its success will depend on maintaining operational discipline, adapting to competitive pressures, and leveraging technological innovation. For investors, Petco's transformation represents a compelling case study in how traditional retailers can reinvent themselves to capture value in a high-growth sector.