Good afternoon, and welcome to the Petco Health and Wellness Company, Inc. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note that this event is being recorded. I would now like to turn the conference over to Tina Romani, Head of Investor Relations and Treasury. Please go ahead.

Good afternoon, everyone. And thank you for joining Petco Health and Wellness Company, Inc.'s fourth quarter and full year 2024 earnings conference call. In addition to the earnings release, there is a presentation available to download on our website at ir.petco.com summarizing our results. On the call with me today are Joel Anderson, Petco Health and Wellness Company, Inc.'s Chief Executive Officer, and Sabrina Simmons, Petco Health and Wellness Company, Inc.'s Chief Financial Officer. Before they begin, I'd like to remind everyone that on this call, we will make certain forward-looking statements. We are subject to a number of risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties include those set out in our earnings materials and SEC filings. In addition, on today's call, we will refer to certain non-GAAP financial measures. Reconciliations of these measures can be found in our earnings release, presentation, and SEC filings. With that, let me turn it over to Joel.

Good afternoon, everyone. And thank you for joining us today. 2025 marks the sixtieth anniversary of the Petco Health and Wellness Company, Inc. brand. What started as a single store in 1965 has grown into a fleet of over 1,500 stores in North America, allowing us to reach approximately three in four people in the United States who live within ten miles of a Petco Health and Wellness Company, Inc. As we celebrate the company's history, we also have an opportunity to reinvent our iconic brand for the future and position the business to regain share in the large but highly fragmented market. This includes broadening our brand and vision from a singular focus on health and wellness to serving all pets and pet parents while tapping into the emotional connection to pets inherent in our brand DNA. Before I discuss today's results, I want to briefly reflect on my tenure to date at Petco Health and Wellness Company, Inc. Culture is something that has always been important to me as a CEO. It is an area at Petco Health and Wellness Company, Inc. that needed immediate attention but is also not something that changes overnight. It takes consistency and authenticity to evolve the mindset of our broader teams or increase transparency, accountability, and teamwork. As part of this, I've been actively engaged visiting and working in our pet care centers, distribution warehouses, holding small group listening sessions, which I call coffee connects, as well as large town halls. I found our team members responding well to the message and appreciative of the openness about what we need to do to improve this great brand once again. I want all 30,000 partners to know how committed I am to them and express my excitement about the long-term opportunity in front of us. In my prepared remarks today, I will provide you with specific details of what we have accomplished and what is on the horizon to continue our progress. In addition to the internal changes underway, we also benefit from operating in a resilient market. The pet category is expected to reach $200 billion in the next five years, and the ongoing humanization of pets continues to be a powerful tailwind, one that we are all well-positioned to benefit from. Additionally, services are the fastest-growing area of the pet category, where we have an established leadership position and a differentiated model of owned grooming and vet locations at scale. Most importantly, our Petco Health and Wellness Company, Inc. team brings our mission to life with their passion for pets and dedication to serving our customers. It is against this backdrop I firmly believe that Petco Health and Wellness Company, Inc. is the only retailer that can deliver complete care for pets and expert support for pet parents in one stop. Let's turn to our results. In the fourth quarter, we delivered revenue of $1.55 billion in line with our prior outlook, and adjusted EBITDA of $96.1 million, which was ahead of our expectations. Our results demonstrate the progress we've made to return the business model to retail operating excellence and drive structural cost out. While there is more work ahead, I am confident we are going to reset our long-term economic model starting this year and are well-positioned to build on this early momentum and deliver double-digit growth on adjusted EBITDA year over year in 2025. Let me now unpack in greater detail our long-term phased approach to delivering on Petco Health and Wellness Company, Inc.'s full potential. Starting with phase one, which is well underway, over the last six months, I have relentlessly focused on one, improving the operating model, two, giving our stores a voice, and three, restoring our retail fundamentals. Quite frankly, our foundational practices were not those of a successful consumer business and needed overhauling. We have made great progress on all three and are strengthening the foundation for Petco Health and Wellness Company, Inc. to return to sustainable profitable growth. The successful evolution of our leadership team is a critical enabler of this work. Each of our leaders brings a wealth of retail industry expertise and a proven track record for delivering and driving results. And they are already accelerating our operational improvements. Specifically, as CFO, Sabrina Simmons brings more than 20 years of executive financial leadership in consumer retail. She will help us harness the collective expertise of the wider leadership team by driving increased financial rigor and discipline around our initiatives. As Chief Customer and Product Officer, Michael Romancho will drive the transformation of the Petco Health and Wellness Company, Inc. brand from product development to presentation to messaging, with a focus on tapping into the unparalleled joy and love pets bring to our lives. This spans the uniqueness of proprietary brands, how well we tell the story of our national brands, and customer-centric marketing strategies. And Jack Stout transitioned into our Chief Merchant role, where he has been institutionalizing best-in-class retail practices across our buying teams, as well as merchandising operations and supply chain. Additionally, last year, we welcomed Joe Venezia as Chief Revenue Officer, who is focused on optimizing our real estate portfolio while maximizing growth in our existing store and hospital fleet. Dan Calista, Chief Strategy and Transformation Officer, is building the internal capabilities to execute on our transformation. And Holly May has supported all these leadership changes as our Chief Human Resources Officer. I'm incredibly excited to be working along this fantastic team to unlock Petco Health and Wellness Company, Inc.'s full potential. Across our pet care distribution and support centers, our leadership team is helping the entire organization fundamentally change the way we think and work to ensure all aspects of the business are operating effectively and seamlessly. Collectively, we are committed to reinvigorating our culture, and I believe we now have the right cost controls in place and are executing against them with urgency. As we enter 2025, we will continue to identify additional opportunities to drive savings and unlock value. This brings me to phase two. With a seasoned leadership team in place and greater control over our cost print, we are currently in phase two of our long-term strategy, which is all about implementing and executing to strengthen our retail fundamentals. Specifically, merchandising continues to be the greatest near-term opportunity for us to drive gross profit improvement. We have completed negotiations with our vendors and put in place a rigorous product cost framework designed to reduce product costs and support gross margin improvement in 2025 and beyond. In today's more challenging economic and consumer environment, we recognize the consumer remains discerning, and it is critical that we always have the right products at the right price. To that end, we conducted a detailed review of our product assortment and are optimizing it to more closely align with consumer demand and preferences. Specifically, we're allocating more of our focus and shelf space to top-selling brands and high-velocity SKUs across categories. In addition, we're continuing to sharpen our approach to pricing and have established a strategic pricing framework by category. This allows us to offer quality across the value spectrum, with competitive price points while also protecting margins. Next, to further lower costs and strengthen the economic model, we are laser-focused on driving efficiencies throughout the organization. Part of our pricing work we have refocused our promotional strategy to move away from low-margin revenue and toward more impactful targeted opportunities. We are now executing more targeted promotions and seeing favorable initial results. We're also optimizing our customer support infrastructure, which includes our call center vendor partnerships and physical locations of our support teams. We expect these actions to reduce friction for the customer while also removing costs from the system. And within e-commerce, we've identified opportunities to reduce the cost per order and the number of split shipments, increasing overall shipping efficiencies and delivering speed. Taken together, these actions are not only improving profitability, but they are delivering exceptional customer service. Across our pet care centers, we are continuing to evolve our labor model to reduce in-store tasking and free our team up to spend more time with our customers. And we're taking actions to improve overall customer satisfaction, including reducing click-to-delivery time for our e-commerce customers and increasing visibility into order tracking for omnichannel customers. In addition, during this phase of implementing and executing, the entire leadership team is busy studying the pet category, the market opportunities, the competition, and getting to know the superpowers of our teams. It is important that before we turn our full attention to growth, our actions are rooted in deep data and analysis. I'm pleased with the early phase two progress to further strengthen the fundamentals of the business as well as the identification of additional opportunities to drive savings and unlock value. Let me spend a few minutes now on phase three, which should begin in earnest late 2025. While we are 100% focused on executing on our initiatives to drive profit improvement, we are also preparing for the third phase of our trajectory, revenue growth. As we position the business to return to offense, we will begin to see and test revenue growth initiatives. Allow me to share several examples. One, central to the growth will be the customer and product work currently underway led by Michael Romancho. In his initial days, he has begun to evaluate a more cohesive approach to communicating with our customer. He is also focused on better utilizing our internal product development capabilities to source unique products just for Petco Health and Wellness Company, Inc., both differentiating us from the market and increasing our relevance with pet parents. Two, we are engaged in a comprehensive North Star project to fully understand our positioning in the competitive landscape and where the clear white space is for Petco Health and Wellness Company, Inc. to win with customers. We expect to complete that work by the end of the second quarter. Three, it is important we identify ways to make our store fleet more productive as well as study which DMAs are underserved by Petco Health and Wellness Company, Inc. That work kicked off in Q1 of this year. Four, we will also look to enhance our omnichannel capabilities and digital experience to stimulate growth, including revisiting scaling our membership program in 2026. And five, we will continue to invest in services opportunities, the fastest-growing area of the pet category. We have an established leadership position and a differentiated model. All these actions and more will gain momentum once we have successfully implemented the actions of phase two that I outlined for you earlier. Collectively, they're designed to identify new ways to elevate the Petco Health and Wellness Company, Inc. brand, enhance the customer experience, and build top-line momentum. I look forward to providing periodic updates on our progress as we prepare the organization to shift to offense. Before I hand it over to Sabrina, let me reiterate that I'm pleased with the progress we have made in 2024 to strengthen our retail fundamentals and set the foundation for sustainable profitable growth. While there is more work ahead, we are operating from a stronger position today, and we have a detailed multi-phased approach in place for continued improvements. I am confident we have the right strategy and team in place to reach our full potential over time. Sabrina,

Thank you, Joel, and good afternoon, everyone. I'm thrilled to be joining all of you today. I feel fortunate to step into this position at such a pivotal time for Petco Health and Wellness Company, Inc. I didn't really imagine I'd be taking on another operating role. The potential before us was frankly just too hard to resist. Echoing Joel's comments, Petco Health and Wellness Company, Inc. is an incredible brand. And with the work the teams have underway, we'll hold an increasingly differentiated position within the large and resilient pet category. Serving on the board over the past few years has allowed me a running start in focusing on the key areas that will improve our operating and financial performance. As you've heard from Joel, over the past several quarters, our focus remains on improving profitability, which we believe in large part will result from execution. Our number one financial priority is clear: restoring the health of our economic model, which in turn will improve our earnings power and set the foundation for sustainable profitable growth over the long term. Specifically, we are focused on three areas. First is an intense focus on driving gross margin improvement, both in terms of rate and dollars. Principally, this means that we will no longer chase sales at the expense of margin. Instead, we will look to maximize all levers at our disposal, including AUC, pricing and promotions, and mix to improve our gross margin rates. While this takes time and requires great attention to detail, it represents a foundational tenet of managing a healthier business. And that's what excites me. The focus on simply strengthening retail fundamentals presents such an opportunity to improve our earnings power. A great example would be our services business. Work on our existing fleet of vet hospitals is underway, where the teams are optimizing our current locations that are not at full utilization. Optimizing existing hospitals is a highly efficient way to drive services growth and improve our services margins with minimal capital. That is just one example, but, again, a simple back-to-retail fundamentals approach that will have a meaningful benefit to our margin structure over time. Moving to our second priority, leveraging SG&A will be a key pillar of our strengthened economic model, ensuring all aspects of our business are operating effectively while instilling cost discipline across the organization. To be clear, this is not a one-time cost-cutting exercise but rather an operating principle and shift in our mindset, resulting in greater efficiency, agility, and increased productivity, all of which will require a higher level of accountability and discipline across every aspect of our business. Which brings me to our third priority, the imperative to improve our return on invested capital by instilling new rigor and discipline into our capital allocation decisions. Our focus on these three pillars—gross margin expansion, SG&A leverage, and ROIC—will improve profitability and, quite importantly, free cash flow generation. I look forward to discussing all of these topics further both today and in our conversations to come. Now I'll go into our fourth quarter results followed by our outlook for 2025. Fourth quarter comparable sales were up 50 basis points year over year. For the quarter, net sales were $1.55 billion in line with the prior outlook. When comparing net sales to the prior year, it's important to note that the fourth quarter of 2023 benefited from an additional week. Fourth quarter gross profit decreased about 3% to $589 million, primarily reflecting the impact from the loss of the fifty-third week in 2024. Fourth quarter gross margin increased 180 basis points to 38%. The majority of the increase is driven by the lapping of an inventory and impairment charge in the fourth quarter of last year, with the remainder driven by progress on margin management. Moving on to expenses, total SG&A was $571.9 million or 36.8% of net sales, an increase of approximately 60 basis points versus last year, primarily driven by consulting fees and incentive compensation associated with our ongoing transformation efforts. Adjusted EBITDA was $96.1 million with an adjusted EBITDA margin rate of 6.2%, down approximately 10 basis points versus last year. Regarding the balance sheet and cash flow, a critical goal for us is to achieve a debt-to-EBITDA leverage ratio below two times. Clearly, this will take time and will require profitability improvement through the tenets I spoke about earlier, which we are pursuing with urgency. In the short term, we're focused on making incremental progress as evidenced by the steps forward we made in 2024, including $50 million of positive free cash flow and an improved cash balance of $182 million. Now turning to our outlook for 2025. Of note, our outlook excludes any estimated impact of potential tariffs where the dynamics remain quite volatile. To be helpful in providing some perspective on potential impact, there are a few points I can share. The most direct tariff exposure sits within our own brands. Inventory purchases from China, Canada, and Mexico for our own brands represent only about 5% of our total merchandise cost of goods sold. Our indirect exposure sits primarily within our national brands. We are fortunate to have strong vendor relationships at scale, which provide productive conversations and supply flexibility as we partner together to navigate fluid dynamics and uncertainty. We, like everyone, are closely monitoring the situation as developments continue to unfold and will leverage our flexible supply chain to mitigate any potential impact. With that, for the full year, we expect overall net sales to be down low single digits to last year. Of note, we closed 25 net locations in 2024 and ended the year with 1,398 pet care centers in the US. In 2025, we expect to close between 20 to 30 net locations. We expect adjusted EBITDA to be between $375 and $390 million. Within this guidance, and following the framework laid out earlier in my remarks, our goal will be to expand gross margin rate each quarter on a year-over-year basis, albeit modestly initially, and to leverage SG&A. With regards to other guidance items for the full year, we expect depreciation and amortization to be approximately $200 million, net interest expense of approximately $130 million, and approximately $130 to $140 million of capital expenditures with a greater focus on ROIC. Now let me share some perspective on our outlook for the first quarter. Broadly, we expect the first quarter to align to the economic model framework I've outlined for the year. Specifically, we expect net sales to be down low single digits versus the prior year and adjusted EBITDA to be between $82 million and $83 million, up approximately 9% year over year at the midpoint. Before opening up for Q&A, I just wanted to reiterate my optimism about the opportunities in front of us. With a seasoned leadership team now in place, a defined framework to strengthen our economic model, and operational improvements underway, I'm confident we're establishing a solid foundation for Petco Health and Wellness Company, Inc. to return to long-term profitable growth. With that, we welcome your questions.

We will now begin the question and answer session. If at any time your question has been addressed and you would like to withdraw your question, and your first question today will come from Steve Forbes with Guggenheim. Please go ahead. Good afternoon.

Joel, I'd be curious. You lay out the phases here: phase one, phase two, phase three. A lot of us want to look out to phase three and the return to growth. Maybe just talk about the infrastructure—supply chain infrastructure or digital capabilities—that you may need to invest in or improve now that you have the people in place. What other larger moves or investments do you need to lean into to ready the business for phase three?

Hi Steve, and thanks for the question. I think it was important I laid out for all of you a specific plan for our long-term growth objectives. Phase one I started on right away. I'd summarize that as stabilizing profitability, getting the leadership team in place, and improving culture. Right now, we are in the middle of implementing and executing. As it relates to phase three, which I'm sure you're all anxious about, what's more important is that we stay focused on this implementation and execution phase of getting our costs back under control and delivering improved EBITDA. I don't see any significant infrastructure investments that we've got to make. We just have to be more disciplined about how we go about delivering improved EBITDA. Specifically, Sabrina talked a lot about our discipline around ROIC, and I think that is something we weren't as diligent on as we had to be before, but there's not a significant infrastructure investment needed in order to start to get back to driving offense.

Maybe just to add on to what Joel said, Steve. Of our total CapEx spend this year, about 40% is against what we'd call expansion capital. So within that 40%, we are investing in IT infrastructure, including digital. We are investing in a lot of testing, like for remodels. So we are queuing up for our phase to regrowth within that capital spend. Rest assured that it's not all just maintenance capital.

Thanks, Sabrina. That's helpful. As we think about this ROIC fixation as you deploy capital, Sabrina, you mentioned optimizing existing vet hospitals. Can you talk about what's driving the difference in performance among the hospitals today? Is it real estate location or operations? What are you doing to optimize that initiative?

Steve, that strategy remains very important to us. First of all, we have a relatively new fleet of hospitals. The first thing we've got to do is continue to staff up those hospitals, do more marketing to make customers aware we have them. That is a very low capital investment and a strong return on investment since we've already invested in the capital to build them. Now we've got to get them staffed and tell people they're there.

Thank you.

And your next question today will come from Steven Zaccone with Citi. Please go ahead.

Hey. Good afternoon. Sabrina, I was curious for your assessment coming into the business. When you look at the opportunity for EBITDA improvement, what do you see as some of the low-hanging fruit that maybe should have been done years ago, and what gets you most excited about margin opportunities in the future?

Thanks for the question, Steve. You could probably hear in my voice I'm just excited to be here because the opportunity is immense. Many of my colleagues who are new to the team also saw this enormous opportunity for this great brand to return to greater economic health. As Joel has said, the most exciting part is it's really just fundamental retail work. It's about working every lever of the business properly to improve profitability. This year, we have an opportunity to go after gross margin expansion in a disciplined manner. That means every lever: working with vendors on AUC, working on pricing, stopping promo stacking—many levers within that line item. On the SG&A line, it's a mindset change where we're looking at efficiency and effectiveness everywhere and committing to leveraging SG&A. When you're able to do that, and you start to regrow sales, the flow-through of sales is powerful. That's the EBITDA opportunity before us, and it's very exciting.

Okay. Great. Then Joel, on merchandise improvement, could you elaborate a bit more? How much of that is working with what's already in the store versus getting better allocations of items you don't already have? We've gone through a period where the prior team talked about not having enough mass product and added that to the store. Help us understand the merchandise improvements.

Great question, Steven. There are two sides. Our merchandising model has a nice balance between consumables and discretionary. On the consumable side, we've been focused on improving our in-stock. We put in place a new inventory system last year that's helped significantly. On the discretionary side, that's about innovation, newness, and trends. We have a big opportunity there to drive better impulse buying. Initiatives underway that are already gaining traction include better vendor negotiation, assortment optimization, and a shorter pricing approach. All of those combined are starting to take traction as we implement and execute. That gives you an overview of how we're thinking about the merchandising model.

Thanks very much.

Your next question today will come from Michael Lasser with UBS. Please go ahead.

Good evening. Thank you for taking our question. Given the commentary and the plan you've outlined, along with comparing Petco Health and Wellness Company's performance in the fourth quarter to its largest pure-play pet specialty competitor, it would seem like the message is you are willing to sacrifice some sales and market share in the short run to improve profitability and establish the foundation for the long run. Is that a fair interpretation? And do you get the market share back, especially if customers gravitate to other outlets? How do you win those customers back over the long term?

Thanks, Michael. That's a fair assessment. Take that as an example of our discipline about returning this great brand to growth. Part of that discipline is understanding all the levers we had, and frankly, we were chasing sales in several instances that had no long-term lifetime value. While that was needed in the short term, it is not our long-term goal. Success looks like strengthened profitability, improved cash flow, and lower leverage. In phase three, which will start to emerge in the back half of this year and into next year, we will begin to identify levers of growth—I outlined several areas we'll focus on—and we will test our way into those to make sure they're promising.

If I could ask a follow-up: Your guidance for this year embeds an expectation that comps are flat to slightly negative. How do you manage SG&A in light of that? At some point, do you run the risk of cutting customer-facing activities that could make it harder to return to growth when that phase arrives?

Great question, Michael. We are absolutely customer-focused. Part of this foundation-building in 2025 is making sure we are addressing customer needs. SG&A is about leverage, not a one-time cut program. There are many areas to go after that do not touch the customer or harm the customer experience. That's our number one goal: to please our customer.

If you look at our closures, we closed 25 stores last year, mostly near the end of Q4, and we expect to close 20 to 30 this year. Those closures alone account for a couple points of decline. We wouldn't be closing those stores if they were profitable. Removing stores that were dragging us down contributes to improved EBITDA.

It's very helpful. Good luck.

Your next question today will come from Oliver Wintermantel with Evercore. Please go ahead.

Hi. Thanks. Question regarding EBITDA flow through to free cash flow. Could you give us details on how you think EBITDA converts into free cash flow in 2025?

There are many variables that impact free cash flow. If you look at how we've guided adjusted EBITDA up about 14% at the midpoint for 2025, one of the biggest levers to cash flow will be that improved profitability. After that, we'll continue working all our working capital levers. We may look during the year to do some inventory investing to ensure in-stock levels for our customers, but we have other working capital levers to offset that. That's how we're thinking about cash flow for 2025.

Got it. Thank you. And as a follow-up, can you talk about how you expect mix to play out this year between supplies, hard goods, and services?

Good news: we are not relying on any mix shift into supplies or out of consumables to meet our guidance. If that happens, it's a tailwind, but we're not relying on it to deliver our guidance.

Thank you all.

And your next question today will come from Simeon Gutman with Morgan Stanley. Please go ahead.

Hi, Joel. I wanted to ask about your perception on price and Vital Care. Looking at the offering, how much value is there? The company has done a lot of work on pricing and narrowing gaps. One of the competitors gives 5% back with a rewards program. It seems like your offering is still in the right place, but I wanted your perception.

Thanks, Simeon. Price was one of the things we were working on before I joined. We implemented thousands of price changes in the fall to be more competitive both up and down. I feel we're in a good place on price from a perception standpoint. That's dynamic, and we're monitoring it week to week and month to month. Regarding Vital Care, the membership program is important for us long term. We're in the process of making enhancements to it, and I think it'll be one of the levers to drive growth in 2026 and beyond. We have both a free membership and a paid membership program, and we're pretty far down the path. I think we can make it better.

One follow-up: What is the implied comp in your guidance? And what does the industry do in 2025? It looks like the industry is growing slightly. What assumptions are you building so comp can get positive in the future?

Our assumption is that 2025 is a self-help year for Petco Health and Wellness Company, Inc. We are not waiting for the industry to recover. We can deliver on what we shared by driving internal operational and profit improvements that are not dependent on the industry. If the industry grows and we take our fair share, that's an additional tailwind.

To underscore that, our guidance of a low single-digit decline on sales means we're not counting on a positive comp to achieve our adjusted EBITDA guidance. If industry growth comes, it's just a welcome tailwind.

Thanks. Good luck.

And your next question today will come from Zach Fadem with Wells Fargo. Please go ahead.

Hi, guys. This is David Lantz on for Zach. Thanks for taking our questions. With sales expected down low single digits in Q1, can you talk about the shape of Q2 to Q4 in more detail and whether there's anything to keep in mind regarding timing of store closures this year?

We try to be helpful by giving you the shape of the P&L we are trying to achieve each quarter. Our goal is to expand gross margin each quarter on a year-over-year basis, not sequentially, and to leverage SG&A. We intend to march that economic model through every quarter. Regarding the timing of closures, we can't give anything definitive, but thinking in terms of first half versus second half is a reasonable range; we'll handle closures individually as leases come up.

On the timing question, you can think about it roughly split between the first half and second half of the year as a reasonable assumption. We'll manage on a lease-by-lease basis.

Got it. That's helpful. Also, fresh frozen remains a standout. Can you talk about the drivers of that and how it's performing relative to the industry?

Fresh frozen is still one of the faster-growing areas relative to the industry. We've been invested in it for a long time, and it's an area we should continue to expand in. I feel strong about our fresh frozen capabilities, and we'll explore it further as a potential growth lever.

Thanks.

And your next question today will come from Peter Benedict with Baird. Please go ahead.

Thanks for taking the question. On the stores: the 20 to 30 net closures this year—should we expect that run rate to continue in out years? What's your longer-term viewpoint on the store fleet?

I wouldn't read too much into that number. With a fleet of about 1,400 stores, you'll do some optimizing every year. The net closure number reflects that we're not opening many stores against that, which makes the net closure look a bit bigger. The theme is we own a lot of assets on our balance sheet that we believe we can make more productive. Job one is making the assets we own work, and then we'll look to the future to regrow, which may include more stores down the road.

Okay. Thanks. On merchandise differentiation, besides fresh frozen, is there anything else in consumables you're focused on? Owned brands or national brands? And on supplies, how do you achieve differentiation there?

A broader insight: we've named Jack as our chief merchant, and I'm getting out in the field and doing top-to-tops with our top suppliers. We have great relationships with our vendors; they want to see Petco succeed. The discipline and transparency we're putting in place translates into opportunity. Vendors are talking to us about brands and ideas they're working on, and I'm excited about the prospects. Right now, we're optimizing stores and focusing on top sellers that drive the business. We're in the middle of a big reset and optimization of consumables, and we'll have more specifics as the year progresses. There's real opportunity through vendor partnerships.

Fair enough. Thank you, and good luck.

And your next question today will come from Kendall Toscano with Bank of America. Please go ahead.

Hi. Thanks for taking my question. As you're optimizing the assortment, any update on how you're thinking about differentiation for Petco at a high level and where opportunities are, whether in consumables or general merchandise?

I'm not at a point where I want to talk about specific initiatives openly, but the team's marching orders have been about looking at newness, innovation, and testing new products. We're in phase two, focused on getting our cost infrastructure back under control and delivering on the three principles Sabrina outlined: gross margin expansion, SG&A leverage, and ROIC.

Understood. One more: any more color on traffic versus pricing within the 0.5% comp?

We're looking at every lever to drive the position we've guided to. It's not one lever; there's no single big call-out.

And your next question today will come from Seth Basham with Wedbush Securities. Please go ahead.

Thanks a lot, and good afternoon. To clarify: for your EBITDA guidance of roughly 14% increase at the midpoint, what are the largest building blocks? Can you quantify them?

The two biggest levers are expanding gross margin and leveraging SG&A. We're going to use both; we won't lean into one at the expense of the other. We'll be balanced, flexible, and adaptable, and we're laser-focused on delivering that.

Store closures represent a material improvement. Can you clarify the impact of closures in the 14% growth and any other primary key drivers?

2024, we closed 25 net stores. Broadly, that's about $50 million in sales and nearly 1% of sales heading into 2025. In 2025, we expect to close net 20 to 30. Retailers generally back half of closures into the prior year; the 2024 closures have a bigger impact than 2025's expected closures. That gives a sense of what closures mean to the year.

When thinking about the biggest risk and opportunity to the visibility of your EBITDA improvement in 2025, how do you assess those?

What I like is we're not relying on robust macro or consumer strength. Our top line is anchored on a low single-digit sales decrease, which forces us to use other levers to deliver adjusted EBITDA. If we do better on the top line, that's extra tailwind.

Thank you.

And your final question today will come from Chris Bottiglieri with BNP Paribas. Please go ahead.

Hey. Thanks for taking the question. What are you embedding for inflation in your outlook? Are you seeing signs from vendors that costs are turning up again, and could you pass that through? Also, regarding promos: since you said you're pulling back, can you frame that for us? Will promos be down year over year? Are you repurposing promo dollars into more productive programs that drive profits?

Overall, it's pretty steady year over year. The market is promotional but generally rational. My comment was about chasing empty-calorie sales; we need to be disciplined so that when we do a promo, there's an end game that delivers lifetime value. It's part of getting back to retail fundamentals. Overall, the promotional environment is pretty steady year over year.

We want to offer value and be perceived as offering value. Some systemic issues we had allowed stacking of promos, which you don't want to do. Managing promos includes cleanup so we aren't allowing stacking, while still offering good value and competing appropriately.

Fantastic. Thanks, Joel and Sabrina. That concludes our call today. Thank you, everyone, for your time and your thoughtful questions, and we look forward to continuing the conversation.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.