Petco Health and Wellness Company Inc (NASDAQ:WOOF). reported a third-quarter earnings per share (EPS) of -$0.02, surpassing the forecasted EPS of -$0.04. The company's revenue reached $1.51 billion, slightly above the expected $1.50 billion. Following the earnings announcement, Petco's stock rose 3.17% in after-hours trading, reflecting a positive investor response.
Key Takeaways
- EPS of -$0.02 beat the forecast of -$0.04.
- Revenue of $1.51 billion slightly exceeded expectations.
- Stock price increased 3.17% in after-hours trading.
- Services revenue grew by 9%, contributing to performance.
- New initiatives like "Welcome to the Family" aim to boost customer engagement.
Company Performance
Petco's third-quarter performance marked a modest improvement over the previous year, with net revenue increasing by 1% year-over-year to $1.51 billion. Comparable sales were up 2%, driven by a 3% increase in consumables and a 9% rise in services revenue. The company has focused on enhancing its services and optimizing product management, which contributed to a gross margin increase of 130 basis points to 38.1%.
Financial Highlights
- Revenue: $1.51 billion, up 1% year-over-year
- Earnings per share: -$0.02, improved from -$0.05 in the previous year
- Gross margin: 38.1%, up 130 basis points
- Adjusted EBITDA: $81.2 million, representing a 5.4% margin
Earnings vs. Forecast
Petco's actual EPS of -$0.02 surpassed the forecast of -$0.04, representing a surprise of approximately 50%. This positive deviation from expectations is notable compared to previous quarters, where the company faced challenges in meeting earnings forecasts.
Market Reaction
Following the earnings release, Petco's stock price increased by 3.17% in after-hours trading, reaching $5.21. This rise reflects investor optimism about the company's ability to exceed earnings expectations despite a challenging market environment. The stock had closed at $5.05 before the earnings announcement, showing resilience compared to its 52-week range of $1.414 to $5.94.
Company Outlook
Looking ahead, Petco expects fourth-quarter revenue of approximately $1.55 billion and adjusted EBITDA between $90 million and $95 million. The company is projecting positive free cash flow for fiscal 2024 and plans to continue focusing on cost reduction and operational efficiency. Key initiatives include the "Welcome to the Family" program and enhancements in inventory management.
Executive Commentary
CEO Joel Anderson emphasized the company's proactive approach, stating, "We're not passively waiting for the market to recover." He also highlighted the potential for growth in Petco's veterinary hospitals, noting, "Our hospitals are rather still in their infancy and we'll continue to improve." Anderson expressed confidence in the company's direction, saying, "I'm more bullish than ever on my decision to join Petco."
Q&A
During the earnings call, analysts inquired about cost reduction strategies and margin improvement opportunities. Executives indicated that current cost reduction measures do not require reinvestment and highlighted significant potential for margin enhancement in veterinary services. Additionally, vendor negotiations were reported to be progressing well, contributing to improved product cost management.
Risks and Challenges
- Supply chain disruptions could impact inventory management and product availability.
- Market saturation in the pet industry may limit growth opportunities.
- Macroeconomic pressures, such as inflation, could affect consumer spending.
- Increased competition from online retailers poses a threat to market share.
- Execution risks associated with new strategic initiatives and operational changes.
Full transcript - Petco Health and Wellness Company Inc (WOOF) Q3 2025:
Conference Operator: Good afternoon, and welcome to the Petco Third Quarter 20 24 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Lisa Stark, Senior Director of Communications. Please go ahead.
Lisa Stark, Senior Director of Communications, Petco: Good afternoon, and thank you for joining Petco's 3rd quarter 24 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's Chief Executive Officer and Brian LaRose, Petco's Chief Financial Officer. Before they begin, I'd like to remind everyone that on this call, we will make certain forward looking statements, which 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. And finally, during the Q and A portion of today's call, we ask that you please keep to one question and one follow-up. With that, let me turn it over to Joel.
Joel Anderson, Chief Executive Officer, Petco: Thank you, Lisa. Good afternoon, everyone, and thank you for joining us today. Our Q3 results came in slightly ahead of our expectations as we more effectively navigated a dynamic consumer environment and the actions we are taking to strengthen our retail fundamentals and drive cost out are beginning to take hold. Revenue was $1,510,000,000 up 1%, driven by consumables and services. Gross margin expanded 130 basis points to 38.1 percent driven by progress on product cost management and improvements in services margin.
Adjusted EBITDA was $81,200,000 While there is much more work to do, our improving results increase our conviction that we are on the right path as we position Petco to win. Throughout the quarter, I spent significant amount of time meeting with teammates across the organization, from working alongside our associates in our pet care centers to visiting our distribution centers to hosting small group listening sessions at our support centers. I've witnessed firsthand the passion our people have for pets and the dedication they bring to serving our customers. Importantly, it's exciting to see the entire organization rally behind our plans to drive operational and financial performance improvement. On our call, I outlined our commitment to resetting the trajectory of our business on the last call.
Today, I will share specific areas of opportunities, discuss developing plans to drive improvement and holding ourselves accountable, while we're on the path to returning to long term sustainable profitable growth. Our initiatives are currently focused on 3 critical areas: merchandising, servicing our customers and driving efficiency across our business. Allow me to provide you with an update on each, including specific examples. 1st, improving merchandise remains the greatest near term opportunity for us to strengthen profitability. I'd like to take this moment to thank our merchandising team along with our merchant vendor partners for their collaboration and support as we take the necessary steps to make Petco a better retailer, employer and partner.
We're optimizing our assortment to be aligned more closely with customer demand and make it easier for them to shop with us. In support of this, we completed a detailed review of our assortment across both consumables and supplies have identified several opportunities to enhance our offering. Key focus areas for us include creating more space on shelves for faster turning SKUs as well as reducing SKUs in certain categories to simplify the customer's decision making process. In addition, I've met 1 on 1 with several of our vendors in order to directly learn how we can improve our relationships. As consumers continue to be judicious in their spend, we have to meet them where and when they want with the value they're looking for.
We've implemented new processes to deliver timely product resets that allow us to offer more exciting products. We're also sharpening our approach to pricing to remain competitive in the market and drive financial outcomes for Petco. To date, we put in place stronger pricing guardrails, implemented more robust reviews of our pricing gaps and established processes for promo and assessments. An example of our merchandising work in action is the recent launch of our Welcome to the Family program, given the importance of first time pet ownership. We designed this program in partnership with our key vendors, as well as our expert vet, training and grooming teams to provide dog and cat parents with guidance, resources and savings on new pet essentials and services.
2nd, to win in today's retail environment, we must improve the way we service our customers across our pet care centers, online and in our services platforms. From my time spent working in our pet care centers, I observed several opportunities to drive greater consistency across the entire footprint, which will generate savings that can be reinvested into the customer experience and strengthen profitability. Let me share several examples of where we are making meaningful improvements to better serve our customers. We've set new standards for our labor model to staff our stores and in a way that allows our partners to spend more time with the customers and less time on tasks in the back of the store. This extends to store leadership, where we're reducing tasking, administrative responsibilities and overall complexity for our general managers, bringing them up to spend more time leading their teams and driving store productivity.
Additionally, leveraging automation to standardize the online order fulfillment process in our pet care centers is one area in particular I see significant potential. Finally, in services, our bed offering remains a key growth driver and differentiator for Petco. Services revenue was up 9% with strength across both hospitals and Vetco mobile clinics. As our hospital fleet continues to mature, our services team is focused on accelerating utilization to support structural margin improvement of our vet hospitals and ensure we can meet the growing demand for our customers in a timely manner. And we're leveraging our vet customer data to better understand their purchasing patterns, inform how we engage with them and ultimately drive greater wallet share.
These initiatives are having a direct impact on our top and bottom line as we're creating more selling opportunities for partners, while simultaneously driving greater efficiencies. Turning to our 3rd commitment, driving greater efficiencies across the business to bend the cost curve. Within merchandising, we're taking action to improve our commercial execution. In Q3, we completed key vendor negotiations, and we're pleased with the outcome as we continue to strengthen our vendor relationships and differentiated merchandising offering. In our supply chain, we're renegotiating multiyear contracts with our shipping partners, reducing split shipments and driving incremental improvements in distribution center labor to reduce cost per shipment and improve speed of shipping.
In vet, we're closely measuring performance at the individual hospital level, providing us greater visibility into the needs of each hospital and the staffing required to maximize efficiency and productivity. We believe there is significant opportunity to improve the profitability of the existing fleet by ensuring hospitals remain staffed and are supported through marketing and merchandising efforts. And we're taking action to professionalize our procurement team. As a start, we requested contract negotiations and conducted RFPs across a broad selection of medium to large scale indirect procurement partners. We're pleased with the engagement and the outcomes we're seeing so far.
Overall, our cost initiatives are well underway and tracking against our prior expectations. Importantly, these aren't just one time savings. These initiatives are designed to fundamentally change the way we think and work to consistently identify areas of opportunity to unlock long term value. This redefinition of retail fundamentals is expected to have an enduring impact on our people and culture, leading to greater accountability and transparency. Further ensure our success around our 3 initiatives of merchandising, servicing our customers and driving efficiency, we've added 2 key executives.
Leadership is critical to shaping the direction of the business, and I'm pleased with our recent hiring of 2 new leaders that will help us realize our full potential. We named Joe Venezia, Chief Revenue Officer, a newly created role in charge of developing the integrated strategies for improving the customer experience and driving revenue across the organization. Joe will oversee these critical areas that contribute to Petco's growth, including the pet care centers, services, real estate and customer success capabilities. Dan Callista also has joined us as our Chief Strategy and Transformation Officer. In this role, Dan will be responsible for building the internal capabilities we need to get our fundamentals right, maintaining accountability through our ongoing transformation and positioning ourselves for growth.
These hires underscore our top priority for improving profitability through structural cost out, while positioning Petco for growth. It's still early days, but our actions are beginning to take hold. We're setting ourselves up to play offense as we build momentum into fiscal 2025. Before I close, let me leave you with this. Having been in the role for over 100 days, I can say with conviction and certainty that I'm more excited today than I have ever been on our potential here at Petco.
The time I spent working alongside our associates showed me how their knowledge, expertise and simply raw passion for improving the lives of pets and their parents is unlike anything else in the industry. This enthusiasm that sets us apart makes me confident in our trajectory. With that, over to Brian to provide more details on our financial performance and guidance. Brian?
Brian LaRose, Chief Financial Officer, Petco: Thanks, Joel, and good afternoon, everyone. First, I want to extend my thanks to our Petco partners for their continued dedication to delivering for our customers. Our Q3 performance demonstrates improved operational and financial execution enabling us to deliver results ahead of our expectations. For the quarter, net revenue was $1,510,000,000 up 1% year over year with comparable sales up 2% year over year. Breaking this down by category, consumables grew 3%.
Supplies and companion animal remained soft at down 3%, but improved roughly 200 basis points sequentially on a percentage basis. Services and other, which is comprised of services, wholesale and recently disposed non core businesses delivered 5% growth. Services specifically were up 9% driven by ongoing strength in our vet hospitals, mobile clinics and grooming. Moving down the P and L, gross profit was $576,000,000 up 5% from prior year. Gross margin for the quarter was 38.1%, up nearly 130 basis points from prior year driven by progress on product cost management and improvements in services gross margin.
SG and A was $572,000,000 increasing 2% year over year. As a percentage of sales, SG and A rate was 37.8%, up nearly 40 basis points driven primarily by our planned step up in store labor in line with our expectations and reflecting our commitment to improving the in store customer experience. We expect these increased SG and A costs to continue into the Q4. Adjusted EBITDA was $81,200,000 with an adjusted EBITDA margin rate of 5.4 percent, up almost 60 basis points year over year. All in adjusted EPS was negative $0.02 compared to negative $0.05 per share in the prior year.
Turning to the balance sheet, merchandise inventories were $690,000,000 at the end of the 3rd quarter as we effectively controlled our inventory, which along with in stock rates are in excellent shape. Liquidity remains strong at $644,000,000 inclusive of $117,000,000 in cash and cash equivalents and $528,000,000 of availability on our revolving credit facility. CapEx was down $31,000,000 year over year for the quarter, year to date down approximately $85,000,000 year over year in line with our guidance to reduce CapEx in 2024. Free cash flow was negative $10,000,000 a meaningful improvement year over year supported by lower inventory levels achieved as part of our ongoing approach through disciplined inventory management. And we remain firmly on track to deliver positive free cash flow for fiscal 2024.
Before moving on to guidance, let me address the recent announcement of potential tariffs on goods imported from China, Mexico and Canada. We have a few immaterial vendors where we source directly from Mexico and Canada which we do not expect to impact us negatively. Regarding China relative to broader retail, we have a lower level of exposure to imported products and we believe the proposals as currently outlined would not be meaningful to our overall business. Specific to Petco Mexico, we do not source or import any products from them, rather they source their products primarily from the U. S.
With select products exported directly to them from Asia or source directly from suppliers based in Mexico. Petco Mexico remains the clear market leader in pet specialty in Mexico and an important strategic partner for us continuing to drive long term profitable growth. I'll now turn to outlook. As a reminder, Petco's fiscal 20 20 3 Q4 and full year included an additional week. For the Q4 of fiscal 2024, we expect revenue of approximately $1,550,000,000 adjusted EBITDA between $90,000,000 to $95,000,000 which is inclusive of a minimum of $10,000,000 in third party consulting fees associated with our transformation effort and adjusted EPS between $0.02 Additionally, for the full year, we expect net interest expense of approximately $140,000,000 inclusive of the estimated impacts of our hedges against the forward rate curve, dollars 273,000,000 weighted average fully diluted shares and $130,000,000 of capital expenditures.
Stepping back, we're encouraged by the structural improvement we're seeing throughout the business. The meaningful changes we've made in
Conference Operator: the 1st 9 months of
Brian LaRose, Chief Financial Officer, Petco: the year sets us up for a solid finish to 2024 as we build momentum heading into 2025. Thank you for your time. And with that, we'll be happy to take your questions.
Conference Operator: We will now begin the question and answer session. The first question comes from Komal Jajiwala with Jefferies. Please go ahead.
Joel Anderson, Chief Executive Officer, Petco: Hey, thank you. I guess the first question, you've made a lot of progress on the cost side. What would be a target same store sales figure where you can start levering off this newer cost base? Thank you for the question. I'll give you some of my thoughts and Brian if you want to add anything.
Look, I think our focus right now is, as you said even in your question is about taking costs out of our base permanently. It's a structural change that we want embedded in our DNA to drive accountability and transparency. But as it relates to a longer term and the question you're asking, I think that's something that we should leave for March as we think about the longer term. A lot is going to change. Obviously, the number is much lower right now because we're so focused on the structural elements of costs that we think are permanent and not one time.
Yes.
Brian LaRose, Chief Financial Officer, Petco: I would just add to that. If you look at SG and A, we've talked for 2, 3 quarters in a row now about sort of step up in labor investments that we needed to make to improve the in store customer experience. We've done that. We've seen that actually manifest in an improved customer experience in the stores. Simultaneously, we have taken cost out of the SG and A structure through some G and A actions as well as making sure that we reduce the tasks in store, simplifying the experience for our GMs and partners in the store and again improving that customer experience.
Joel Anderson, Chief Executive Officer, Petco: Okay, great. Thank you.
Conference Operator: The next question comes from Steve Shemash with RBC Capital. Please go ahead.
Steve Shemash, Analyst, RBC Capital: Great. Good evening and thank you for taking my question. I wanted to ask on supplies and companion animals and the more discretionary segment. So still negative, but the underlying trend is improving there. Wondering if you can elaborate on that, if that's just all sub segments generally just doing better or if there's any insights to glean from specific sub segments?
Joel Anderson, Chief Executive Officer, Petco: Yes. Look, I think you're asking about discretionary. I think it's more important you think about Petco in the broader business, which as I look at it is really 2 pronged. We have a huge consumables business and that's really all about being in stock. And that's where a large focus is our of ours has been.
We just implemented a new inventory management system. We're improving shelf utilization. And then as it relates to discretionary, you're right, we've seen a 200 basis point sequential improvement. But discretionary is really all about innovation, newness, being trend right and really driving impulse buying. We'll continue to get better at that.
We're really focused on both sides of the business and getting them
Unidentified Speaker: right. Got it. Helpful.
Steve Shemash, Analyst, RBC Capital: Thank you. And maybe just as a follow-up, one of your competitors has been talking for a few quarters now on adoption trending in the right direction. Curious if that aligns with what you guys are seeing in the market? I know the data for adoption is pretty spotty. And if not, has it stabilized?
What are you looking for to maybe get ahead of an inflection there?
Joel Anderson, Chief Executive Officer, Petco: Yes. Look, I think everybody is looking at it a little bit differently. The market is rather flat is what we're seeing. But as it relates to Petco, in the short term and by that I mean throughout 2025, we're really in a self help situation and that we don't have to rely on the market getting better in order for our business to get better. And so look, if the market improves, like you're talking about, that's just icing on the cake and makes us even stronger.
We're really focused on what's in our control and we don't need the industry success to drive near term operational and profit improvement. The market growth upside as I said. Thanks.
Unidentified Speaker: Got
Conference Operator: it. And the next question comes from Seth Basham with Wedbush Securities. Please go ahead.
Matt McCartney/Steve Forbes, Analyst, Wedbush Securities/Guggenheim: Hi. This is Matt McCartney on for Seth Basham. Just wondering if you could talk about the pricing impact in the quarter, whether it was positive or negative and how we should think about pricing going forward as you tweak your product mix?
Brian LaRose, Chief Financial Officer, Petco: Yes. Thanks for the question, Matt. We don't typically talk about the impact of pricing. I will tell you that the overall environment, I'll comment on, the overall environment, has been rational, both from a pricing standpoint and a promotional environment.
Matt McCartney/Steve Forbes, Analyst, Wedbush Securities/Guggenheim: Great. Thanks. I was just wondering then if
Brian LaRose, Chief Financial Officer, Petco: you could talk about the services margin and what drove the improvement there this quarter? Yes, a couple of things. First, I'll talk in overall gross margin. If you look at our gross margin improvement year over year of 130 basis points, that was with mix going against us. So although supplies and CA was down 3% versus 5% last quarter, it was still a negative mix year over year.
The 2 biggest drivers of the gross margin improvement for the company were number 1, our cost actions taking hold and seeing improvement throughout the cost ecosystem. Number 2 was that services gross margin improvement that you talked about and that's a function of a number of things. First and foremost would be maturation of the vet hospitals and all the great work that the team is doing there going hospital by hospital. And as Joel indicated in his prepared remarks, we believe we have ample opportunity to improve the profitability of the existing vet fleet. 2nd would be the continuation of strength in our VECO Mobile business.
So VECO Mobile is all a it's a volume and utilization business and we continue to actually increase the top line in that business and with that drags along incremental margin improvement. And then the grooming business also remains strong for us.
Conference Operator: Great. Thank you. I'll pass it along.
Joel Anderson, Chief Executive Officer, Petco: Thanks, Matt.
Conference Operator: The next question comes from Michael Lasser with UBS. Please go ahead.
Michael Lasser, Analyst, UBS: Good evening. Thank you so much for taking my question. So Joel, it seems like your initial priority is to come in, cut some costs, focus on retail fundamentals. So A, how much of an opportunity for savings is there? If you could size that, that would be great.
And B, how much of that are you going to have to reinvest in the business to drive sustainable same store sales growth? Because as we know, this is a very competitive market with some reinvigorated players who are all looking to address the addressable market here. Thank you.
Joel Anderson, Chief Executive Officer, Petco: Hey, thanks, Michael, and good to hear your voice. Look, I think at the phase we're at right now, Michael, none of what we're taking out at this point in time is stuff that we see we need to reinvest. We think we still have significant more cost out opportunities. And as we get down to that second wave of stuff, certainly that's when we'll start to look at things to reinvest like more marketing to drive top line growth. But at this point in time, our real focus right now is about taking costs out of the business.
It's not just one time in nature that has to be reinvested in the business, but it's a permanent cost out. And that's kind of how we're thinking about it, Michael. All right. Thanks, Michael.
Conference Operator: And the next question comes from Steven Zaccone with Citi. Please go ahead.
Steven Zaccone/Ariana, Analyst, Citi: Hi. This is Ariana on for Steve. Thank you for taking our question. My first question is how has the business trended thus far in 4Q? And are there any callouts for holiday performance relative to the implied 4Q outlook for revenue growth?
Joel Anderson, Chief Executive Officer, Petco: Look, I'm not going to get into kind of inter quarter trends and stuff. I mean, that's clearly reflected in our guide. We're pleased with the start of the quarter and you can see by the guide the sequential improvement from Q3 is a nice improvement. And so that's kind of where we're tracking for now. And I think we've got momentum going into the back half of the quarter here.
Steven Zaccone/Ariana, Analyst, Citi: Thank you. And then my follow-up is, how do you think about the ability to regain market share in 2025 and in the medium term? Like aside from better growth in the category, what do you see as the specific drivers to have customers reengage with Petco?
Joel Anderson, Chief Executive Officer, Petco: Well, look, hopefully, what you took away from my remarks is that I'm more bullish than ever on my decision to join Petco. The passion I saw from our associates, the way everybody here has just embraced us in turning this business around and getting back to retail disciplines, certainly then sets us up for growth in 2025 and beyond. And as far as specific numbers and everything, we'll lay that we'll outlay that for you as we get into March and next year. But hopefully, you sense in my tone in my prepared remarks how excited I am and the progress we've made in an extremely short period of time. Thanks, Arianna.
Conference Operator: And the next question comes from Steve Forbes with Guggenheim. Please go ahead.
Matt McCartney/Steve Forbes, Analyst, Wedbush Securities/Guggenheim: Hey, guys. This is Julio Marquez on for Steve Forbes. I wanted to touch on the vet hospitals and opportunity for efficiency enhancements. I think you mentioned need for full time staffing, maybe some improvement on the merchandising side. So any color you can provide there on staffing and merchandising and maybe the anticipated lift?
And then finally, any way to contextualize maybe the end state margin for the vet clinics and I guess maybe the scaling to get there? Thank you.
Joel Anderson, Chief Executive Officer, Petco: Yes. If I heard you right, your question was about the hospitals. Look, we've made a lot of progress this year. Stephen, who joined us earlier this year and leads our hospital operations team, has just done a great job of delivering better profitability, helping us invest better in terms of staffing, utilization rates, etcetera, etcetera. So the progress we're making there is fantastic and it certainly resulted in sales continuing to grow.
I mean, our hospitals and Vetco were up 17% this last quarter and really pleased with the progress we're making with hospitals and vets overall.
Unidentified Speaker: Right.
Joel Anderson, Chief Executive Officer, Petco: Is there a second part to that question I missed on there?
Matt McCartney/Steve Forbes, Analyst, Wedbush Securities/Guggenheim: Maybe on the merchandising opportunities there and just if how you guys are thinking about like the end state margin for the bed hospital business and maybe the scaling to get there. Is it more like an intermediate kind of thing, long term
Brian LaRose, Chief Financial Officer, Petco: kind of thing?
Joel Anderson, Chief Executive Officer, Petco: Yes. Look, I think on the merchandising piece, it's us getting better at Rx. It's us getting better at connecting our vets back into the stores and the grooming and the recommendations there, our product. That's something we're just still in our infancy on and we can get to better. As far as the ultimate goal on margins, there's just still so much improvement there that we're nowhere close to the peak there of what the ultimate margin is.
Our hospitals are rather still in their infancy and we'll continue to improve as our utilization rates go up.
Unidentified Speaker: Thank you. You bet.
Conference Operator: And the next question comes from Zach Fadem with Wells Fargo (NYSE:WFC). Please go ahead.
Unidentified Speaker: Hey guys, this is David Lance on for Zach. Thanks for taking our questions. So I guess how should we think about the potential glide path of gross margin improvement from here? And is there any color you can provide around Q4 outside of lapping the 130 basis point inventory write down?
Brian LaRose, Chief Financial Officer, Petco: Thanks for your question. We're not going to get into guiding for the rest of the year on gross margin. I will tell you we're encouraged by what we saw in Q3. As I mentioned earlier, there were 2 fundamental drivers in the improvement year over year. Number 1 was the cost actions beginning to take hold.
Number 2 was the improvement in the services business. And again, that's with mix going against us. So we are starting to see those actions take hold. Joel talked about those being not one time in nature, but being fundamental to our DNA and how we operate and run the company. So beyond that though, we're not going to give anything forward.
Unidentified Speaker: Got it. Okay. That's helpful. And then sorry, go ahead.
Joel Anderson, Chief Executive Officer, Petco: Go ahead, David.
Unidentified Speaker: Okay. Can you talk about the 3% decline in services and companion animal in the context of the broader market?
Brian LaRose, Chief Financial Officer, Petco: I would contextualize it this way. Just as we said earlier, we're in self help mode here. And when we think about the market, we are not passively waiting for the market to recover in supplies and companion animal. We're taking actions. Part of the cost actions are in those two categories.
The assortment actions are in those two categories. And we see a lot of room for improvement for us, regardless of how the market performs overall.
Unidentified Speaker: Got it. Thank you.
Conference Operator: And the next question comes from Simeon Gutman with Morgan Stanley (NYSE:MS). Please go ahead.
Kendall Pasquale/Lauren Ng, Analyst, Bank of America/Morgan Stanley: Hi. This is Lauren Ng on for Simeon Gutman. We wanted to ask about the consumables improvement in Q3. Just curious to know if this was ticket driven. Are you seeing new pet owners or customers coming to Petco?
Just any color on the improvement there? Thank you.
Joel Anderson, Chief Executive Officer, Petco: Yes. Look, consumables is something I talked about a couple of questions ago. And that business is all about being in stock. And I think it's a combination of our new inventory management system that's now fully in place in Q3. It's about the teams getting better at flowing inventory, better shelf utilization, and then just being priced competitively.
So all those actions we're taking are starting to show up in better sales and that's what you saw start to happen in Q3.
Brian LaRose, Chief Financial Officer, Petco: I would just add one thing to that and that's fresh frozen continues to be really strong for us. So that was up 20% year over year in the quarter. So that continues to be strong.
Kendall Pasquale/Lauren Ng, Analyst, Bank of America/Morgan Stanley: Great. Thank you.
Steve Shemash, Analyst, RBC Capital: Thanks, Lauren.
Conference Operator: And the next question comes from Kendall Pasquale with Bank of America. Please go ahead.
Kendall Pasquale/Lauren Ng, Analyst, Bank of America/Morgan Stanley: Hi. Thanks for taking my question. So just wanted to go back to you talked before about opportunities in merchandising and negotiating better terms from your suppliers. And it may still be early, but just curious if there's any update on what the response has been from vendors and how receptive they've been to your efforts there? Thanks.
Joel Anderson, Chief Executive Officer, Petco: Yes. Thanks for the question, Kendall. Look, I actually think I commented on it specifically in my prepared remarks. The discussions with our vendors have been really well received. I personally have met with some of our merch vendor partners myself.
And the key to all that is transparency and openness and talking to them about what they need as much as what we need. We've had just really successful discussions there as we build our joint business plans for 2025. And I'm really pleased with the progress our merchant teams have done.
Kendall Pasquale/Lauren Ng, Analyst, Bank of America/Morgan Stanley: Got it. Thanks for the help there. Another question I had was just on another one that may still be early to ask, but curious if there's any update on the vet hospitals and when you're thinking about essentially returning to rolling those out since you're kind of positive for this year and the foreseeable future? Curious on the timeline of that.
Joel Anderson, Chief Executive Officer, Petco: Yes. The vet hospitals are a key growth driver for us and they're also a key differentiator for us as all our vet hospitals are pet co owned. As far as what the specific growth for next year will be, we'll lay that out for you in detail as we get into March. But we do expect that to continue to be a growth driver for us.
Brian LaRose, Chief Financial Officer, Petco: And I would just add, Kendall, the decision to open a handful this year was not because that's not to open a handful this year was not because that's not strategic, not because we don't believe it's a short, medium and long term opportunity. It was maybe because we wanted to make sure we continue to strengthen our balance sheet, generate free cash flow and get the company back in the position of strength so that we can invest in those high ROI projects going forward.
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