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Petco: Petco's Q3 2025 Earnings: A Step Towards Recovery

Petco's third-quarter 2025 results showed a decline in sales by 3.1% with comparable sales down 2.2%, largely driven by 34 net store closures. However, the company demonstrated a strong improvement in profitability metrics, with gross margin expanding 75 basis points to 38.9%, primarily due to a more disciplined approach to average unit retail and cost. Adjusted EBITDA increased 21% to $98.6 million, and adjusted EBITDA margin expanded nearly 140 basis points to 6.7% of sales. The company's EPS came in at $0.05, beating estimates of $0.01. Free cash flow for the quarter was $61 million, and year-to-date was $71 million, showcasing a strong improvement in cash generation.

WOOF

USD 3.015

-1.47%

A-Score: 3.1/10

Publication date: November 25, 2025

Full Report

Author: Analystock.ai

📋 Highlights
  • Adjusted EBITDA Growth Surged 21% to $98.6M, with margin expanding 140 bps to 6.7% of sales.
  • Gross Margin Expansion Rose 75 bps to 38.9%, driven by disciplined pricing and cost controls.
  • Store Closures Impact 34 net closures contributed to 3.1% sales decline and 2.2% comp drop in Q3.
  • Free Cash Flow Strength Generated $61M in Q3 and $71M year-to-date, improving cash flow generation.
  • 2025 EBITDA Outlook Raised Now $395–$397M (18% YoY growth at midpoint), despite full-year sales decline of 2.5–2.8%.

Guidance and Outlook

The company raised its adjusted EBITDA outlook for 2025 to $395-$397 million, an 18% year-over-year increase at the midpoint. For the fourth quarter, net sales are expected to be down low single digits, with adjusted EBITDA of $93-$95 million. The impact of tariffs will be more meaningful in Q4, mainly in the private label supplies area. As Joel Anderson, a key executive, noted, "This year, our primary focus was expanding margins, walking away from unprofitable sales, and building a strong foundation for sales growth in 2026."

Transformation and Growth Strategy

Petco's transformation is now shifting towards Phase 3, focusing on a return to growth. The company's strategy is built around four pillars: delivering compelling product and merchandise differentiation, a trusted store experience, winning with integrated services at scale, and serving customers with a seamless omni experience. The company is making progress on these initiatives, including improving shopability, infusing newness in 2026, and enhancing digital capabilities. Analysts estimate next year's revenue growth at -2.6%, but the company's efforts are expected to drive a gradual ramp in growth.

Valuation and Metrics

With a P/E Ratio of -388.14, P/B Ratio of 0.74, and EV/EBITDA of 7.78, the market seems to have priced in the challenges Petco is facing. However, the company's improving profitability and cash generation metrics, such as Free Cash Flow Yield of 6.87%, suggest a positive trajectory. The Net Debt / EBITDA ratio of 4.47 indicates that the company still has leverage to reduce. As the company prioritizes cash usage, first investing in its business and then focusing on debt paydown, it is likely to bring down leverage on an absolute basis and ratio.

Services and Membership Program

The company is seeing a significant opportunity to grow services, which will be a key component of its growth in 2026. Services in stores are coming together, with a halo effect on the overall business. Petco is also on track to relaunch its membership program in 2026, with live testing in several markets in Q4, and expects a positive impact on same-store sales growth.

Petco's A-Score