Petco (WOOF) Reported Adjusted EBITDA Growth but a $6.8M Tariff Refund Helped the Quarter. Is the Turnaround Self-Funding?

Petco Health and Wellness Company, Inc. (NASDAQ:WOOF) reported second-quarter 2026 net sales of $1.49 billion, up 0.05%, while comparable sales increased 0.6%. Company-defined non-GAAP adjusted EBITDA reached $122.2 million, compared with $113.9 million one year earlier.

Petco Health and Wellness Company, Inc. calculates adjusted EBITDA from net income attributable to common stockholders, adding net interest, taxes, depreciation and amortization, equity-based compensation, losses on debt extinguishment and modification, 50% of Mexico joint venture EBITDA and specified other costs, while deducting income from equity-method investees.

The reported result included a $6.8 million net benefit from the International Emergency Economic Powers Act, or IEEPA, tariff refunds after investments to reposition assortments and partially offset fuel and tariff expenses. Excluding that benefit, normalized adjusted EBITDA was $115.4 million, only $1.5 million, or approximately 1.3%, above the prior-year result. Gross margin increased 37 basis points to 39.7%, but was approximately flat year over year without the refund benefit.

Bull Case

Year-to-date operating cash flow increased to $130.6 million from $70.4 million. Company-defined free cash flow, calculated as operating cash flow less cash paid for fixed assets, increased to $60.8 million from $9.9 million. The year-to-date calculation reflects $130.6 million of operating cash flow less $69.8 million paid for fixed assets.

Petco Health and Wellness Company, Inc. ended the quarter with $293.5 million of cash, up from $188.7 million one year earlier. Inventory declined 1.1% year over year despite the slight increase in net sales.

Total debt declined year over year to $1.48 billion from $1.59 billion, while net debt fell to $1.19 billion from $1.40 billion. After the quarter, Petco Health and Wellness Company, Inc. prepaid another $75 million, bringing voluntary prepayments to $170 million over nine months. The stated leverage target is 2 times, calculated as net debt divided by adjusted EBITDA.

Bear Case

The refund accounted for most of the adjusted EBITDA increase. Normalized growth of approximately 1.3% remains modest, particularly when comparable sales increased only 0.6%. Based on reported figures, product sales declined 0.7%, while services and other sales increased 3.6%.

Petco Health and Wellness Company, Inc. reaffirmed full-year net sales guidance of flat to 1.5% growth and adjusted EBITDA guidance of $415 million to $430 million. That adjusted EBITDA range includes the $6.8 million refund, while the outlook assumes no additional IEEPA refunds during the rest of the year. The forward measure lacked a GAAP reconciliation because future adjustments could not be predicted without unreasonable efforts.

Debt remains substantial. The $170 million of prepayments spans nine months and exceeds $60.8 million of first-half free cash flow, so the figures do not establish that current-year free cash flow funded the entire amount. Based on the quarter-end balance, total debt would remain approximately $1.40 billion after the subsequent $75 million prepayment, before other changes. Fiscal 2026 guidance includes approximately $122 million of net interest expense. Competition, discretionary-demand pressure, and planned net closures of 15 to 20 stores constrain the recovery.

Hedge Fund Sentiment

The filings available so far reflect positions held before Petco Health and Wellness Company, Inc. reported second-quarter 2026 results. Insider Monkey’s database showed 22 hedge funds holding Petco Health and Wellness Company, Inc. at the end of 2Q2026, unchanged from three months earlier.

Conclusion

Petco Health and Wellness Company, Inc. is generating cash and reducing debt, supporting the self-funding case. However, the tariff refund magnified adjusted EBITDA and gross-margin improvement, while refund-excluded EBITDA growth and comparable sales remained limited. Sustained free cash flow, stronger refund-excluded EBITDA growth, and further debt repayment are needed to establish durability.

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This article is originally published at Insider Monkey.