Good afternoon, welcome to Petco's Q1 fiscal 2026 earnings conference call. Joining me on the call today are Joel Anderson, Petco's Chief Executive Officer, and Sabrina Simmons, Petco's Chief Financial Officer. In addition to the earnings release, we've posted a slide presentation on our website at ir.petco.com. 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. With that, I'll turn the call over to Joel.
Thanks, Roxanne, and good afternoon, everyone. Thank you for joining us to discuss our Q1 results. Our strong Q1 results provide an encouraging early validation of our Phase III Reach for the Sky strategy. We returned the business to a positive comp for the quarter while expanding our profitability, performing better than our quarterly outlook for both top-line and adjusted EBITDA. We were particularly pleased to see the improvement in our consumables business, while our differentiated services business once again delivered strong results and continues to be a growth engine for us. This solid start to the year gives us deep confidence that our growth initiatives are taking hold. It speaks directly to our innovation pipeline, rigorous execution, smarter marketing, and most importantly, the advantages of our wholly owned omni-channel ecosystem.
In light of our solid Q1, we are pleased to reaffirm our full-year outlook and remain confident in our ability to drive consistent top-line results. Sabrina will take you through our financial details shortly, but first, I want to spend some time updating you on the progress we've made across our strategic four pillars, which are positioning Petco for long-term profitable growth. Let's begin with our first pillar, compelling product. While we are still in the early innings of evolving our product mix and the flow of our merchandise, we've begun to introduce real newness to our aisles, and we are seeing evidence that it is resonating with pet parents. Specifically, you should now see several of our main dry aisle end caps converted to new product and identified with a yellow new logo. From a top-line perspective, we saw outperformance in the cat category this quarter.
We anticipated the recent spike in demand for cat products, as a result, we invested to make Petco the destination for cat parents. It was a key contributor to the improved sequential trends we saw in consumables overall. You will see cat newness ramping up even further in Q2 with exciting additions in areas such as furniture, beds, and bowls, also in novelty items such as cat trees. We also continue to lead in the fresh frozen space. During the quarter, we added significant incremental freezer capacity to support the momentum in this category. We hold a distinct advantage in this category, driven by the breadth of our offerings, our key brand partnerships, and a wide range of price points. We have positioned Petco as a premier destination for pet nutrition, which we believe will serve us well as the pet humanization trend continues to pick up speed.
Our expertise and dedicated in-store teams offer a level and type of service that you simply cannot find at grocery stores, big box competitors, or online. As a reminder, those that buy fresh food from us make over four more trips per year and spend over 50% more annually than dry food-only customers. Further, we experienced strength in seasonal categories. Specifically, in flea and tick, we saw our strongest start of the season in five years. While this was partially aided by weather patterns, for Petco, it's an ecosystem story. We capture over-the-counter sales, vet sales, and grooming through our flea and tick packages, all supported by a cohesive marketing push. In addition, as we previously announced, we launched our new Gardening with Your Pet earlier this quarter. This performed above expectations with live house plants performing well.
Looking ahead, we have an exciting pipeline for both Q2 and the back half of the year. In consumables, we are leaning into emerging customer trends like high-protein diets, as well as new treats for dogs and cats. We've also recently launched several new supplements categories, such as for hip and joint care, liver health, and a holistic care line based on the growing trend of health and longevity in the pet space, which we see as an important extension of the humanization trend. In supplies, we are introducing newness across categories, including grooming, toys, and collars and leads. Within the grooming category, we relaunched our own brand, Well & Good, which was completed last week. This represents the beginnings of our investment in private label starting to show up in our stores.
It includes new formulas without harsh chemicals, as well as fresh packaging for our shampoos, conditioners, and balms, all supported by marketing. Finally, in June, we'll be rolling out sports-inspired collections celebrating the World Cup and U.S. Soccer. Moving on to our second pillar, services at scale. Simply put, services are an important growth engine of ours. They are a massive point of differentiation and a competitive advantage. Through our wholly owned services model, we own the entire pet journey. It isn't just about our vet hospitals, which continue to see solid gains in sales productivity. It's also about our clinics, grooming, and training. Grooming is a strong annuity business for us and continues to perform well. To build on that momentum, we expanded our care reminders directly into our app late in the Q1.
A highly effective and frankly, obvious way to drive what is already a sticky repeat business even more frequently and consistently. Another call-out was the puppy-dog package we began to offer in the Q1, in which a significant number of the customers that came in were new. We'll continue to offer this throughout the year. In the Q2, we are driving excitement with the rollout of our Well & Good grooming products I just referenced, as well as a new Disney Stitch grooming package, which includes scented shampoo and spritz, conditioner, teeth brushing, nail buffing, and a seasonal bandana. Together, these initiatives are intended to ensure that our salons remain a premier destination for pet parents and a highly dependable driver of recurring foot traffic.
On the vet hospital side, the strong performance we are driving today helps fuel our future expansion plans, which are on track to resume in 2027. We continue to see improving productivity across our footprint, and we are on track to optimize about 25 significantly underutilized hospitals this year. Crucial to this effort is our veterinary team, and we are pleased to share that doctor days, which is a combination of hiring additional doctors and adding hours per doctor, continues to improve. Because of our scale, depth of expertise, unique ecosystem, and the flexibility we offer, we believe Petco is an employer of choice for veterinarians and vet techs looking to build long-term careers. As we discussed last quarter, cross-selling continues to be a major and largely untapped opportunity between our clinics and the rest of the store.
A great example of this clinical presence driving our broader business is our vet diet category, which performed extremely well this quarter, tying beautifully back into our veterinary ecosystem. Looking ahead, we believe we have several strong catalysts and opportunities in Q2 designed to drive ongoing traffic to our clinics. In mid-April, we launched the new Vetco Clinic packages, which offers bundles of services such as routine shots, which we're excited to see gaining early traction. Additionally, to drive traffic and care during National Pet Month in May, we offered free microchips, with the number of pets getting microchips up 71% versus last year. Looking beyond these near-term drivers, we are incredibly optimistic about the long-term growth opportunity within our wholly owned vet business and the immense value it brings to the Petco ecosystem. Our third pillar is our trusted store experience.
The work is underway to build our basket size through better cross-selling and customer engagement. For example, we are now empowering our groomers with customer data to facilitate sales across the entire store. They can see a customer's last food purchase history. This allows our partners to have informed, personalized conversations that drive cross-category sales and importantly, can help enhance customer satisfaction and loyalty over time. In terms of customer engagement, we feel in-store experiences are how we best appeal to our core customer, the passionate explorer. This quarter, we hosted popular events such as Pictures with the Easter Bunny. We continued that effort with weekly store events throughout May to celebrate National Pet Month, including Mother's Day photos and weekly brand tasting events. Finally, our fourth pillar, an integrated omnichannel model.
We are pleased with the headway we've made in our ongoing work to improve retail fundamentals in our omnichannel model compared to last year. By removing friction from the online checkout process, we have been seeing improved digital traffic. We achieved sales growth in omnichannel, even while lapping the non-productive, unprofitable sales we were still generating through 1Q last year. Looking ahead, we see ongoing opportunities to increase site speed and optimize shipping windows for our customers. A key call-out is BOPUS, which was up strongly year-over-year. This is our differentiation in action, building loyalty through e-commerce, but physically bringing the customer into our stores to experience our services, community, and the cross-selling opportunities our partners provide. Speaking of loyalty, I'm thrilled to share that we are relaunching our loyalty programs later this quarter, officially branded as Petco Perks.
During our pilot phase, our biggest learnings was that simplifying, removing friction, and making the program distinctly customer-friendly had a massive impact. Petco Perks uniquely leverages our entire ecosystem, spanning both merchandise and services. The program will be heavily focused on personalized offers based on factors like shopping frequency and customer lifetime value, a strategy that successfully drove higher sales and stickiness during our pilot. In conclusion, the Q1 served as an initial proof point of our inflection to growth. While the broader macro environment remains dynamic, we remain hyper-focused on controlling what we can control, and our results prove that our self-help strategy is successfully navigating this environment. We are executing on our Phase III Reach for the Sky strategy. While we are pleased with these initial results, we are still in the early innings of what is a long, exciting journey.
Thank you, Joel. Good afternoon, everyone. As we've discussed, our primary goal is to build a stronger retail and financial foundation which supports our focus on regrowing our top line in Phase III and driving sustainable, profitable growth. We're committed to delivering upon our economic model for the full year in 2026 and are pleased to report that we're off to a solid start. Turning to Q1 results. Net sales were up 0.2% to $1.5 billion. Importantly, the Q1 marked our return to positive comp sales with a 0.7% comp, providing evidence that our initiatives across our four growth pillars are beginning to take hold. The spread between comp and net sales reflected the 16 net store closures in 2025 and four net closures in Q1. We ended the quarter with 1,378 stores in the U.S. Moving on to margin results.
Q1 gross profit dollars were $574.4 million, while our gross margin rate expanded 21 basis points to 38.4% as we executed with discipline. Moving on to expenses. For the quarter, SG&A was $549.8 million or 36.7% of net sales, leveraging 34 basis points. The $3.8 million improvement in expenses year-over-year was driven by declines in G&A despite investments in marketing to support our omni-related initiatives. For Q1, our expanded gross margin and expense leverage resulted in operating profit of $24.6 million or a 50.5% improvement versus prior year. Operating margin rate improved 55 basis points year-over-year. Adjusted EBITDA increased $7.9 million or 8.8% year-over-year to $97.3 million. Balance sheet and cash flow. Q1 ending inventory was down 1.9% year-over-year on top of a 5.2% decline last year.
It's worth noting that inventory dollars were down year-over-year, even with sales growth of 0.2%, reflecting our ongoing discipline and execution. Our Q1 ending cash balance was $167 million, an increase of approximately $33 million versus the Q1 last year. For the quarter, free cash flow was an outflow of $69 million. While our Q1 cash flow is historically our lowest, we wanted to call out two contributing factors. First, capital expenditures increased $10 million versus last year, but are in line with the full year guidance we've provided. Second, as planned, inventory investments increased to support our growth, but we are pleased overall that inventory levels remain well controlled. Moving on, total liquidity for the Q1 was $654.4 million, up versus the prior year. For the quarter, total debt was $1.48 billion, down over $100 million compared to Q1 last year.
As many of you have heard me state, after completing our opportunistic debt refinancing, we have extended our maturities out to 2031 and achieved a more optimal mix of fixed to floating rate debt, which provides us with ample flexibility. Importantly, we remain laser focused on our goal of reducing our leverage ratio to two times. Now turning to our outlook. While the external environment continues to evolve, our solid foundation enables us to remain agile, and we are well positioned to deliver on our financial commitments this year. Therefore, we are reaffirming our full year sales and adjusted EBITDA outlook. Specifically, we continue to expect net sales of flat to up 1.5% compared to last year, as our growth initiatives take hold and build over the course of the year. We continue to expect adjusted EBITDA to be between $415 million and $430 million.
Looking out, we wanted to outline some updates to our underlying full year assumptions. First, we now expect fuel prices to remain at approximately current levels for the remainder of the year. Recall that our prior full year outlook assumed higher fuel prices through the Q1 only. Next, our outlook includes the benefit of a tariff refund received in May. The refund represents only a portion of the IEEPA tariffs we paid through February 2026. Our full year guidance assumes no additional tariff refunds beyond what we've received to date. Our outlook also assumes that the current tariff policies remain for the balance of the year. With regard to other line items, the following assumptions remain unchanged for the full year. Net interest expense, about $125 million. Depreciation and amortization, about $200 million. Capital expenditures about $140 million, with an ongoing focus on ROIC.
Net store closures between 15 and 20, weighted toward the back half of the year. Finally, we still expect the full year spread between total sales and comp sales to be about 50 basis points, though it will vary by quarter. Moving on to the Q2, we are comfortable with current consensus estimates for net sales, implying growth of about 0.3% versus the prior year. We expect adjusted EBITDA to be between $110 million and $112 million. As you think about your models, we wanted to flag some considerations to be helpful. First, recall last year's Q2 reflected peak adjusted EBITDA growth, including peak gross margin expansion. In last year's Q2 commentary, I flagged an approximate $9 million benefit in SG&A from a semi-annual actuarial true-up. This was related to employee optimization work. This year, we do not expect to anniversary this benefit.
On tariffs and higher fuel costs. A simple way to think about these factors is that the tariff refunds roughly offset incremental tariff and higher fuel cost expected in the Q2, thereby neutralizing one another in the quarter. In closing, I want to thank our teams for their dedication and discipline in executing on our transformation this quarter, including our return to positive comparable sales growth. We will now open up the call for your questions.