Chewy Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 31, 2023

There are 13 speakers on the call.

Operator

Successfully respond to business risks. Such statements are considered forward looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks, uncertainties and other factors described in the section titled Risk Factors in our annual report on Form 10 ks and other subsequent quarterly reports, which could cause actual results to differ materially from those contemplated by our forward looking statements. Reported results should not be considered an indication of future performance. Also note that the forward looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward looking statements except as required by law.

Operator

Also during this call, we will discuss certain non GAAP financial measures. Reconciliations of these non GAAP items to the most directly comparable GAAP financial measures are provided on our Investor Relations website and in our earnings release and letter to shareholders, which were filed with the SEC today. These non GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise noted, results discussed today refer to the Q1 of 20 to 23 and all comparisons are accordingly against the Q1 of 2022. Finally, this call in its entirety is being webcast on our Investor Relations website.

Operator

A replay of this call will also be available on our IR website shortly. I'd now like to turn the call over to Sumit.

Speaker 1

Thanks, Yan, and thank you all for joining us on the call today. Before we begin, I would like to thank Bob LaFleur, who after serving as our Head of Investor Relations for the past 3 years has decided to move on to his next chapter after Chuy. We are all grateful to Bob for his years of service and for building out Chuy's IR function following our IPO. At the same time, today, I'd like to announce that Jen Hsu, our Head of Corporate Development and M and A has now expanded her responsibilities to include our Investor Relations team. Before joining Chuy, Jen spent 12 years in technology focused investment banking and that background will continue to serve her well in her expanded role.

Speaker 1

Welcome, Jen. Now let's review our Q1 results. Throughout Q1, customers remained engaged with our platform and shopping trends remained strong. Chewy's superior value proposition along with our team's focus and high quality execution did the rest. As a result, in Q1, we reported $2,780,000,000 in net sales to an approximately 15% year over year increase and a 4% adjusted EBITDA margin.

Speaker 1

Our active customer base steadied and net sales per active customer or NESPAK grew 15% to exceed $500 Consistent NESPAK growth is driven by strong and ongoing customer engagement in programs like Autoship and expansion in cross category purchases. Autoship customer sales represented nearly 75% of total net sales in the Q1. Our Autoship subscription service is a powerful tool for us driving recurring and predictable revenue and long term customer loyalty. Net sales resulted from strength in categories such as consumables, premium and healthcare. Our customers continue to show durability and product loyalty in these non discretionary categories with no discernible trade down behavior, all of which translated to strength in average order size or AOV.

Speaker 1

A healthy start to the flea and tick season further supported performance in our Healthcare business. Moving to profitability. To gross margin of 28.4 percent exceeded expectations and were buoyed by lower than anticipated promotional activity, overall strength in AOV and better than expected leverage at the freight and packaging level. Below the gross margin line, adjusted EBITDA margin expanded to a record 4% for the quarter. Mario will provide more detail on our financial performance momentarily.

Speaker 1

And before he does so, let me take some time to walk you through our growth investments to innovation. On our last earnings call, we previewed the team's work to launch our first international market. Today, I am excited to announce that we expect to bring Chewy's superior value proposition, including our personalized and outstanding customer experience to Canadian pet parents in Q3 of this year. Let me elaborate on a few key concepts. Why now?

Speaker 1

To why we believe we can win in Canada and how our model will allow us to grow sustainably and profitably in this market. International expansion has long been a part of our strategic roadmap and there are several reasons that make now the right time for us to embark on this journey. First, we have strengthened our fundamentals over the past few years, both operationally and financially, and have put our U. S. Business on a steady trajectory of growth and profitability.

Speaker 1

Additionally, having undergone a multiyear transition to the integration of our tech stack into the cloud, we can now leverage our platform to be reliably deployed in Canada without meaningful incremental investment. As we assessed where geography would be most suitable for our expansion plans, we honed in on Canada's large and growing market where we see a path to achieving market share and profitability akin to our U. S. Business. Canada has a healthy and increasing e commerce penetration where we can offer a differentiated value proposition relative to existing players in the market and build the same level of trust with Canadian pet parents that those in the U.

Speaker 1

S. Have come to associate with the Chewy brand. Our initial launch will focus on the Greater Toronto market, which represents the largest metropolitan area in Canada from which we plan to take a gradual and responsible approach to expanding our footprint. Our service delivery model would leverage our assets to create operational efficiency and attractive economics, while ensuring a high bar customer experience. Specifically, we intend to support our Canada strategy with a scaled local third party fulfillment and logistics partner.

Speaker 1

Our U. S. Supply chain affords us an additional asset, and we will leverage our U. S. Network in situations where it is strategically or economically advantaged to do so.

Speaker 1

Taken together, this approach allows us to launch in Canada with a focus on optimal customer experience and without any material commitment to CapEx spend until the success and scale of the business supports an investment in this area. We do not anticipate this market requiring material CapEx investment to at least 2024. More broadly, on a company wide level, we do not expect our investments in Canada to deviate us from our projected long term profitability, cost or CapEx targets. We look forward to sharing our progress over the quarters to come. Moving on from international and back to business stateside, I am pleased to announce that we launched our 4th automated fulfillment center, this one in Nashville, Tennessee.

Speaker 1

Our growing network of automated FCs accompanied by our supply chain transformation, which I have discussed in previous earnings calls, to our improving margin efficiency and we believe will contribute to the scaling of our long term SG and A target. Elsewhere in Chewy Health, We are excited to announce the official launch of Lemonade as part of the CarePlus suite of wellness and insurance offerings. With this launch, CarePlus plans are now available across a wide spectrum of coverage options and price points from 2 best in class providers, Lemonade and Tropanion, allowing us to meet the needs of a broader range of pet parents. We expect these plans to be available nationwide to the vast majority of our customers by next quarter. As we drive broader awareness and to litigation around our insurance product offering, we continue to see a compelling opportunity to expand TAM in this underpenetrated and highly profitable category.

Speaker 1

In closing, I am proud of our execution in the quarter as we entered the new fiscal year. With the base business performing robustly And with several new innovations in nascent stages, I remain incredibly encouraged by Chuy's prospects to deliver long term growth and profitability and fuel positive and meaningful shareholder return. With that, I will turn the call over to Mario.

Speaker 2

Thank you, Sumit, and hello, everyone. I am happy to share results from a record setting quarter for Chewy. Net sales increased 14.7 percent or $356,300,000 to $2,780,000,000 Non discretionary consumables and health care categories continue to support our growth and collectively represented over 84% of 1st quarter net sales. Autoship customer sales were $2,080,000,000 to up 18.6 percent, exceeding overall net sales growth by almost 400 basis points. Ownership customer sales have grown to represent 74.7 to a 10%

Speaker 3

of total net sales. Our primary measure

Speaker 2

of customer engagement, NESPAK, grew 14.8% year over year to $5.12 driven primarily by our large customer base that spends more with us over time, growing AutoShip customer sales to an increasing levels of cross category purchases by our customers. Both NESPAK and Autoship customer sales reached new record highs for the company. We ended the Q1 with 20,400,000 active customers, reflecting modest net active customer growth relative to Q4 2022. To gross adds continue to run ahead of pre pandemic levels and we are seeing the gradual waning of the attrition headwinds related to our outsized pandemic cohorts. To the P and L.

Speaker 2

Please note that my discussion of financials, where applicable, refers to metrics excluding share based compensation expense and related taxes as well as certain other adjustments where relevant. The same applies to my discussion of guidance and financial outlook. Gross margin reached 28.4 percent in Q1, expanding 90 basis points year over year. Gross margin exceeded expectations and as Sumit noted in his remarks, we're buoyed by lower than anticipated promotional activity, overall strength in average order size and better than expected leverage in freight and packaging. Continuing on to OpEx.

Speaker 2

SG and A excluding share based compensation and related taxes totaled $529,900,000 to 19% of net sales, improving 60 basis points compared to the Q1 of 2022. The main drivers of this improvement included operating leverage from higher average order size, incremental efficiencies and fulfillment costs, our team's operating discipline and to a smaller degree, to favorability and the timing of spend to support the initiatives we announced on our last call. Q1 advertising and marketing expense was $183,700,000 or 6.6 percent of net sales, in line with our expectation of 6% to 7% of net sales. 1st quarter adjusted net income was $87,200,000 a year over year increase of $41,600,000 1st quarter adjusted EBITDA increased $49,700,000 to $110,200,000 and to Adjusted EBITDA margin expanded 150 basis points to 4%, a result of gross margin expansion and SG and A leverage. 1st quarter free cash flow was $126,800,000 reflecting $148,400,000 in cash flow from operating activities to $21,600,000 in capital expenditures.

Speaker 2

Capital expenditures were primarily comprised of investments in our new automated fulfillment center to ongoing technology projects. CapEx in the Q1 came in lower than our historical averages, but we expect overall 2023 CapEx to remain in the range of 1.5% to 2% of net sales. We finished Q1 with $803,200,000 in cash to cash equivalents and marketable securities, nearly $200,000,000 higher than the balance at this time last year. At the end of Q1, between cash on hand, marketable securities and availability in our ABL, our liquidity stood at $1,600,000,000 That concludes my Q1 recap. So now let me cover our Q2 and updated full year 2023 guidance.

Speaker 2

Our guidance reflects a balanced view that incorporates the strength of our business model and customer engagement along with the latest views on the evolving economic outlook. We expect 2nd quarter net sales to be between $2,750,000,000 $2,770,000,000 representing year over year growth of approximately to 13% to 14%. We are raising our full year 2023 net sales outlook to be between $11,150,000,000 $11,350,000,000 representing growth of approximately 10% to 12%. We are also raising our full year 2023 adjusted EBITDA margin to approximately 3%. As usual, let me provide you some further thoughts as to update your models for the rest of the year.

Speaker 2

As we have shared before, our gross and adjusted EBITDA margins may fluctuate slightly from quarter to quarter, driven by several factors, including the timing of investments, changes to vendor contracts and other accruals or releases as part of the normal course of business. For example, in Q2 as we begin operations at our automated fulfillment center in Nashville and ramp other initiatives including the international launch, we will incur some temporary and incremental SG and A expense. Finally, you should expect our free cash flow for full year 2023 to increase alongside our expanded adjusted EBITDA margin guidance. Before we open the call to questions, I'd like to recap what our latest financial results show, And that is that Chewy is built for the long term. Our operating philosophy remains intact and our team is highly committed to driving sustainable profitable growth.

Speaker 2

With that, I'll turn the call over to the operator for questions. Operator?

Speaker 1

To

Speaker 3

to one question today with one follow-up. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. To the operator. The first question is from the line of Mark Mahaney with Evercore. You may to proceed.

Speaker 4

Okay, thanks. Just the sustainability of the gross margin trends, they've been kind of grinding higher now for quite some time. And I realize that there's seasonal fluctuations to it. But just talk through why we shouldn't expect kind of to sustainably higher gross margins going forward. And then just on the revenue outlook for the balance of the year, you had pretty solid results this quarter.

Speaker 4

For some reason, your guidance implies kind of a decelerating growth rate, not dramatically, but somewhat decelerating through the back half of the year. I would have thought that as we would have thought as you've kind of worked through all of that to COVID cohort digestion that you'd be able to kind of sustain growth rates at these levels or higher. So just are there any one time ish factors or comps issues we should know for the balance to the year. Thank

Speaker 2

you. Hey Mark, it's Mario. I'll start and Sumit may add something if I miss anything here. So to your first part of the question, to the sustainability of gross margin trends. I think I'll start off with that we had a good strong Q1.

Speaker 2

The year started off on a high note. We were helped in the quarter by a leverage in the freight and packaging line because of the basket size. It exceeded our expectations. We also had a lower than anticipated promotional activity in the quarter. We may or may not get that into the Q2 and the rest of the year.

Speaker 2

And historically, we have seen fluctuations between quarters. So that's not would be that would not be a new change in the pattern here. When I look at the rest of the year in terms of your second question, in terms of sales. I would say 2 things. 1 is, again, very good start for the Q1.

Speaker 2

Q2 guidance would tell you another strong quarters ahead of us, mid teens more than $300,000,000 on an absolute dollar basis year over year growth. And that's at the midpoint of the guidance we provided. It's also more than any quarter in 2022, if you look back at what we added last year. So we're bullish about where we're heading in the Q2. That said, we do see historically to some seasonality in our hardgood sales.

Speaker 2

There's a small pullback between 1st and second quarter. You can see that in our reported financials. And as we called out, we also had a strong flea and ticks season in the Q1. So take that into account when you think about the 2nd quarter. Now what makes us bullish about the Q2 and the rest of the year is the fact that over 80% of our sales are in the to the categories that we talked about that are non discretionary in nature.

Speaker 2

They are consumables, they are healthcare and the like And that's also helped by the fact that we have roughly 75% of our sales are to auto ship customers. So These are good indicators for us and makes us bullish about the rest of the year. Now very specific, very long answer to your But when we look at the second half of the year, the implied guidance is still to add about $500,000,000 to the top line in the second half of the year. So it's a pretty big sizable growth no matter how we look at it. And right now, our focus is making sure that we execute on the Q2 and that we're well positioned to as a company to play out to the rest of the year.

Speaker 2

Sumit, anything you want to add there?

Speaker 1

No, Mark. The only thing I would add is the first half, if you look at the dynamics between year over year dynamic between 'twenty three over 'twenty two. The first half is the composition of the growth when you looked at 'twenty two was a combination of to kind of equal weighting between price and volume. And what the second half guidance kind of implies is structural unit growth being over weighted relative to price. So the composition of the growth is more structural in nature as we get out of the first half into the second half.

Speaker 1

So that's kind of baked in. And then remember, we're not baking in any material reacceleration of the hardgoods business, which has stronger indication as we've executed Q1 as we move through the rest of the year. What we like about the current portfolio is the strong engagement. Autoship sales continue to be strong. To NSPAC continues to be strong.

Speaker 1

And so we're baking in the checks and balances and flowing through. We'll get one more chance to update you, of course, as we play through Q2 and we're standing in the middle of the

Speaker 4

Thank you, Sumit. Thank you, Mario.

Speaker 5

Thanks, Mark.

Speaker 3

Thank you, Mr. Mahaney. The next question is from Doug Anmuth with JPMorgan. You may proceed.

Speaker 6

Thanks so much. I want to ask just how are you thinking about the timing for return to active customer growth? To what needs to happen there just from a macro or attrition or acquisition perspective? And then what gives you the confidence in long term to customer growth going forward. Thanks.

Speaker 1

Hey, Doug, this is Smith. I'll start. So a couple of trends are encouraging to us And are worth taking note of. 1, we delivered sequential growth even though modest on the active customer line. Number 2, our gross adds continue to trend higher.

Speaker 1

And where the softness in any gross add metric is all in in the hard goods categories and much less so in the consumables and health categories. So that's another data point. A third data point is We are observing the gradual veining of the attrition of the cohorts. And so overall, the net impact of the above two statements is that we have a steadying customer base no longer on the active kind of decline trajectory that we were through kind of 2022. And so the pivot point that we're to relative to the strong execution that our marketing team and the rest of the Chewy value proposition, the in stock, the pricing, the delivery convenience, to all being sharper from a year over year point of view.

Speaker 1

We're just we're bullish in our ability to go to market much more so in the second half of the year as we've shared that same perspective was shared in the last earnings call and we haven't come off of that. So the large active large kind of base of customers that still remains in front of us plus the value proposition that continues to strengthen is what gives us confidence alongside the steadying customer base that we observed as we've played through Q1. Anything to add Mario?

Speaker 2

Got it. Thanks.

Speaker 5

Okay. Thank you.

Speaker 3

Thank you, Mr. Amu. The next question is from the line of Anna Andreeva with Needham. You may proceed.

Speaker 7

Great. Thank you so much. Good afternoon, guys. To Two questions from us. Mario, just a follow-up on the guide.

Speaker 7

You mentioned some incremental investments in the Q2 as you ramp to international. Just any color on how we should be thinking about the expense on those? And secondly, good to see hardgoods to seeing some improvement sequentially and you are lapping easier compares now. But can you talk about what drove that? And are you to that team to see continued stabilization in the category as we go through the year.

Speaker 2

Hi Ana, good to hear from you. So let me start off with the first to Which is about the investments that we talked about. So we had said 50 to 75 basis points in SG and A and marketing and that's across all the growth investments for this year. The largest component We do expect that to be our Canada launch. We're still going to hold to that view of 50 basis points to 75 basis points for the full year.

Speaker 2

Now you saw that in the Q1 that the investment was a little smaller than that. It's about 25 basis points in the Q1. So that means that the timing throughout the year is going to change. We're going to see that more pronounced in the Q2. Now, we are looking to self fund.

Speaker 2

We have found ways to self fund some of that investment and that's what allows to now grow or erase our EBITDA margin guidance for the full year. As you heard us say to 3%, we had originally said somewhere between 25 and 50 basis points lower than that about 2.75% to 2.5%. So we are now looking to raise that or have raised it to a 3%. Specifically to the Q2, I'll tell you the international investment is one of the things that you'll see us to flow through in the quarter. But the other one is something as simple as the fact that we're we just launched our 4th automated to fulfillment center, this one in Nashville.

Speaker 2

And every time we launch a fulfillment center, we see some small deleverage in SG and A in the quarter that we launched it and the following quarter. And then it obviously we've talked about the benefits it provides over the long term. So that's what you would expect to happen again in the Q2. On your question on hard goods and when do we expect that to improve? Let me make sure that I follow the question correctly.

Speaker 1

To I'll take it. Hi, Anna. This is Sumit. So the improvement that we saw in Q1 is primarily a result of comping and lapping the years, to particularly 'twenty two over 'twenty one and the effect in 'twenty three here. And so that's that.

Speaker 1

We are not assuming any material reacceleration even though we are seeing to trends starting to stabilize in what you would call replenishable hardgood categories. Where hardgood is tied strictly to to core pet household formation trends, for example, pet adoption or new pet in household, specifically to categories such as crates, etcetera, those trends aren't yet improving sequentially or on a year over year basis. That would be the right type of color to provide.

Speaker 3

Okay, terrific. Thanks so much, Dave. Thank you, Ms. Sundaribo. To The next question is from the line of Rupesh Parikh with Oppenheimer.

Speaker 3

You may proceed.

Speaker 5

Good afternoon. Thanks for taking my question. I just wanted to go back to your Canada expansion. So as you look at the expansion to Canada, just curious how you think about the recognition to the Chewy brand in Canada at this point? And then how you compare the competitive landscape in Canada to what you experience

Speaker 2

right now in the U.

Speaker 1

S? Sure. Hey, Rupesh, this is Sumit. So we've been doing some extensive work as you would expect us to, both in terms of learning the market, the dynamics and particularly customer to behavior and shopping trends per se. So a few things that are noteworthy to us.

Speaker 1

1, it's encouraging for us to note that we're not starting at ground 0 in to Canada even though we're not present in Canada. Our market awareness broadly sits in the mid-20s. And even though that's lower than obviously what we enjoy here in the United to It's worth noting that it's not 0. That's 1. Number 2, when we compare the value proposition of the Chewy Brand against what the consumer really wants and desires, which is a propensity towards value, a propensity towards to convenience.

Speaker 1

And then in Canada, much more so in the United States, a heavy lean in towards service orientation. And compare that against the proposition that Shuey brings to market, we are tremendously bullish in our ability to meet the consumer where they want to be met. When you look at the landscape per se, the core inputs that drive e commerce sustained e commerce growth Are present in Canada yet without a scaled ecom provider and a high quality ecom provider like ours being present in Canada. So when you combine these inputs, the approach that we're taking in our opinion is well is insight driven. And to the extent that our execution remains high quality, which we have no doubt that it will not, the outputs and the outcome should follow.

Speaker 5

Thank you. I'll pass him on.

Speaker 2

Thank you.

Speaker 3

To Thank you, Mr. Parikh. The next question is from the line of Rick Patel with Raymond James. You may proceed.

Speaker 8

Thank you. Good afternoon and congrats on the strong execution. I wanted to follow-up on the Canada question and help us to understand the opportunity a little bit better. What do you consider the TAM of that market and how quickly is it growing?

Speaker 1

And it seems like you have

Speaker 8

a running start for brand awareness. I'm just curious what your go to market strategy is to capture new customers in light of that?

Speaker 1

Yes, sure. So the Canadian market is expected to be roughly between $12,000,000,000 to $15,000,000,000 over the next 4 to 5 years, growing at a slight to the United States, which is obviously an encouraging data point. When you look at e comm penetration, e comm penetration sits roughly 1,000 to 1200 basis points below to the United States, which is also an encouraging trend, both from the point that you're not starting from ground 0. To As I said, the inputs are there and at the same time, the market could appreciate a scale high quality provider such as ourselves, Who has a proven playbook from our efforts here in the United States. And so in that way, we are going to combine to what the customer desires in that particular market against the strong value proposition that we bring to the market and the results should be amplified.

Speaker 1

In terms of our customer acquisition strategy, we enjoy a dynamic range of to our dynamic array of options in the way that we pick up customers from kind of having a full funnel approach as we enter the market to utilizing our brand awareness, strong word-of-mouth advertising that we enjoy here in the United States, as well as to an array of valve mechanisms that we deploy to earn customer trust by delivering surprise and delight are all in the array of options in the way that we will go to market. And so we're looking forward to it. Thanks.

Speaker 8

Thank you very much.

Speaker 3

Thank you, Mr. Patel. The next question is from the line of Corey Grady with Jefferies.

Speaker 8

To you noted in your shareholder letter that you're seeing no signs of trade down. But I'm curious if you're seeing any other changes like consolidation or

Speaker 1

to Hey, Cory. No, we're not. We are not seeing any we're seeing Strengthening in behavior as it comes to non discretionary categories, which has been super encouraging for us to see. If you notice the Autoship customer growth to Autorship customer sales growth at 75%. It is a combination of improved active customer base in Autorship from a year over year point of view As well as improvement in NESPAK per customer subscribed to the Autoship program.

Speaker 1

So and by the way, that improvement in NESPAK is not to price or ASP inflation is not the major driver there, which is obviously an encouraging point to note. So when we look at the proposition of us being in better inventory positions, sharper on pricing, to improved delivery expectation and promise, combined with the same kind of personalized service that customers look for. I'd say loyalty is stronger on the platform, which is keeping ASPs and also AOEs intact. And therefore, we're seeing the high engagement that we're talking about here.

Speaker 5

Thank you.

Speaker 1

Sure.

Speaker 3

Thank you, Mr. Grady. To The next question is from the line of David Bellinger with ROTH MKM. You may proceed.

Speaker 5

Hi, everyone. Thanks for the question. In terms of promotional activity, it seems like somewhat of a shift Q4 to Q1, maybe a little more Intense lately, but not to the extent you are anticipating. So can you discern whether some of your promotions are in fact pulling in new customers? And To what extent can you use additional promos to get your net actives moving sustainably higher again?

Speaker 1

Hey, David. It's Sumit. I'll start. Mario might add something. So I think comparing Q1, first of all, to Q4 is a little bit of an apples and oranges given how seasonally relevant Q4 is to Elasticity and Q1 isn't as much.

Speaker 1

So year over year comparison might be more accurate to perspective. And from that point of view, we did see incremental promotional activity on a year over year basis. At the same time, we saw to less than anticipated promo activity, which is obviously encouraging. And which Mario in his prepared remarks It has said helped kind of buoy some of the gross margin strength that we saw in the quarter as well. And so we're not that's the current dynamic and We're using promos across an array of options.

Speaker 1

Yes, some part of it drives new customers. It also allows us to test for demand elasticity. It allows us to pass value by helping customers build bigger baskets, etcetera, etcetera. But we don't use promos as a repeatable CRM mechanism per se. So and then in terms of Price, you've heard us kind of say in the past, we're not price leading.

Speaker 1

We prepare to make sure that we are competitively priced, sharply priced where we understand demand elasticity without really demand allowing for demand destruction, while maintaining kind of profitability to the bottom line.

Speaker 2

All right. Thanks, David.

Speaker 3

Thank you, Mr. Bellinger. To. The next question is from the line of Brian Fitzgerald with Wells Fargo. You may proceed.

Speaker 9

Thanks guys. 1 of your larger Omnichannel competitors called out some weakness in the consumer in the second half of Q1. It was driven by macro issues that even cited Regional Banking crisis and lowered tax refunds. Did you see any of that whatsoever in the consumer demand trajectory intra quarter?

Speaker 1

No, Brian. We're not seeing that.

Speaker 9

And then my next follow-up would just be on the Lemonade launch. Any view on how that helps you attack the TAM there? Anything you'd highlight in terms of the dynamics of the insurance market? And anything you can tell us about to the existing level of awareness with your foray or your offerings in the insurance suite?

Speaker 1

Thanks. Yes, Brent, we're really excited about this. As I mentioned in my prepared remarks, anytime you can bring choice to consumer and on top of that expand price points available to a consumer. It directly correlates to incremental outcome to income in terms of revenue and therefore with a vertical like insurance we actually expect a high level of flow through to the bottom line as well. So we're excited about the addition of Lemonade.

Speaker 1

Lemonade is a tech forward player that appeals to a wide array of customers. And alongside Trupanion, which is obviously a high bar provider of insurance services, we at this point believe that we have the full spectrum covered both from a range of customer demographic, customer psychographic as well as price point coverage in a way that we're going to market. I can tell you our quotes to conversion ratios are improving. Our overall to traffic towards these policies is improving. And at the same time, the ramp is built towards the back half of the year into 2024, given that we've just onboarded Lemonade and we're going to be ramping them up.

Speaker 1

And as the prepared remarks suggested, it's really a month from now when we kind of go to market with 2 scale providers. Anything to add Mario? Sure. Brian, happy to take a follow-up, but that's our current point of view. We're excited about

Speaker 9

That's awesome. I just got a new Upper Knees Mountain dog puppy, so I'll be taking advantage of that.

Speaker 2

Appreciate it. Congrats, Ryan. Congrats.

Speaker 3

Thank you, Mr. Fitzgerald. Our next question is from Steven Zaccone with Citi. You may proceed.

Speaker 10

Great. Good afternoon. Thanks for taking my question. Smed, I was curious for your perspective on the to competitive dynamics in the pet category if the consumer spending environment weakens. I know there's been some earlier questions here Citing some peers have talked about softening trends.

Speaker 10

How do you think you're positioned if the consumer starts to pull back on spending? To how do you think about your competitive positioning maybe on price or maybe loyalty? I'd be curious to get your perspective.

Speaker 1

I think the results Steven, the results speak for themselves. I'll lead with 2 data points. A, Over 84% of our sales were attributed to resilient categories such as consumables and health, where we have to a tremendously strong proposition of a wide assortment, be sharp pricing. And when you look at delivery convenience, it has actually improved on a year over year basis. Let me give you some data points.

Speaker 1

Our on time delivery relative to 2022 is sitting at about 150 basis points higher. Our click to deliver is sitting roughly 20% better at this particular point. Our in stock positions are sitting roughly at some of the lowest levels that we've observed in the last 2 years. And so when we combine these inputs alongside, again, I've mentioned the personalized to the experience that we deliver, it just sets you up for to continue to fuel the loyalty that we enjoy. And the second brief point, I said I'll lead with 2 data points.

Speaker 1

The second data point is the Autoship sales. 75% of our sales going through the Autoship program allows to a predictable repeatable base of volume that allows us to fulfill that demand in a manner that optimizes asset utilization across the company and allows us to kind of flow that revenue into the bottom line.

Speaker 2

I would add that So maybe just hit on the very key point here that you have brand loyalty coupled with an auto ship program that serves the customer well, coupled with pricing convenience selection that we believe are unparalleled. And you have this the dynamics of that would say that if that were to happen, to the competitive dynamics change, we're well positioned. And we obviously have just raised our full year guidance Given everything we know. So yes, we're well positioned.

Speaker 10

Great. I appreciate the detail. The follow-up I had was just on gross margin Because freight costs are coming down overall from an industry perspective, would you still expect freight to be a tailwind to gross margin over the balance of the year?

Speaker 2

For which part of the Freight and packaging because we have a multiyear contract with our logistics provider. So the rate they are pretty locked in at this point. The thing that may fluctuate are things like fuel prices. Obviously, they can go up or down from where we are today, but that should be a de minimis at this point. So it's more things that are under our control in terms of the logistics and the supply chain transformation initiatives that we've launched last year.

Speaker 2

And I think at the last call, we said that those have paid off very well and that we have upset to most, if not all of the increases under the rate card that we occurred starting in 2022.

Speaker 1

Stephen, specifically, if If we were to put a range on the transformation impact to left on freight and packaging, I'd say, we'd likely be able to pull another 50 to 75 basis points out, but to But that will happen on a multiyear basis, right. It's not happening this year. We've like Mario said, we've pulled most of that out into the last kind of 15 months of execution, which helped us kind of buoy 2022 margins. And in 2023, as we're heading into it, some of the outside of kind of fuel variances, we feel we're running this pretty tightly. And to the extent that supply chains improve, it helps us improve our inventory placements better.

Speaker 1

Yes, that might buoy freight a little bit, but From an input point of view, we're fairly well set.

Speaker 11

Okay. Thanks for the detail. Best of luck.

Speaker 1

Thanks, Steven.

Speaker 3

Thank you, Mr. Zekone. The next question is from the line of Lee Horowitz with Deutsche Bank. You may proceed.

Speaker 8

Great. Thanks for the time. Can you spend a little bit of time talking about the underlying pet household growth? I think in the to ask you to talk about the decline in the low single digit range. Is this still what you're seeing in the underlying market?

Speaker 8

And are you maybe seeing any stabilization here that may give you hope to That industry growth is perhaps on the horizon. And then can you update us on how your advertising data has been progressing? A test customer driven compelling ROIs in the beta test. And what are the markers that you are looking for before you roll out the advertising products of our other side of partners.

Speaker 1

Sure. So your first question on underlying pet household growth. So I'll share 2 data points with you. Pet household formation is flat. So to the extent that we could consider that encouraging, yes, it's at least not declining like we've mentioned in the past.

Speaker 1

Our recent read is that it's flat. And then another data point is that When you look at shelter and rescue data between adoption and relinquishments, adoptions aren't happening and relinquishments have steadied. So there isn't a growth in adoption. At the same time, we're not seeing relinquishments increase per se. So that's a helpful data point, to which kind of signals towards the resilience overall long term for these inputs that fuel growth in Pet over time.

Speaker 1

I will caveat it as I always do, which is the source of this data isn't there aren't ones there isn't one published source. We gather these data points from our relationships across 5,000 shelters and rescue communities that we work with, along with our to buyers and vendors conversations, etcetera. So just want to caveat it with that. Number 2, like on the advertising data, We're really encouraged by the way this is progressing. So I'll share a little bit of what I said last time.

Speaker 1

We're in process of ramping up supply. We have demand knocking at our doorstep. And what we are doing right now is phase gating that demand against the to supply that is available on the website. So as we've exited Q1 into Q2, we've actually kind of internally moved away from the word beta to a little bit more of a softer kind of ramp up per se. Because the guardrail that we're testing against is We are hyper conscious of the impact of expanding ads inventory on pet parent user experience.

Speaker 1

And so that's the guardrail that we're maintaining. We feel good about our ability to expand supply as we move towards the back half of the year and then ultimately really kind of full ramp this program in 2024. I didn't quite catch the question. I think you had a ROAS to question in there. And if you do, please repeat that.

Speaker 1

If not, then I think I would rest there.

Speaker 8

Yes, the question is sort of around the tibroa that you're seeing within the beta asset. And I think you sort of answered the to

Speaker 1

Sure, sure, sure. So, a thing that we are encouraged, which is unique to Chewy proposition. Again, going back to the repeat recurring purchase nature of how consumers trend their loyalty with us Is the concept of the LTV, right, which is fueled with programs like auto ship. And so when you consider that, you would also then consider that our approach to ROAS is slightly different from the direct ROAS that the industry is used to and therefore we would take into account the power of loyalty and LTV ROAS as we go to market. And by the way, that's being well understood and it's well received.

Speaker 1

And when you compare the ROAS to LTV ROAS, we're actually seeing to quite healthy returns above industry standard at this particular point. So we're encouraged by the ramp.

Speaker 8

Very helpful. Thank you.

Speaker 2

Thanks, Lee.

Speaker 3

To Thank you, Mr. Horowitz. The next question is from the line of Dylan Carden with William Blair. You may proceed.

Speaker 11

Thank you very much. Just curious the language that you're using with gross adds ahead of pre pandemic levels, I guess the implication there would be that if churn normalizes, you'd be back to kind of net adds in line with kind of the 2018, 2019 period. Is that fair without asking you to put a timeframe on that?

Speaker 2

Hey, Dylan, it's Mario. I'll answer that one. It's We are our gross adds are running ahead of pre pandemic levels and certainly they're even running ahead of last year, the same quarter. But I'm going to reserve making a statement that we expect to return to any sort of levels until we are ready to make that statement. Let me just say that what we have said is that our thinking hasn't changed for this year that we would expect to 2nd half growth in active customers.

Speaker 11

Okay. Fair enough. And then I guess

Speaker 1

what's that?

Speaker 2

And obviously, we're pleased that we had stability in that active customer base in the Q1. That's a given here.

Speaker 11

Right, right, sure. And then the spend per customer, are you seeing that kind of return to more normalized levels? I know in the middle of the pandemic kind of dipped down for certain year cohorts. Is that normalized or is the hard goods component of that Still making that noisy metrics.

Speaker 2

Well, the NASDAQ, as we've shown it, the $512,000,000 is a new record high for the company and the increase about 15% or so was similar to what we saw all of last year. So we're seeing strength there. That's obviously part driven by to the increasing prices, but it also is a volume play. So the customers that are staying with us. The longer they stay with us, the more they spend with us.

Speaker 2

That dynamic continues to hold through this quarter as well. Certainly, if we had more sales in hard goods and we've seen that grow, that obviously would help with NASDAQ Just overall spend per customer, but for now we're seeing even without that we're seeing an increase in NSPAC.

Speaker 11

Okay. And then final one for me. I had thought kind of early on in your public history that to the auto ship kind of penetration. It wasn't expected to grow too much. The 75% kind of surprised you as to where you've been able to get to.

Speaker 11

Do you think that there's more upside to that number? And are there any kind of quantifiable margin implications from adding the kind of 5 percentage points that you have over the last couple of years? Go ahead.

Speaker 2

Yes, Dylan, I think the comment we may have made at that point was not that we didn't expect it to grow. As we were saying, I think at that point we were around the 60% mark give or take. And we were saying, look, 60% is really good when you're selling a product you have to ship. And if it were if it grows, great, but At that level, every order in the company that flows through our warehouse was benefiting from that level of AutoShip customer sales. Certainly very happy that it's grown to about 75%.

Speaker 2

That's a function of a handful of things. One is the program just gets better over time. To we find ways to reduce the friction to make the program easier on our customers. Certainly, I think you know that this program is doesn't cost anything. In fact, it leads to a to discount for the customers who sign up for that program, and that discount is funded by our vendors.

Speaker 2

So we don't have to fund it ourselves. So there are between that and the fact that we are now seeing more of our sales shift to healthcare and consumables, given the relative softness in hardgoods, you're seeing that grow to the 75% or so that We just printed. So it's a handful of factors. It's a really good thing. We think about the program as a program and how we can make it better, We're not necessarily sort of obsessing over whether we get it to 77% or 73% or anything like that.

Speaker 1

It's the symbiotic relationship here really helps. It's one of the more effective mechanisms to fuel brand loyalty for our supplier brands. And obviously, their participation greatly showcases the value that both of us kind of find in it. And number 2, customers, I talked about the power of expanding kind of choices for customers. If you observe over the last 3 or 4 years, we've expanded the eligibility of SKUs in the particular program And have led customers, right, our site experience continues to let customers engage in more productive manners to be able to build bigger baskets, to which then they extract greater value from.

Speaker 1

You can kind of see the inputs that are correlated to program growth. And then you put on categories such as healthcare, which were obviously driving growth towards, it all leads to that you're seeing here, which is why I mentioned the combination of both active customer growth in the program times the NESPAK increase that we're seeing on a year over year basis.

Speaker 11

Has the healthcare component been a big part of the increase in penetration?

Speaker 1

It absolutely is. I mean, when you think about over we started the healthcare category 4 years ago and at this point run the largest to pharmacy in North America or pure play ecom pharmacy in North America. And that's a credible base that we are building from and serving to customers who continue to enjoy the same propositions that we've talked about on this call. And when you think about the proposition of a health customer. Humans are bad at feeding humans medication.

Speaker 1

We forget to feed our pets. So when you if you have the option of putting to That on recurring delivery, combined with an ongoing engaged program and the notification engine put behind it, Etcetera, etcetera, it fuels even stronger compliance rates. And so our compliance is really healthy relative to average compliance in the industry. Again, as I said, it's a symbiotic relationship between our suppliers and us, who together kind of build brand loyalty and the customers enjoy the return in that way.

Speaker 2

Yes, one more data point I think just to kind of complete that thought here. But Over 95% of our consumables SKUs or products are auto ship eligible. 100% of our healthcare products are, ownership eligible. So when you think about that and the fact that those components in our sales to profile have grown over time as a percent of total sales, you get the lift in overall auto ship customer sales.

Speaker 11

Yes. Really appreciate the extra time guys. Thank you.

Speaker 1

Yes.

Speaker 3

Thank you, Mr. Carden. Our next question is from the line of Trevor Young with Barclays. You may proceed.

Speaker 6

Great. Thanks. First one, just what was orders shipped growth in the quarter? I think the 10 Q mentioned that it was positive year on year, but it didn't specifically quantify. And then second one, we've had some questions from investors around some one time to prior rebates that maybe started in 4Q and carried over into 1Q.

Speaker 6

And just wondering if you could clarify if there was in fact some one time rebate this quarter and how much of a lift that was? To?

Speaker 2

Yes. So I'll answer the first part of the question. We actually we purposely took it out of the 10 Q, Trevor, because it was causing some confusion. The way we were defining those orders, it was as a packages shipped and of course, as we get better at packaging Shipping fewer packages per order by consolidating the product into single boxes. And that's going to that was kind of throwing everybody off and we had it just created confusion.

Speaker 2

So better to say that The orders grew overall. Certainly, unit grew. You heard us say that 2 thirds of the growth in the quarter came from unit growth. But because we're getting better at sending those orders and complete in a single package, the number of packages held Grew at a slower rate, let me put it that way, than the overall sales. The second part of your question was around to questions from investors on one time supply of rebates.

Speaker 2

We did not see anything like that in the Q1, nothing meaningful to call out. So let me just say that where you tend to see something like that is going to be towards the end of the year. And that is as you get growth rebates on the mic. But look, let's say That's not a that's something that we're sort of assuming at this point in the year. So nothing to call out in the Q1.

Speaker 5

To Great. Thank you.

Speaker 2

Thanks, Trevor.

Speaker 3

Thank you, Mr. Young. Our last question comes from the line of Lauren Schenck with Morgan Stanley. You may proceed.

Speaker 12

To Great. Thank you. Nice to see the net adds turned positive. Is your expectation that that will remain positive in the Q2 and then into the back half of the year? And just a clarifier on the customer growth expectations in the back half of the year, you're talking on a year over year basis, that should be positive in 3Q and 4Q?

Speaker 12

And then lastly, any way to think about what the customer contribution from the Canada launch could look like in the second half of the year? Thanks.

Speaker 2

Hey, Lauren, it's Mario. So I'll start off with your first question, which is that I'll start with repeating your statement that you were pleased to see a positive net add in the quarter. Maybe I'm putting words in your mouth. I would say that we were pleased as well. But reality is, look, this is all within to the I would like to call the set of expectations we have internally.

Speaker 2

We went up a little bit, we could have gone down a little bit, and that would have been perfectly within the set of to expectations for the first half of the year. I won't break down quarter by quarter because that's going to get us into just trouble. I'll just tell you that we are Our thinking for the full year has not changed. But we expect the first half to be around the to mean point coming into the year and in the second half to see some growth in active customers. Let me kind of keep it too fat.

Speaker 2

I think it's going to be better than trying to guide you quarter by quarter. The customer contribution we're expecting from Canada launch, what you have heard us say in this case is that Canada is We expect we're preparing now for launch in the Q3 and we expect it to not have a material impact on net sales, Gross margin, nest pack or active customers. The impact it will have is on EBITDA as we make those initial investments and we outlined what that impact is, But nothing meaningful to call out for top line or active customers or Nespec at this point.

Speaker 12

Okay. Thank you.

Speaker 3

Thank you, Mr. Shank. To that concludes the question and answer session. I will now pass the call over to the management team for any further remarks.

Speaker 1

Thank you, team. This is Smith. Have a great evening. Thank you for joining us.

Speaker 3

That concludes today's call. Thank you for your participation. You may now disconnect your line.

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Earnings Conference Call
Chewy Q1 2024
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