Chewy, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the QE First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Bob LaFleur, Vice President of Investor Relations and Capital Markets. Please go ahead.

Thank you for joining us on the call today to discuss our first quarter 2020 results. Joining me today are Chewy CEO Sumit Singh and CFO Mario Marte. Our earnings release and letter to shareholders, which were filed with the SEC on Form 8K earlier today, have been posted to the investor relations section on our website, investor.chewy.com. A link to the webcast of today's conference call is also available on our site. On the call today, we will be making forward-looking statements, including statements concerning Chewy's future prospects, financial results, business strategies, industry trends, and our ability to successfully respond to business risks, including those related to the spread of COVID-19, including any adverse impacts on our supply chain, workforce, fulfillment centers, other facilities, customer service operations, and future plans. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, 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. For further information, please refer to the risk factors and other information in CHIWIs 10Q and 8K filed earlier today and in our other filings with the SEC. 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 at and in our earnings release and letter to shareholders, which were filed with the SEC on Form 8K earlier today. These non-GAAP measures are not intended as a substitute for GAAP results. Finally, this call in its entirety is being webcast on our investor relations website. A replay of this call will be available on our IR website shortly. I'd now like to turn the call over to Sumit.

Thanks, Bob, and thanks to all of you for joining us on the call. Shortly after we spoke in April, three-quarters of the U.S. population was under shelter-in-place orders. Two things became clear very quickly. First, the pandemic put Shoei in a unique position to provide essential services to pets and pet parents. And second, we needed to prepare for a significant change in operating conditions. Over the past two months, we have continued to adapt and respond rapidly to service millions of new and existing customers while caring for the safety and well-being of our team members. I'm proud of the incredible spirit of innovation that we have sustained across the company, as well as our team's ability to adapt and respond to COVID-19. For instance, in Q1, Chui's busiest quarter ever, we launched gift cards for pet parents. This is a virtual product that customers have been asking us to offer for years, and the early adoption signs are encouraging. Our team's also built and led campaigns with shelters and rescues across the United States, raising awareness about this community and making over $7 million in charitable contributions. And then, we also quickly developed effective work-from-home technology solutions from scratch that enabled us to move our entire customer service operations from zero to 100% work-from-home in a matter of weeks. The pandemic has tested and proven our ability as a company and as a team to move rapidly and deliberately and to plan, communicate, and innovate on behalf of our employees and customers. Now, I will discuss our Q1 results and then share some insights about the new customers we have acquired in the first quarter and our ability to retain them over the long term. After that, I will share updates on our supply chain and fulfillment network. Finally, I will turn the call over to Mario to discuss our first quarter results and guidance in more detail. As anticipated, our shop-at-home business proved resilient amidst the current economic disruptions. First quarter results reflect the significant change that occurred in customer shopping behavior as the pandemic spread. First quarter net sales increased 46% year-over-year to $1.62 billion. We ended the quarter with 15 million active customers, an increase of 3.7 million compared to the end of first quarter 2019, and the fastest acceleration of new customer acquisition in the company's history. Autoship customer sales exceeded $1 billion for the first time in a single quarter, totaling $1.1 billion, or 67.9% of total net sales. Net sales per active customer grew 6.6% to $357 when adjusting to exclude the extra week in 2018. Q1 growth margin expanded by 50 basis points year over year to 23.4%. In addition to the scale benefits from overall revenue growth, Our private label business contributed 60 basis points to the year-over-year expansion in gross margin. Our healthcare Rx business continued its robust growth in Q1, despite clinic closures and or reduced clinic hours due to the pandemic. And lastly, incremental freight and logistics investments that we made to protect the customer experience due to COVID-19 decreased our gross margins by 120 basis points in the quarter. I am also pleased to report that for the first time in Chewy history, we delivered positive adjusted EBITDA of $3.4 million, improving margins by 160 basis points year over year. This marks a significant milestone achievement for our company. Our sales momentum, combined with the marketing efficiencies, more than offset incremental COVID-related costs in the quarter, leading to positive adjusted EBITDA. We believe that the volume-related cost pressures are temporary, and we expect those to moderate as we look ahead. We further believe this combination of scaled revenues and cost discipline will accelerate us along our path of sustainable profitability. Now, let's shift our focus to customer acquisitions in the quarter and insights into their purchasing behavior. We collected data on five customer cohorts. Our control group consisted of customer cohorts from six weeks, six months, and one year prior to the COVID-19 outbreak. We then looked at Q1 March and April customer cohorts after the outbreak. For the purposes of clarity, we've blended the three control group cohorts into a single pre-COVID cohort and the March and April cohorts into a single post-COVID cohort. Unless specified, the results that I will talk about reflect comparison of the blended cohorts. First, we added a record 1.6 million net active customers in the first quarter, which was more than double our average quarterly pace of net active customer ads in 2019. Second, and equally as important, the behavior shown so far by these new customers is promising. Initial orders were up 11%, larger in value than our pre-COVID-19 customers. In the first four weeks since their initial purchase, A higher percentage of our new customers returned to make a second purchase, and the average value of those repeat orders was as much as 5% higher than the pre-COVID customers. Finally, we analyzed their ownership sign-up and cancellation rates, and on a net basis, they were within historical ranges. These insights bode well as a sign of future customer engagement, and although we cannot predict the future, currently we're expecting these customers to become long-term QE customers. We also observed encouraging signs from our existing customers. In the quarter, we saw nearly double the number of customers coming back into active status versus previous quarters. This means more customers who had not made a purchase with us in the previous year returned to an active status, providing us an opportunity to re-engage them. Also, after the COVID-19 outbreak, our existing customers started creating bigger baskets. These baskets had a higher mix of consumables in them. We believe these larger baskets with a higher mix of consumables were evidence of pandemic-related pantry stocking, and we estimate this benefited first quarter net sales by approximately $70 million. We view this as a one-time benefit that we have not seen reverse in the second quarter, and we do not expect to see it reverse going forward. All in all, we see these as positive data points as we look ahead into the second quarter and the rest of the year. Now, let me share some observations for Q1 across our supply chain and fulfillment network. The surge in orders increased our shipping volume in March by over 50% compared to February. Although our supply chain remained resilient through the quarter, the unplanned nature of the demand surge related to COVID-19 created temporary stress points in our supply chain as well as customer service and fulfillment operations. We typically spend months preparing for our annual Q4 holiday cycle, but in this situation, there was no advanced warning or preparation. The demand shock, which was also felt by our supplier network, caused elevated out-of-stock levels for certain product categories and led to some temporary conditions of suboptimal inventory placement across our fulfillment network. We were able to quickly react to this by updating our recommendation engines so customers could easily self-select different brands, sizes, or patterns if their original choices were unavailable. Our private brand portfolio categories, like treats, litter, and hard goods offered customers attractive alternatives and experienced strong year-over-year growth in the quarter. These actions helped reduce abandoned orders and maintain customer engagement and conversion levels, which kept sales momentum strong throughout the quarter. However, inventory imbalances in the fulfillment network led to higher rate of split customer orders and led us to ship more orders in multiple boxes and ship more orders over longer distances. For a portion of our volume, we increased the use of express shipments as a way to ensure timely delivery and protect customer experience. This deviation from our standard playbook increased first quarter freight and packaging costs by approximately $20 million and negatively impacted gross margins. The elevated volumes also led to a sizable increase in order backlog across the fulfillment network, which we tackled with a multi-pronged strategy. Our first priority was the well-being of team members. So we did everything we could to make fulfillment center workspaces as clean and safe as possible. In Q1, we also hired 4,600 new hourly associates, most of whom were dedicated to our fulfillment centers. Since the end of the quarter, we have achieved 100% of our original hiring target of 6,000. These new team members, along with thousands of other dedicated utopians, helped us work through the backlog and tackle the increase in customer demand. Now that fulfillment center staffing is properly aligned with our elevated order volumes, we are better positioned to maintain equilibrium going forward. The process here is similar to hiring up around the holiday season. We add positions as demand ramps up and then balance out our ongoing staffing needs by calibrating our replacement hiring rate against natural attrition depending upon volume requirements. We also opened our ninth fulfillment center in Salisbury, North Carolina on April 6th and immediately accelerated its volume ramp to further help reduce backlog. I would like to thank the CHUI team members who came together for this opening under exceptionally difficult circumstances. It is a demanding task to open a fulfillment center, and it is even more challenging to do so in the middle of a pandemic. Our next fulfillment center in Archibald, Pennsylvania, remains on track to open later this year. In closing, We are proud of the way the team executed through this milestone first quarter of 2020. We experienced strong revenue growth, record new customer acquisition, and generated positive adjusted EBITDA for the first time. 2020 will be a pivotal year for Chewy, and we plan to remain true to our mission of being the most trusted and convenient online destination for pet parents and partners everywhere. Now more than ever, we are focused on execution through communication, innovation, and perseverance. I will now turn the call over to Mario, who will provide the details on our first quarter results and walk you through our current second quarter and full year financial outlook. Mario?