Chewy, Inc.

Good afternoon and welcome to the QE fourth quarter and full year 2020 results call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Robert LaFleur, President of Investor Relations. Please go ahead.

Thank you for joining us on the call today to discuss our fourth quarter and full year results for fiscal 2020. 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 of our website, investor.chui.com. A link to the webcast of today's conference call is also available on our site. On our call today, we will be making forward-looking statements, including statements concerning CHUI'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 CHIE's 10-K and 8-K 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 measurements are provided on our investor relations website and in our earnings release and letter to shareholders which were filed with the SEC on Form 8K earlier today and in our 10K. 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 also be included 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. As we gathered for this call a year ago, we were just beginning to realize the scope of the COVID pandemic. Looking back, I'm incredibly proud of the way Tutopians came together to execute through this incredibly challenging year. As a leadership team, we communicated frequently and honestly about how we would navigate the pandemic with our team members' safety in the forefront. We made sure our teams had safe and healthy workspaces and implemented new team member-friendly policies and benefits. In response, our teams redoubled their dedication to our customers and made sure that their pets received the vital products and care that they needed. In the face of surging volume, we kept our supply chains operating and our fulfillment centers or FCs open. Our corporate staff and customer service teams quickly adapted to working from home, and our tech and product teams solved challenge after challenge to seamlessly foster that transition. Despite the disruptions caused by COVID, and in some cases because of them, we accelerated the rollout of several strategic initiatives, including the launch of e-gift cards and personalized products, the introduction of service innovations like our telehealth offering, connect with a vet, and compounding services, and the opening of our first automated and first high-velocity fulfillment centers. These accelerated rollouts speak to the adaptability and the innovative spirit of our entire Chewy team. And even with the COVID backdrop, our teams remained relentlessly focused on the strong execution required to deliver a superior customer experience to over 19 million pet parents who trusted us to deliver on that promise. It is for all these reasons that 2020 will go down as a landmark year in Chewy's history. Over the next few minutes, I will briefly discuss our Q4 and FY 2020 results. I will then use the balance of my remarks to outline our long-term vision for Chewy and why we believe this vision leaves us well-positioned for long-term sales and profitability growth. After that, I will turn the call over to Mario to discuss our fourth quarter and full-year 2020 results in greater detail, as well as our first quarter and full-year 2021 guidance. Q4 net sales increased 50.8% year-over-year to $2.04 billion, bringing 2020 full-year net sales to $7.15 billion, or 47.4% annual growth. Exceeding $2 billion of quarterly net sales is another milestone for us. It took us 7.5 years to reach our first billion-dollar quota and only 2 years to reach the $2 billion quarterly sales mark. Active customer growth and continued strength in purchasing behavior were key drivers of Q4 and full year 2020 momentum. During Q4, our new customer acquisition pace accelerated relative to Q3. Customer reactivations increased by 40% and customer retention improved by 240 basis points. As a result, we added 1.4 million net active customers in the fourth quarter and ended the year with 19.2 million active customers. As we have shared with you in the past, Efficiently adding new customers to our platform and then growing their share of wallet is a key part of our growth strategy. For the full year, we added 5.7 million net active customers, reflecting a 42.7% annual growth. The customer cohorts we acquired in 2020 were highly engaged and displayed similar, and in some cases stronger, purchase and repurchase behavior compared to legacy cohorts. These positive behaviors were driven by a wider product assortment and by our growing set of customer offerings, such as gift cards, personalized products, compounding services, and connect with event. Assessing our progress by business vertical, we are pleased to note that our core consumables business remains strong, and we continue to gain traction in hard goods, healthcare, and proprietary brands. Looking at the Q4 trends within our key verticals, third-party hard goods sales grew 40% faster than the business overall, and proprietary brands' hard goods sales more than doubled year over year. Further within hard goods, our proprietary brand penetration increased 570 basis points year-over-year to reach 21%, continuing the share gains we have reported throughout the year. These results provide us confidence that we are on the right track and that there is a lot of opportunity in front of us to continue winning customers' hearts and minds in these areas. Now let's review our margin performance. We are encouraged to see our effort to increase customer lifetime value, or LTV, drive higher margins. fourth quarter gross margin expanded 300 basis points year-over-year to 27.1%. Full-year 2020 gross margin was 25.5%, up 190 basis points versus 2019, and a record high on a full-year basis. Approximately half of our Q4 gross margin improvement came from structural and sustainable drivers, like higher penetration rates into higher margin verticals, like hard goods, proprietary brands, and healthcare. Notably, On a year-over-year basis, we executed a 510 basis point mix shift out of lower margin consumables and into higher margin verticals like healthcare and hardware. Higher gross margins and rigorous focus on bottom line execution translated into another quarter of positive EBITDA. Fourth quarter adjusted EBITDA was $60.8 million, translating to adjusted EBITDA margin of 3%, a 340 basis point improvement year-over-year. For the full year, adjusted EBITDA was $85.2 million, and adjusted EBITDA margin improved 290 basis points to 1.2%. Both Q4 and full year 2020 adjusted EBITDA includes a $15.9 million benefit from releasing a prior tax reserve. And even if we back out this one-time tailwind, we generated $150 million more in adjusted EBITDA in 2020 than we did in 2019. demonstrating our ability to successfully scale the business and drive incremental profitability. Our performance and dynamics of this past year have provided us with an advanced look at Chewy's future. We believe that our future is bright, given the size of the opportunity in front of us and our relentless focus. Moving forward, we plan on executing against this opportunity in order to realize even greater scale and improve profitability. I will focus the balance of my remarks today outlining the scale of the large and growing opportunity in front of us and in sharing with you the ways we intend to meet the challenge of realizing it. Let's start with three important trends and why we believe Chewy is well prepared to capitalize on them. First is the increase in the number of pet-owning households. Pet adoption surged in 2020 as millions of people sought out comfort, companionship, and the joy of pet parenthood. According to industry analysts, the number of pet-owning households increased by 5.7% in 2020, a significant acceleration from the pre-pandemic five-year CAGR of 0.6%. Looking at our own data, it is clear to us that these new pet parents are joining us early in their journey. For example, in 2020, we observed a 35% year-over-year increase in the creation of pet profiles for puppies and kittens. and a 40% increase in the creation of profiles for newly adopted pets. We get excited about these insights because that newly adopted chewy puppy is going to grow up, eat more food, and shred more toys, leading to a long-lasting relationship with us, resulting in a stream of recurring revenues for years to come. Understanding our customers and anticipating their wants and needs help us create sustainable advantages to win in the pet space. The second trend is the size of the US pet market opportunity. and our ability to expand the competitive playing field. Today, we compete in roughly 70% of the 100 billion U.S. pet market, and we do so primarily in the areas of food, supplies, and prescription drugs and diet. That leaves us with an additional $30 billion opportunity in healthcare and services to grow into, and we are confident in our vision and our ability to do so. Equally exciting to note is that we are continuing to increase our penetration into a growing U.S. pet market that is expected to reach $120 billion by 2024. At $7 billion in net sales, Chewy is clearly only scratching the surface of the overall market opportunity in front of us. And finally, the third tenant is growing e-commerce penetration within the U.S. pet market. Online penetration rates in the retail food and supplies category are estimated to have grown from 7% in 2015 to 30% in 2020, and are expected to reach 53% by 2025, which is in line with the current online penetration rates of categories like books and electronics. Further, as we are observing, healthcare and services have already begun to shift online, and we believe this trend will continue and accelerate. Equally importantly, we believe these shifts in favor of e-commerce channels are durable and largely permanent. This is where we believe Chewy has won and will continue to win for years to come. Years of preparation and focus have positioned us as the Internet's preeminent neighborhood pet store and a leading pure play e-commerce company in the pet space. We look forward to a future marked by ongoing innovation, winning customer hearts and minds, and growing market share. Overall, we see 2020 and the impact of COVID as much more than a one-time growth accelerator. We see the past year as a catalyst that sped up a secular shift towards e-commerce that was already underway. There are multiple growth vectors ahead of us, which make the market opportunity so compelling. And moving forward, we plan to continue following the growth and margin expansion roadmap that we have used since our IPO. That roadmap consists of the following. Acquire new customers. increase share of wallet for existing customers, expand assortment, grow proprietary brands and healthcare offerings, launch services, and when the time is right, expand the business outside of the U.S. As we continue to successfully execute in each of these areas, we will also continue to invest wisely to grow our base of recurring revenues, scale our operating expenses, and drive profitable growth over the long term. Let's look at how our efforts are translating into tangible results. Increased wallet share is a truly powerful growth catalyst. We captured 12% more initial wallet share from our 2020 new customer cohort than we did from their 2019 predecessors, and we accomplished this while absorbing our largest new customer cohort ever. An additional data point which lends us confidence that our efforts are delivering results is the fact that year one contribution profit per customer, which we calculate as gross profit less variable cost, has increased at an average annual rate of 16% over the past two years. Reiterating what I mentioned earlier in my comments, these gains across share of wallet and profitability are being realized as a direct result of our efforts and reflect the impact of catalog expansion, improved discoverability, and the incremental contributions from high margin verticals like healthcare, hard goods, and proprietary brands. In the past three years, we have nearly doubled our total SKU count, including executing a seven-fold increase in higher margin proprietary brand skews. Within healthcare, we are unlocking value for ourselves, our customers, and our partners in this large and growing $35 billion market opportunity. You will likely recall that we recently launched two services in the healthcare space, Connect with a Vet and Compounding. In 2020, these services were live just for a few months, but in 2021, we will get a full 12 months of financial benefits these services provide, as well as vital knowledge that we continue to accumulate as we operate and refine these businesses. In the year ahead and beyond, we will remain focused on expanding our customer base. Sustained improvements in customer LTV continue to support our strategy of disciplined investing in advertising and marketing. As we quickly and efficiently convert new customers into engaged active customers, our growing customer base in turn generates the profits that we then reinvest into acquiring even more customers, thereby completing the flywheel effect that drives both top line and bottom line growth. Additionally, we expect to continue leveraging SG&A. Along the way, we may choose to make incremental investments to strengthen our employee value proposition. However, our playbook shows us offsetting these investments over time with efficiencies from the technology and productivity enhancements that we began implementing in 2020. We are confident that these investments will drive long-term growth and profitability. More specifically, in 2021, we will invest approximately $60 million in higher wages and benefits, the bulk of which will be directed to our fulfillment and customer service teams. This investment is necessary to help us attract and retain team members, drive higher employee engagement, and increase productivity over time. At the same time, we expect to see productivity gains accelerate in 2021 from the technology and automation investments we have made in our fulfillment center network. You may recall that in October 2020, we opened our first fully automated FC. A month earlier than that, we began realizing a different style of efficiency when we opened our first limited catalog high velocity FC. Given their launch timing, these FCs provided only modest ramp benefit to us in fiscal 2020. In 2021, we expect to realize accelerated productivity gains from their full year operations. We also expect to open our second automated fulfillment center in Q2 2021 in Kansas City and another limited catalog facility in Q3 2021. Additionally, in 2022, we will begin automation retrofits at select fulfillment centers. We will keep you apprised of the specific timing of these events on our upcoming calls. We believe these investments in our people and automation are not only prudent but they also have the potential to drive step function changes in our variable cost structure and contribute meaningfully to effective SG&A leverage. Finally, I would like to share that having achieved our first full year of positive adjusted EBITDA in 2020 and our first quarter of positive NIT income in Q4, we have taken a meaningful step forward on our path to profitability and in demonstrating our ability to get big fast and get fit fast. Going forward, our margins may fluctuate quarter to quarter, but we believe our profit trajectory is clear and positive. I will end my comments by reiterating that 2020 was an incredibly challenging and unpredictable year for all of us. During this time, Chewy performed exceptionally well and made significant strategic and operational progress. We navigated the safety concerns of the pandemic and kept delivering for our pet parents and business partners. We proactively grew our market share by offering a wow level of service to the millions of new customers who adopted pets during the pandemic. Further, we capitalized on the accelerated and sustainable shift of consumer to e-commerce channels. As a result, we grew our customer base by 43% and ended the year with 19.2 million active customers. Perhaps most importantly, we dramatically increased our market size by launching new services in the pet health and wellness space. These expanded offerings help us reach additional customers and improve our ability to increase wallet share with our existing customers. We are entering 2021 with significant momentum, and we are confident in our ability to deliver. With that, I will turn the call over to Mario.