Chewy, Inc.

Good day and welcome to the Chewy First Quarter 2021 Earnings Conference Call. All participants will be in a 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 a 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, Vice President, Investor Relations. Please go ahead.

Thank you for joining us on the call today to discuss our first quarter 2021 results. Joining me today on the call 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.chewy.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 Chewy's future prospects, financial results, business strategies, investments, 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 Chewy's 10-Q 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 measures 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 10Q. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise noted, results discussed today refer to first quarter 2021 and all comparisons are accordingly against the first quarter of 2020. Finally, this call in its entirety is being webcast on our investor relations website. 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.

Thanks, Bob, and thanks to all of you for joining us on the call. 2021 is already turning out to be an exciting and busy year for us at Chewy. our business momentum and strong customer engagement continue, and that gives us the confidence to raise our full year 2021 guidance for net sales and adjust it even the margin expansion. Along with our financial results, today I will share with you some exciting new launches that highlight our ongoing pace of innovation and further strengthen our customer value proposition. I will also share with you some of the headwinds we are facing and update you on the actions we are taking to protect customer experience and business continuity. After that, I will turn the call over to Mario to discuss our first quarter results in greater detail and share our updated guidance. Let's start with our Q1 results. Q1 net sales increased 32% to $2.14 billion. Continued growth in our active customer base and strength in purchasing behavior drove our top-line results. While we are pleased with our net sales in the quarter, elevated out-of-stock levels were a persistent headwind throughout the quarter and reduced our Q1 net sales by an estimated $40 million. This is clearly a supply-driven situation, which we expect to abate in the second half of this year as additional production capacity comes online. Until then, we will keep actively managing our inventory and using our recommendation engines to help customers find attractive alternatives. Efficiently adding new customers to our platform and then growing their share of wallet remains a key part of our growth strategy. Active customers increased by 4.7 million or 31.6% to end the first quarter at 19.8 million customers. New customer additions remain above pre-pandemic levels and as anticipated, moderated against the peak pandemic levels of this past year. Further, retention rates remain steady as the 2020 cohort matures into their second year on our platform. Taking a broader view, over the past two years, we have increased our active customer base by 8.4 million, or 75%. The practical effect of this is that the weighted average tenure of our active customer base is just under two years. In other words, our average active customer is still squarely on the left side of their lifetime spending curve with us. For context, our customers historically spend over $400 with us in their second year, compared to approximately $700 in their fifth year, and almost $900 in their ninth year. As such, we believe that we still have significant future share of wallet gains left to realize from a substantial component of our customer base. First quarter net sales per active customer, or NESPAC, increased $31, or 8.7%, to reach $388, a meaningful acceleration over our 2020 growth rate. In reviewing the purchase behavior of the Q1 customer cohort, we saw the same kind of positive engagement levels and basket-sized trends that we saw throughout 2020, which helped drive a 13% year-over-year increase in Q1 average spend per new customer. Topline momentum translated into improved margin performance. Q1 gross margin was 27.6%, reflecting a 420 basis point increase, approximately half of which is the result of our efforts to improve customer engagement and drive structural growth in our hard goods, proprietary brands, specialty, and healthcare verticals. The remainder came from normalizing freight costs against the COVID-related spike last year and the muted pricing and promotional environment. As we executed Q1 with rigor, we faced labor shortages in our fulfillment centers, or FCs, similar to those being faced by many companies nationwide. To offset these headwinds, we did a few things concurrently. We invested in higher wages and short-term incentives, which, to some degree, helped overcome FC staffing constraints. We also implemented other operating cost disciplines. For example, we developed algorithms which enabled real-time improvements in inventory receipts and order allocation, leading to increased density in pick and pack across our FC network. We introduced part-time shifts to better optimize interval-level labor forecasting and provide more flexibility options to our team members. These activities helped keep operating expenses in check, and this operating discipline, when combined with our strong gross margin performance, drove meaningful improvements in flow-through as Q1 adjusted EBITDA came in at $77.4 million, and adjusted EBITDA margin increased 340 basis points to 3.6%. In addition to these strong financial results, I am also tremendously proud of the broader transformations underway at Chewy. In 2018, we were mostly a provisor of food and treats. Today, just three years later, we are delivering a multidimensional customer experience that spans food, treats, personalized accessories, healthcare, and most recently, services. And our pace of innovation and quality of execution has never been stronger. With that in mind, I'd now like to spend a few minutes sharing some of the many things that are going on inside Chewy today. We are excited about these because they represent continued progress in our effort to improve experience for our pet parents and partners and drive higher engagement with them. Additionally, they position us well to capture the large and growing opportunity in front of us. First, we continue to make meaningful strides in upgrading our technology stack and architecture. In Q1 2021, we relaunched the Chewy.com homepage and other stops in the shopping funnel as single-page applications. This enhancement allows us to offer a more targeted and customized shopping experience to our customers, which we are already starting to take advantage of. Once fully implemented across our website, these features will unlock hyper-local and enhanced personalized recommendations that will improve the shopping experience and, through their revenue-enhancing functionality, support our efforts to increase customer share of wallets. We are also excited to announce our entry into the fresh and prepared pet food space with new selections from the segment's leading brand, Fresh Pet, and our premium proprietary brand, Tileys. Our highly trained and best-in-class customer service team, coupled with our personalized search and discovery features, make Chewy the right platform to drive customer adoption in this category, given the increased level of education and awareness pet parents need when deciding among the many pet food options that are available today. To date, we have already developed and patented new sustainable packaging that allows us to preserve product quality throughout the customer delivery process. We are currently in beta mode and will soon launch our initial distribution in three geographies, covering approximately 60% of Chewy's customer base. And we intend to grow both our fresh catalog and expand geographic distribution as we scale this business. We are enthusiastic about the fresh and prepared foods categories and the opportunity to serve new customers and expand assortment choices for our existing ones. With this launch, fresh joints connect with the vet and our compounding pharmacy on the growing list of recently launched offerings that expand our TAM. Over the past few years, we have expanded our pet health and wellness offerings to include a wide spectrum of products and services, which now include OTC medicine, vet diet, pharmacy, and most recently, pet descriptions, compounding, and telehealth. Collectively, we now call this still-expanding effort Chewy Health. which consumers and veterinarians are starting to recognize as a brand that delivers innovative solutions designed to improve the health of every pet and empower those who care for them. We continue to gain traction with our recently launched innovations, Connect with a Vet, Compounding Pharmacy, and Petscriptions, which is our proprietary prescription management system for veterinarians. Recently, we enabled the video chat functionality for our proprietary telehealth solution and expanded its reach. Connect with a Vet is now available via text or video chat seven days a week until 11 p.m. East Coast time, 365 days a year, which provides important coverage on nights, weekends, and holidays when care is often difficult to find. These upgrades have significantly improved customer experience and are driving higher customer adoption of this service. Net promoter scores for Connect with a Vet remained strong, and over 85% of customers who rated the service in Q1 gave us perfect 10 out of 10 scores. Our compounding pharmacy business continues to expand. We now publish 1,800 compounding SKUs, servicing dogs, cats, and as of April, horses. We also achieved a major milestone recently by earning our PCAP accreditation, which is a gold standard for quality and safety compliance in the compounding industry. As planned, our entrance into compounding is improving customer access to pet health and wellness services and growing our customer base. Approximately two-thirds of our compounding customers are new to Chewy Health, including over 20% that are new to Chewy overall. As anticipated, compounding is also emerging as a strong recurring revenue driver with over 60% of outbound shipments already going through auto-ship. And on prescriptions, I am pleased to share that close to 7,000 clinics and veterinarian partners are now utilizing this product to simplify and automate all prescription management tasks with an intuitive, easy-to-use digital solution. This helps to reduce friction, improve veterinarian efficiency, reduce in-clinic costs, and enhance customer experience for both the veterinarian and the patient. We will share more about our ongoing work in this space in our Q2 call in September. Chewy Health is the only brand that blends technology and consumer innovation in pioneering modern pet health solutions for everyone. Our mission within Chewy Health is to make pet healthcare more affordable and accessible by developing value-added services and products that keep pet parents and veterinarians at the center of the equation. We are just getting started and will keep you updated on our progress. The same spirit that animates our quest to make pet healthcare more affordable and accessible also drives our charitable efforts through a program we call Chewy Gives Back. Chewy Gives Back operates under a mission to make the world a better place for pets and the communities that serve them. To this end, last year we made approximately $35 million of in-kind donations to shelters and rescues, providing them with the critical supplies they needed to perform their important work on the frontlines. Additionally, I am excited to share with you that last week we launched our nationwide pet adoption services that enables millions of Chewy customers and not-yet-Chewy customers to discover and adopt a pet directly through Chewy's website. As with everything we do, we believe that customers will find this new service to be an engaging and bar-raising experience. Over 6,000 shelters and rescues have already signed up, and the list continues to grow rapidly. The launch is supported with full wishlist integration, which enables shelter and rescues to list their needed supplies on Chewy.com for customers to conveniently discover, donate, and have them shipped directly to the shelter. Our launch of the pet adoption service and features such as Wishlist again shows how our innovation with customers continues to extend to our partners and service community and is in complete harmony with our mission of being the most trusted and convenient destination for pet parents and partners everywhere. Now, before I wrap up, let's quickly visit growth across our fulfillment center networks. As our top-line momentum continues, we are investing in our distribution network to stay ahead of the growth curve and enhance customer experience. At the end of Q1, we opened our 12th Fulfillment Center located in Lewisbury, Pennsylvania. This facility primarily specializes in carrying our bulkier assortment items like cat trees and dog crates and or items that ship in their original containers. I'm also pleased to share the news that we are expanding the capacity of our Phoenix, Arizona Fulfillment Center this summer and also that we will open our third automated FC and 13th FC overall in Reno, Nevada next year. This new facility, along with the Phoenix expansion, will further reduce ship times, improve customer experience, and help reduce costs. I will end my comments by reiterating my optimistic outlook for the balance of 2021. We continue to execute against our growth roadmap by expanding our customer base, increasing share of wallet, growing our TAM expanding verticals, and launching new ones. While supply chain and labor market conditions remain challenging, we are successfully managing through these headwinds and still driving significant year-over-year improvements in gross margin, adjusted EBITDA, and free cash flow. I am incredibly proud of the determination and focus of our teams and their ability to accelerate our pace of innovation while consistently delivering strong top-line and bottom-line results for our shareholders. With that, I will turn the call over to Mario.