Chewy, Inc.

Good day and welcome to the Chewy Third 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 touch-tone 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 of Investor Relations. Please go ahead.

Thank you for joining us on the call today to discuss our third quarter 2021 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 earlier today, have been posted to the Investor Relations section of our website, investor.chewy.com. On our call today, we will be making forward-looking statements, including statements concerning CHUI'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. 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 financial measures to the most directly comparable GAAP financial measures are provided on our investor relations website and in today's SEC filings. These non-GAAP measures are not intended as substitutes for GAAP results. Additionally, unless otherwise noted, results discussed today refer to third quarter 2021, and all comparisons are accordingly against the third 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 submit.

Thanks, Bob, and thanks to all of you for joining us on the call. Demand and customer engagement remained strong throughout the third quarter. Q3 net sales were $2.21 billion, adding 24% growth on top of strong comps last year. These top-line results and our continued growth this year demonstrate the durability of our business model and the overall strength of the pet category. Our metrics measuring demand and customer engagement, such as site traffic, new customer acquisition, order volume, order size, purchase frequency, and net sales per active customer, or NESPAC, were strong throughout the quarter. We ended Q3 with 20.4 million customers, a year-over-year increase of 15%. Consistent with the trends we have seen throughout 2021, gross customer ads continue to exceed pre-pandemic levels and retention rates continue to track in line with historical levels. More importantly, the strength and quality of our new and active customers continues to improve. For example, we estimate that the expected lifetime values of the Q3 2021 new customer cohort is 12% higher than their pre-pandemic counterpart. Additionally, third quarter order ship customer sales as a percent of net sales increased 140 basis points to 70.6%, reaching a new company high. And last but not least, the average order value for new to Chewy customers was 6% and 13% higher than the Q3 2020 and Q3 2019 cohorts, respectively. These positive new customer behaviors flow through to NESPAC, which is an important gauge of overall customer engagement and lifetime customer contribution. Here, we are pleased to share that the third quarter NESPAC increased 15% to $419. This reflects year-over-year growth of $56, which is a record increase for us. It is exciting for us to see NESPAC growth accelerate as a large 2020 cohort matures and our expanded customer choices and increased discoverability expedite share of wallet gains. Even with these gains, we are still only capturing a fraction of the average U.S. pet spend per household from the over 20 million loyal customers who deem Chewy their preferred destination for everything pet. And so, further expanding NESPAC is an important piece of our growth and profitability flywheel. We are encouraged to see our efforts bear fruit in this area, and at the same time, we are highly motivated and remain focused on driving additional NASPAC growth. Moving on to gross margins. Third quarter gross margin expanded 90 basis points year over year to 26.4%. This is something we're proud of achieving when operating in the present challenging environment. As we executed Q3, we observed two factors that affected gross margin that had been largely absent through the first half of the year. elevated inbound freight costs, and product cost inflation. Together, these two factors, net of a favorable mix shift and pricing adjustment, muted gross margin expansion in the quarter by approximately 100 basis points. The elevated inbound freight costs reflect macro trends that are impacting imports and the flow of shipments across the country, and we believe these costs will remain elevated in the near term until the global supply chain disruptions begin to abate. On product costs, we saw inflation ramp up on an expanded assortment of inventory items throughout the quarter. In consumables-led categories, many large national brand suppliers have raised MAP to pass through the higher product costs, and we are adjusting our prices accordingly. In hard goods-led categories, which are typically not governed by MAP pricing, we have seen a greater delta between cost and price, which is primarily driven by higher demand elasticity of products in these categories. Given the inherent price transparency across online channels, this lag between higher cost inputs and the eventual rationalization of consumer-facing prices creates a short-term drag on profitability. Over time, we expect increased prices will offset higher product costs and negate any long-term negative impact to gross margin without impacting customer demand. On the advertising and marketing front... We reversed the sequential spike that we saw last quarter and delivered higher marketing efficiency, even as customer acquisitions remained steady and Nespact ramped nicely. Q3 marketing expenses scaled to 6.8% of net sales. The drivers of improved efficiency in Q3 are a combination of ad costs correcting from their Q2 high and sharper, more targeted execution from our team across channels and across customer segments. Our efforts, which included predictive propensity modeling while taking macro conditions into account, proved effective in aligning customer segments and maximizing acquisition LTV. The results of this approach were twofold. First, we saw a strengthening of traffic or sessions to our website, which we converted at a higher rate, both sequentially and year-over-year. Second, we also improved efficiency across various channels and reduced CPA in the quarter by 12% sequentially. Moving on to SG&A, the higher labor costs and related costs we saw in SG&A during Q3 essentially offset our gross margin improvement and marketing efficiencies, leading to Q3 adjusted EBITDA margin that was flat compared to last year. Shifting gears from in-quarter performance to innovations across CHUI, I'd like to share some of the latest developments in our growing CHUI Health franchise. I'm pleased to announce that we have expanded access to our popular Connect with a Vet telehealth service to our entire base of 20 million active customers, plus any new to CHUI customers on a paper consult basis across chat and video. Access for Autoship customers remains free of charge, and now non-Autoship customers can also enjoy the peace of mind that comes from having nationwide access to professional veterinarian care 15 hours a day, 365 days a year. Continuing our innovation streak in Chewy Health, we recently announced that we will offer an exclusive suite of pet health insurance and wellness and preventative plans in partnership with Tropanion, starting in spring 2022. Since its inception, the mission of Chewy Health has been making pet health care more accessible and affordable, and these insurance and wellness plans were designed to do both. In designing them, we wanted to give pet parents the peace of mind to always say yes when it comes to taking the best possible care of their pets. We will share more details on future earning calls. Finally, in Chewy Health, our rollout of Practice Hub is continuing to generate buzz and interest in the industry. As a reminder, with Practice Hub, we have designed a complete e-commerce solution for veterinarians that can be integrated with their existing practice management software. Using our proprietary app, vets can easily create, pre-approve, and manage Rx and vet-type prescriptions, all in one place. Then they can earn revenue as a seller on our marketplace when customers place an order in-clinic or purchase their items at home on Chewy.com, with Chewy handling all of inventory, fulfillment, shipping, and customer service. Our managed initial rollout of Practice Hub continues, with over 50 clinics participating on an invitation-only basis, and we continue to receive positive feedback from veterinarians and staff using the product. we have a healthy pipeline of hundreds of interested users, ranging from independently operated practices to multi-clinic veterinary groups. We are excited about the initial success of Practice Hub and look forward to expanding the rollout to the broader vet community. When evaluating the potential contribution of Chewy Health to our long-term objectives and within the $35 billion pet health TAM, it is worth emphasizing that presently less than 15% of Chewy customers are Chewy Health customers. So the opportunity within our base of 20 million customers is meaningful, not to mention the opportunity from pet parents who are not yet chewy customers. Integrating new healthcare services like insurance, wellness plans, Connect with a Vet, and Practice Hub with our existing pharmacy operations, where we have nearly tripled our run-rate pharmacy revenue over the short 10-quarter period since our IPO, will help us drive deeper penetration into this vertical with our customers and vet partners. I'd also like to take a moment to reiterate that we continue to manage Chewy for the long term by looking beyond the near-term noise in the macro environment today and instead by sticking to the strategic roadmap which has been Chewy's North Star since our IPO. Key components of that roadmap include customer lifecycle management, which includes both acquiring customers and expanding their share of wallet. It also includes growing our private label brands and expanding our healthcare offerings. Since 2018, we've nearly doubled our customer base and increased nest pack by 30%. Our private label catalog has more than quadrupled, and its penetration in the hard goods business has increased to nearly 20%. Additionally, I just outlined the progress we are making in Chewy Health with our B2C and B2B offerings to customers and veterinarians. Overall, when evaluating Chewy's progress from a customer's lens, we now offer a rapidly growing multidimensional customer experience that spans consumables, hard goods, private label brands, and an emerging full ecosystem of health offerings. This makes our customers stickier and gives them an opportunity to strengthen their engagement and spend with us. And finally, while we have not made any announcements yet on our last two roadmap components, non-vet services and international expansion, both remain questions of when and not if. So looking back, we have accomplished a lot and have much to be proud of. But looking forward, tremendous opportunity still lies ahead, and in so many ways, we are just getting started. With that, I will wrap up by reiterating that we are pleased with our Q3 performance and our ability to deliver strong results in the face of disruptions and challenging macro conditions. Looking beyond these near-term challenges, there is plenty of reason for optimism. Consumer engagement is high, business momentum is strong, and we believe the long-term positive trends of more pet ownership, higher per-pet spending, and increased e-commerce penetration are as strong as ever. Amidst this, our ability to retain the significant revenue gains we recorded last year during the height of the pandemic, and then adding meaningful growth on top of that this year, clearly reflects the soundness of our long-term strategy and our efforts to build an enduring franchise to serve millions of loyal pets and pet parents. In short, we are bullish about Chewy's future. And with that, I'll turn the call over to Mario.