Chewy, Inc.

Good afternoon. Thank you for attending today's Chewy Q2 fiscal year 22 earnings call. My name is Hannah and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Robert LaFleur, Vice President of Investor Relations. Please go ahead.

Thank you for joining us on the call today to discuss our second quarter 2022 results. Joining me today are Chewy's 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 on our website, investor.chewy.com. On the call today, we will be making forward-looking statements, including statements concerning Chewy's future prospects, financial results, business strength, investments, industry trends, and our ability to successfully respond to business risks, including those related to inflation and its effect on the economy and our industry. 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 factor section and other information in CHEWIS 10-Q and 8-K filed earlier today. and in our other filings with the SEC, including our annual report on Form 10-K. 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 today's SEC filings. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise noted, Results discussed today refer to the second quarter of 2022, and all comparisons are accordingly against the second quarter of 2021. 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 thank you all for joining us on the call today. We are proud of our Q2 performance and ability to deliver double-digit top line growth and margin expansion during a period when accelerating inflation placed incremental pressure on an already stressed consumer. Across the PEP category, pricing escalated throughout the second quarter. Consumers in the PEP category responded to growing economic uncertainty by curtailing some of their purchase activity, leading to industry-wide declines in unit volume. Even as consumers pulled back in select areas, Chewy outperformed broader industry trends on the strength of our market leadership in non-discretionary recurring revenue categories like food and healthcare, the product categories that are most important to pet parents. Chewy grew Q2 net sales by 13% to $2.43 billion, reflecting our ability to drive steady demand in non-discretionary categories, demand that is anchored by the superior value proposition that we offer pet parents and the predictable nature of our auto-ship program. Collectively, these categories represent more than 80% of our overall business, which provides us with distinct structural advantages in the current environment. At the same time, we saw software demand in the second quarter for discretionary products with longer replacement cycles, such as hard goods, which offset some of our positive momentum in food and healthcare. Altogether, Chewy's strength and competitive advantages in the pet category were evident in Q2 as customer engagement metrics, such as Autoship and Nest Pack, set new records at 73.1% of net sales and $462, respectively. Shifting to profitability, Q2 gross margin was 28.1%, an improvement of 60 basis points both year-over-year and sequentially. This improvement was led by pricing, which continued to strengthen in the second quarter as the favorable delta between price and cost increases widened by approximately 100 basis points compared to last quarter. Additionally, moderating fuel costs and our ongoing efforts to improve supply chain and logistics capabilities also contributed to the strong second quarter gross margin performance. Specifically, during the second quarter, we improved system-wide inventory placement which reduced average delivery distance, improved delivery speed, lowered costs, and enhanced customer experience, which I will expand on shortly. Q2 adjusted EBITDA was $83.1 million, and adjusted EBITDA margin was 3.4%, a year-over-year increase of 230 basis points and a sequential improvement of 90 basis points, reflecting our gross margin expansion, greater marketing efficiency, and improved execution in several SG&A functions that we will detail shortly. Moving next to our customers, we ended the quarter with 20.5 million active customers in line with the expectations we shared on our last call. Our Q2 net ads reflect gross customer additions that have come off their pandemic highs and the retention behavior of the large cohorts we acquired during the pandemic. The number of gross customers that we added in Q2 2022 was mid-single-digit percentage points higher than their comparable pre-pandemic cohort from Q2 2019, even as softer demand across discretionary categories put some pressure on customer acquisition. Once we fully cycle the effects of elevated pandemic pet adoptions and the macro environment recovers, we believe the customer acquisition headwinds related to discretionary demand levels will abate. Additionally, retention rates on the customers we acquired during the pandemic in 2020 and 2021 are still running low single-digit percentage points lower than their comparable pre-pandemic cohorts, which continues to affect total net ads due to the large size of these cohorts. Having said this, we are encouraged to observe that the complexion of the new cohorts that we have acquired so far in 2022 is more consistent with the long-term retention profile of our pre-pandemic cohorts. Notably, we believe that the dynamics that are impacting both growth ads and retention are temporary in nature. And it is important to remember that over the long term, our business model produces incredibly sticky customers, which results in retention curves that stabilize after the first two years of a customer's relationship with Chewy. Now, moving on from financials, let me update you on several innovation areas across Chewy. Let's start with supply chain logistics and transportation. As I have shared over previous earnings calls, we have multiple initiatives underway to improve profitability and customer experience by improving inventory placement, reducing inbound and outbound freight costs, and driving incremental fulfillment cost leverage through automation. To this end, we successfully launched our third automated fulfillment center last month, located in Reno, Nevada. The benefits from automation continue to expand across our network, and our pace of realizing these benefits continue to accelerate. For example, based on the learnings from our first two automated FC launches, we expect that it will take Reno half as long to ramp up to its comparable performance benchmarks as it took for our first automated FC. As we expand our network of automated FCs, these facilities are handling an increasingly larger share of our outbound shipment volume and they are doing so at progressively lower variable costs per package. For example, during the second quarter, nearly 25% of our outbound network volume shipped from our first two automated FCs at a variable cost per unit that was approximately 15% lower than our legacy network. By this time next year, a third of our outbound volume is expected to ship from automated FCs. Based on these trends, As we have shared with you in the past, we are confident in our ability to realize the 40 to 60 basis points of targeted SG&A leverage over time from our three existing automated FCs. We expect to benefit from further SG&A leverage as we open additional automated FCs in 2023 and beyond. On the transportation front, we recently launched our second import routing facility, this one on the East Coast. With facilities on both coasts, we are now able to optimize freight distribution to our FCs and reduce inbound freight costs on more than three quarters of our import volume. Elsewhere in transportation, Chewy Freight Services, or CFS, also continue to grow in the second quarter. As a reminder, CFS is our line haul initiative where we operate a portion of our own middle mile network. In Q2, we carried triple the volume that we did last quarter, which led to reduced costs and improved delivery performance. Looking forward, we will keep adding capacity to this program throughout the remainder of the year. Combined, these automation and transportation initiatives are generating savings in cost per package and improvements in delivery performance and customer experience. Next, let's move on to Chewy Health and the progress we are making in our mission to make pet healthcare more affordable and accessible and to improve the lives of pets and pet parents. First is the successful public launch of Care Plus, our wellness and insurance program. After a two-state soft launch in June, we are now up and running in 31 states as of today, with expectations to complete our nationwide rollout by the end of the year. While it is still early days, we are pleased with the initial customer response to our bespoke insurance and standalone wellness plans. Innovations like Care Plus that improve customer experience, increase engagement, and enhance retention are the cornerstone of our customer strategy. Our primary goal this year is to iterate and learn all we can about this new space from our customers and partners. So while Care Plus won't have a meaningful financial impact on 2022, over the longer term, we believe Care Plus will provide us an opportunity to help grow the historically underpenetrated pet insurance TAM and gain market share in a high-margin business. We look forward to sharing more with you on our insurance rollout in the quarters to come. Next is Practice Hub. I am pleased to share that we now have over 1,000 practices using the platform, up from approximately 300 in March of this year. 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. Our proprietary app allows vets to easily create, pre-approve, and manage both medications and diet prescriptions all in one place, and then earn recurring revenue when customers place an order in clinic, or purchase their items at home on Chewy.com, with Chewy handling all inventory, fulfillment, shipping, and customer service. And finally, I'd like to note an important and proud milestone for our corporate philanthropy program, Chewy Gives Back. At the end of July, we reached the $100 million mark for pet food and essential supplies donated to over 9,000 nonprofit animal welfare organizations that serve pets in need throughout the U.S. Over the past 10 years, we have donated 96 million meals and helped feed millions of rescue pets. Before turning things over to Mario, let me conclude with the following. The operating environment, including what we faced in the second quarter, remains dynamic and evolving. As pet parents pull back in some areas, they refocus their spending on categories centered on the health and well-being of their pets. The strength and durability of our value proposition position Chewy well to compete and take additional market share in this environment. Looking ahead, we believe these same strengths, which include market leadership across recurring demand categories, such as food and healthcare, and rapid innovation in service of customers, will enable us to keep winning impact, a category that has proven its durability throughout economic cycles. As we continue to navigate the challenges and opportunities ahead of us, Our team remains focused on running the business towards incremental growth and profitability and on making decisions that deepen engagement and improve customer experience for millions of pets and pet parents. To that end, we remain guided by our mission to be the most trusted and convenient destination for pet parents and partners everywhere. With that, I will now turn the call over to Mario.