Chewy, Inc.

everyone. And thank you for joining today's Chewy third quarter fiscal year 2022 earnings call. My name is Dante and I'm the operator for today's call. All lines will be muted during the presentation portion of today's call when an opportunity for questions and answers at the end. If you would like to ask a question, it is star one on your telephone keypad. I would now like to pass the conference over to our host, Mr. Robert LaFleur, Vice President of Investor Relations. Sir, the floor is now yours.

Thank you for joining us on the call today to discuss our third quarter 2022 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 Chewy's future prospects, financial results, business strategies, 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 factors and other information in CHIE's 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 third quarter of 2022, and all comparisons are accordingly against the third 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 poll today. Building on the momentum we reported in the second quarter, Chewy's Q3 results showed accelerating double-digit top-line growth, a sequential increase in active customers, sustained gross margin expansion, and solid free cash flow generation. We experienced strong demand throughout the third quarter, especially across our non-discretionary categories, which provided a solid foundation for our growth. The resilience of the underlying demand in these categories, coupled with our ability to grow customer share of wallet, again enabled Chewy to outperform broader industry trends and take incremental market share. Q3 net sales were $2.53 billion, a year-over-year increase of 14.5%, and a sequential acceleration from the 12.8% growth in the second quarter. Our top-line results were anchored by the predictable nature of our auto-ship customer sales, which grew nearly 19% to 73.3% of net sales, And by rising customer engagement as measured by net sales per active customer or nest pack which grew nearly 14% to $477 Digging a little deeper into our Q3 net sales non discretionary categories like core food and healthcare collectively made up over 83% of our net sales and where the primary growth drivers reflecting healthy unit demand and improved in stock levels. Within discretionary categories, hard goods showed relative improvement in Q3, with sales declining 5% year-over-year, which is a 400 basis point improvement versus the second quarter year-over-year performance. We remain confident that hard goods sales will return to their growth path as the economic environment improves. Taking a longer-term view, over the last three years, our third-quarter hard goods sales are up 70%, gross profit has nearly doubled, and gross margin has expanded by over 400 basis points. Shifting to overall company profitability, Q3 gross margin expanded 200 basis points year over year to 28.4%, which is a new quarterly high. Our gross margin performance this quarter reflects the favorable comps from Q3 last year, the continuation of strong pricing trends without any noticeable impact on demand, and the incremental benefits we realized from our ongoing supply chain and logistics transformation. Q3 adjusted EBITDA was $70.4 million, and adjusted EBITDA margin was 2.8%, an increase of 64 million and 250 basis points respectively. The primary drivers of adjusted EBITDA growth were higher gross margins and accelerated scaling of SG&A, results that showcase our ability to get big fast and get fit fast as we simultaneously drive top line growth and expand margins. Moving on to customers, we ended Q3 with 20.5 million active customers. Gross customer additions accelerated 6% sequentially and are up 9% compared to Q3 2019. Consistent with recent quarters, customer retention rates remain stable as we continue to work through the initial attrition phases of our pandemic-era cohorts. In the third quarter, as consumers shifted their focus away from summertime pursuits like travel towards the upcoming holiday season, we saw opportunities to increase our level of marketing investment compared to recent quarters. While ad supply remained tight, we found ROI-positive opportunities consistent with our philosophy to maximize LTV payback, and we invested accordingly. Now, let me update you on some of our latest innovations as we continue to build out the Chewy Health ecosystem, expand into new and exciting high-margin verticals, and make meaningful strides in our supply chain transformation. Starting with Chewy Health, we recently announced the expansion of Care+. our exclusive suite of insurance and wellness offerings with plans provided by Lemonade. Combining the products from Lemonade and Cropanion under the Care Plus banner enables us to diversify our product offerings across the full spectrum of price points and coverage options in order to meet the needs of a wider range of pet parents. We are targeting a nationwide launch of our Lemonade offerings beginning in spring 2023. We remain bullish on the pet insurance space and our ability to drive customer acquisition. and deepen customer engagement. Elsewhere in Chewy Health, we recently launched Vibeful, our first private brand in the pet wellness category. Vibeful is a line of supplements featuring products from multivitamins to hip and joint supplements. The non-prescription pet health and wellness category has an estimated 2022 TAM of over $2.4 billion, and given the increased consumer focus on wellness and the ongoing trend towards pet humanization, We believe this launch gives us another opportunity to strengthen our connection with customers and to drive top and bottom line results. Moving to new lines of growth, we recently launched the beta version of our sponsored ads program several months ahead of schedule. Sponsored ads are dedicated product placements on Chewy.com that promote specific products from select vendors. With these ads, our suppliers can seamlessly advertise to our 20 plus million active customers. We believe sponsored ads will enable us to scale contextual advertisements, which in turn should deliver highly relevant products to customers and high margin revenue to our business. The full launch is on track for 2023. And last but not least, we continue to make excellent progress transforming our supply chain and logistics operations and developing world-class capabilities across our organization. More importantly, these efforts produced meaningful operational and financial benefits throughout the company in Q3. First, our automated FC network is handling an increasingly larger portion of our outbound shipping volume at progressively lower variable costs per order. In Q3, we shipped nearly 30% of our volume through our automated FC network, up from 10% in Q3 last year. Our inventory rebalancing efforts to enhance software and planning capabilities have improved in-stock levels across our network, which has lowered costs by reducing average shipping distances by 25% compared to last year, and enhanced customer experience by reducing click-to-deliver times and improving order accuracy. These efforts have been complemented by our middle-minded initiative, which also cuts average shipping distance and reduces costs. Finally, Our two new import routing facilities are on pace to handle 90% of our import volume by the end of 2022, which further enhances our ability to optimize inventory distribution across our FC network and reduce inbound freight costs. Collectively, the supply chain and logistics efforts have allowed us to mitigate freight costs, begin leveraging our SG&A expenses a quarter ahead of schedule, and improve customer experience on multiple fronts. Let me conclude with the following. The operating environment remains dynamic and evolving. What hasn't changed is how much pet parents value the enduring companionship of their pets, and it is this emotional bond that sustains the pet category through all phases of the economic cycle. Chewy's compelling value proposition, backed by low prices, personalized service, and delivery convenience across a broad selection of products, continues to resonate with our customers. This enables us to build the long-term trust that in our view allows us to outgrow our competitors and take market share. Concurrently and unequivocally, our team's relentless focus on execution and operational excellence allows us to take this growing market share and transform it into incrementally higher profitability and in growing free cash flow. Before I turn the call over to Mario, I would like to share an important development with you. After nearly eight years at Chewy, Mario has decided to retire from the company. Now, it's too soon to plan his retirement party or order the proverbial gold watch, although those things will be appropriate sometime next year. As of today, we have no specific date in mind for Mario's departure, and our intent right now is simply to inform you of our transition plans. We have begun a search for top-tier internal or external candidates for this important and strategic position. In the meantime, it's business as usual, and we are grateful to have Mario's services for as long as necessary to find and ramp a worthy successor. Please understand that this is not a matter about which we will provide regular updates, and we don't plan to comment about this until we have a successor in place. With that, I will turn the call over to Mario. Mario?