Chewy, Inc.

Good afternoon. Thank you for attending today's Chewy fourth quarter 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, Bob LaFleur with Chewy. Please go ahead.

Thank you for joining us on the call today to discuss our fourth quarter and full year results for fiscal 2022. 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.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 CHIE's future prospects, growth, financial results, business strategies, industry trends, and our ability to successfully respond to macroeconomic conditions and business risks. 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 CHIWIs 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 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 8-K earlier today and then 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. The 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. Our fourth quarter results cap an incredible year. Against the backdrop of a rapidly changing operating and economic environment, Chewy produced record high revenue, profitability, and free cash flow. Chewy's dedication to serving pet parents and partners with a wisening ecosystem of offerings led to another year of market share gains in the pet category, which once again demonstrated its historical resilience despite evolving macro conditions. Looking ahead, we continue to be excited about the growth opportunities for our business. The pet category has a US total addressable market that is over 130 billion, which has grown consistently through the ups and downs of economic cycles. Importantly, we continue to see significant white space for expansion, and we remain committed towards innovating at a high pace across both new product and service offerings, as well as technological and operational advancements. Most importantly, our strategy remains focused on relentlessly advancing our mission of being the most trusted and convenient destination for pet parents and partners everywhere. Now, let's review our Q4 and full year 2022 performance, followed by a discussion of our operating philosophy. After that, I will turn the call over to Mario to discuss our results in greater detail and share our 2023 guidance. Q4 net sales increased 13% to $2.71 billion, which brought our full-year 2022 net sales to $10.1 billion, reflecting annual growth of approximately 14%. Non-discretionary categories, including consumables and healthcare, remain the pillars of strength, with the offset coming from discretionary categories such as hard goods. Our top-line expansion reflects our success in managing the dynamic pricing environment as well as the recurring nature of our business model and our ability to expand share of wallet from our customers over time. Autoship customer sales increased 18% and generated 73% of our Q4 net sales, representing a 260 basis point increase over the prior year period. We further deepened our customer engagement with net sales per active customer, or NESPAC, growing 15% year-over-year to reach nearly $500 in Q4. With nearly 60% of our customers having joined our platform within the last three years, we believe there remains significant runway for our customers to spend progressively more with us the longer they stay. Moving on to customers, we ended Q4 with 20.4 million active customers. We believe the modest sequential decline in active customers reflects the continued softness in discretionary spending experienced across the broader economy as well as the residual impact of attrition from our 2020 and 2021 cohorts. We anticipate returning to positive active customer growth this year and expect NESPAC will continue to strengthen. Turning to profitability metrics, fourth quarter 2022 gross margin expanded 270 basis points to 28.1%. The significant improvement in year-over-year Q4 gross margin was driven by favorable pricing comps relative to Q4 of last year, and to a lesser degree by our ongoing supply chain transformation. Full year 2022 gross margin improved by 130 basis points to 28%, in line with the high end of our long-term guidance. Continued pricing strength combined with the progress we have made in our supply chain initiatives enabled us to deliver these results. In 2023, we are excited about our ongoing work to grow high margin verticals, many of which remain in early stages and are expected to provide gross margin tailwinds in the current year and beyond. At the same time, we expect these contributions to be balanced against our expectation of continued suppressed demand in the discretionary categories such as hard goods and the flexibility that we wish to retain to manage overall demand elasticity. To elaborate on demand elasticity, considering the magnitude of price increases that consumers have already experienced and may yet continue to experience, we will continue to take a surgical approach to optimize pricing. Additionally, with supply chains recovering, we are closely monitoring our catalog to ensure we remain competitive in light of current consumer mindset. At this point in the year, we expect the overall result of these drivers to produce a net neutral impact on gross margin in 2023. That said, over a longer time horizon, given the nascency of many of our initiatives, such as private brands, Chewy Health, including insurance, sponsored ads, and more, we believe there is additional runway left for incremental gross margin expansion. Staying on profitability, Q4 adjusted EBITDA was $92 million, and adjusted EBITDA margin was 3.4%, an increase of $120 million and 460 basis points, respectively. The strong gross margin performance and SG&A leverage were the primary drivers of Q4 adjusted EBITDA growth. We saw these same key drivers manifest themselves in our full year 2022 results as adjusted EBITDA nearly quadrupled from 2021 levels to over $300 million. And adjusted EBITDA margin expanded 210 basis points to 3%. Moving away from fiscal 2022, Let me now spend some time sharing our operating philosophy for 2023 and beyond, as well as various growth and margin-enhancing initiatives that we plan to launch. Delivering long-term profitable growth remains our North Star. Over the past four years, we have increased revenues from $3.5 billion to over $10 billion, while concurrently expanding gross margins from 20% to 28% and adjusted EBITDA margins from negative 6.5% to positive 3%. These results are both a testament to our team's focus on scaling our core businesses and our ability to ideate new ways to improve customer experience or to launch new services for customers and partners and following through with disciplined high bar execution. Our 2023 strategy is consistent with this operating philosophy. Scale our existing cost base and simultaneously make purposeful investments to drive sustainable growth and profits over a multi-year period let me provide a few examples of each of these starting first with how we have already driven cost leverage in our business and how we plan on further scaling our existing cost base the supply chain transformation initiatives that we began in 2021 have helped us expand our gross margin while simultaneously improving customer experience as a reminder These efforts included areas such as import routing, inventory planning and placement, and middle mile. Additionally, our decision to invest in fulfillment center automation in 2019 is now providing significant leverage in SG&A with meaningful upside left to go. In 2023, we plan to continue scaling these efforts and drive further SG&A leverage. For starters, given the success of our automation initiatives, and the productivity benefits we are realizing in ramping our first three automated facilities, we have made the decision to close our two oldest FCs, both of which are non-automated assets. Each of the facilities are located near one of our new automated FCs, which allows us to combine operations and offer team members the ability to transfer locations. We believe that this action will enable incremental order volume to flow through our automated facilities which we expect will allow us to realize approximately 50 basis points of additional SG&A leverage in 2023. Furthermore, we are on track to open our fourth automated facility in Nashville in the first half of this year. The punchline here is that in 2023, we expect to continue benefiting from the strategic investments we made just a few years ago in warehouse automations. Moving forward, we remain committed to demonstrating strong operating discipline in running the business and tightly managing expenses along the way. Now, moving on to the investment and innovation part of our operating philosophy. In addition to leveraging our existing cost base, in 2023, we plan on making conscious investments in areas that we believe will create sustainable growth and profits over the long term and generate high ROI for our shareholders. Such areas include our higher margin verticals where we plan to accelerate growth. Additionally, having strengthened our fundamentals over the past few years, we believe that the time is right to bring the Chewy brand and our superior value proposition to pet parents outside of the U.S. We are actively building the capabilities and team to launch our first international market over the next few quarters. We expect this important development to unlock meaningful incremental TAM and we are excited to introduce Chewy to a broader customer base with whom we believe our brand and mission will resonate strongly. We look forward to discussing more specific plans with you on our Q1 call. Our operating history demonstrates a strong track record of making such capital allocation decisions. Chewy Pharmacy is a powerful example of investment and execution behind a new vertical that began four years ago and is now contributing superior growth and profit at scale today we operate the largest pet pharmacy in the u.s as we have demonstrated in the past we plan to remain highly disciplined about our level of commitment to and support off the investments that we seed and will continually evaluate them against our expectations in closing I'm proud of our team's relentless execution that has enabled us to deliver strong results over the course of another dynamic year. As we enter 2023, I remain incredibly optimistic about our roadmap ahead. With that, I will turn the call over to Mario. Mario?