Chewy, Inc.

Good afternoon. Thank you for attending today's Chewy second quarter FY23 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. I would now like to pass the conference over to our host, Jen Su, head of investor relations. You may go ahead.

Thank you for joining us on the call today to discuss our second quarter 2023 results. Joining me are Chewy CEO Sumit Singh and Interim CFO Stacey Bowman. Our earnings release and letter to shareholders, which were filed with the SEC earlier today, has 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, strategies and investments, industry trends, and our ability to successfully respond to business risk. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks, uncertainties, and other factors described in the section titled Risk Factors in our annual report on Form 10-K and other subsequent quarterly reports, 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. 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 are filed with the SEC today. 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 2023, and all comparisons are accordingly against the second quarter of 2022. 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 Investor Relations website shortly. I'd now like to turn the call over to Sumit.

Thanks, Jen. And thank you all for joining us on the call today. Before we begin, I want to introduce Stacey Bowman, our Chief Accounting Officer. As previously announced, CFO Mario Marte retired on July 28th, and Stacey is serving as our interim CFO while we continue the search for a permanent CFO. She is a respected leader who has been with Chewy for more than eight years and is deeply familiar with our finance organization, systems, and processes. Welcome, Stacey. Now, let's begin. Our second quarter carried on the positive trends we saw in our Q1 results, delivering mid-teens growth exceeding guidance as well as robust profitability. In Q2, we reported $2.78 billion in net sales, up 14%, and a 3% adjusted EBITDA margin. Consistent with our expectations, active customers were broadly flat on a sequential basis, while net sales per active customer, or Nespac, reached $530, reflecting a 15% increase. Net sales growth was underpinned by strong participation from our customers, underscoring the ever-increasing strength of the Chewy ecosystem. This momentum was evident across many of our focus areas, including Autoship, where sales continued to grow at a faster pace than our top line, increasing their share of total net sales to 76% in the second quarter. Autoship remains a key differentiator of Chewy's business model, enabling high visibility and predictability driven by recurring revenue streams while engendering customer loyalty. Additionally, we are also successfully driving discovery of our Chewy health platform. For example, cross-category penetration into pharmacy now represents nearly 20% of our overall active customer base. Elsewhere across Chewy, our teams are continuously enhancing our CRM capability improving targeting, and supporting strong customer engagement. Moving down the P&L, we delivered another quarter of robust profitability. Gross margin of 28.3% was broadly in line with expectations. As anticipated, promotional activity in the second quarter was higher than in the first quarter. However, the promotional environment on the whole remains largely rational. Adjusted EBITDA margin came in at 3% for the quarter, benefiting from our strong gross margin trends and fulfillment cost efficiencies, offset by the impact of our exciting growth investments, including our Canada expansion, which remains on track for a Q3 launch. As we indicated during our Q1 earnings call, we continue to utilize our growing free cash flow to self-fund a meaningful portion of these growth initiatives. Additionally, our automation efforts continue to be both a driver of margin improvement to date, as well as a source of continued upside. Two of our four automated facilities are still ramping and our fifth automated site is opening in early 2024. Combined, we expect them to provide additional operating efficiency in the future years. Before spending time on business initiatives, Let me share our perspective on consumer behavior in the pet industry, and in particular, how these trends may impact active customers and Nest Pack at Chewy. Coming out of the summer months, we are sensing a shift in consumer mindset towards being more discernible, and at the same time, with a higher willingness to consolidate their share of wallet to their trusted retailer of choice. This behavior is driven by a more fluid macro environment, including high levels of inflation, which have been passed through the industry over the past 18 months. Our dialogue with our suppliers confirms that these trends are permeating throughout the pet industry. At Chewy, we are in many ways insulated from these pressures, given our high-quality customer base, the mix of our consumables and healthcare businesses, which drove nearly 85% of our net sales in Q2, our powerful ownership subscription service, best-in-class healthcare experience, and our overall promise of competitive prices, convenience, and unparalleled customer service. Our loyal customers recognize these attributes as key differentiators and continue to demonstrate robust ordering behavior, which in turn continues to support our strong performance. Further to this point, we see significant potential to continue growing share of wallet with our existing customers evidenced by our strong track record of sustainable NESPAC expansion. As you may recall, we have grown NESPAC from around $330 in the year preceding our IPO to $530 this quarter, up approximately 60% over that time. While we saw a modest benefit from price increases such as of our auto-ship program, And our large customer base that spends more with us over time have driven the majority of our Nest Pack expansion. This underscores the sustainability of our track record, as well as the ongoing potential to outperform the pet industry and deliver strong and profitable growth. Now, while we're more insulated than some others, we are not fully exempt from the pressures currently facing the pet industry. Pet household formation remains relatively muted, and as I mentioned above, the consumer mindset continues to be pressured. These factors taken together make the current environment a challenging period to forecast consumer behavior. Taking this into consideration, we continue to see potential for returning to net ads growth during the second half of this year. But in light of recent trends, we are now expecting a wider range of potential outcomes. While the industry-wide trends I just described make it challenging to forecast net ads, These dynamics are not specific to Chewy, and we believe we are well positioned to drive improved active customer trends as macro factors and consumer behavior patterns normalize. Now, I would like to provide an update on some of our strategic initiatives. Our upcoming expansion into the Canadian market remains on track for Q3 of this year. Canada represents a large and fast-growing pet category. and our teams are hard at work finalizing selection, ensuring the same convenient delivery experience and high bar service that our US customers enjoy. We look forward to sharing our progress over the quarters to come. In sponsored ads, one of our prospective margin accretive growth vectors, we are executing against a compelling roadmap and remain on track to ramp the program throughout the second half of the year and into 2024. We remain encouraged by the opportunity ahead and will continue to update you on progress as we scale the business. Lastly, I am excited to announce that we intend to host our first Investor Day later this year. Chewy has come a long way since our 2019 IPO, having nearly tripled our net sales to north of $10 billion, expanded gross margin by 800 basis points, and adjusted EBITDA margin by nearly 1,000 basis points. Yet, we are just getting started and believe that we still have considerable runway with clear potential to outperform the broader pet industry and drive both strong growth as well as significant margin expansion. We look forward to sharing a deep dive on our highly integrated pet ecosystem, unveiling our exciting roadmap ahead and recalibrating our long-term financial expectations to reflect the upside we see in the Chewy platform. In closing, I am particularly proud of our strong results and the high levels of customer engagement that we achieved in Q2. We operate in a secular growth category with demonstrated consumer resiliency, and Q2 once again showcased the strength and durability of our platform. With that, I will turn the call over to Stacey.