Chewy, Inc.

Hello, everyone. Thank you for attending today's CHUI third quarter 2023 earnings call. My name is Sierra, and I will be your moderator today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you'd like to ask a question, press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Jen Hsu with CHUI. Please proceed.

Thank you for joining us on the call today to discuss our third 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, 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, 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 were 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 third quarter of 2023, and all comparisons are accordingly against the third 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 jump in, as we have previously announced, we will be hosting our inaugural investor day next week on Thursday, December 14th. We look forward to seeing many of you in person and encourage everyone to tune into the live webcast which can be found on our investor relations website. I'm excited to introduce you to our broader senior leadership team next week. We plan to provide a comprehensive update on our strategic roadmap, including a deep dive into our Chewy Health business and will share refreshed long-term financial targets. In light of our investor day next week, we will streamline today's call to focus on this quarter's results and a few notable recent updates. We will leave most strategy and innovation topics for next week. Now, let's review Q3. Shoei continues to outperform and gain market share through the present environment. We reported $2.74 billion in net sales this quarter, up 8% against an industry that grew in the low single digits with pet inflation continuing to return to historical levels. Additionally, the team is executing admirably against controllable factors, as reflected by another strong quarter of 3% adjusted EBITDA margin. Consistent with the expectation we shared on our last earnings call, active customers declined marginally on a sequential basis. Looking beyond the near term, we believe we remain well positioned to drive improved active customer trends as the macro environment and pet household formation trends recover. Notably, we yet again demonstrated our ability to grow wallet share with our customers, as net sales per active customer, or NESPAC, exceeded $540, up nearly 14%. Throughout the third quarter, customer engagement remained strong. Our industry-leading mix of non-discretionary consumables and health, bolstered by our auto-ship subscription service, continues to reinforce the structural soundness and defensible nature of our business model. The loyalty and spending resiliency of our Autoship customers remains unabated, with no changes to their ordering behavior. Additionally, our conversion of new customers into Autoship continues at a healthy rate. As a result, Autoship customer sales continue to outpace overall top-line growth and were up nearly 13% in the quarter and represented over 76% of net sales. Non-discretionary consumables and health categories anchor our business, collectively representing approximately 85% of third-quarter net sales. pharmacy continued to grow at a premium to the overall company and now represents north of a billion dollar business for us, based on trailing 12 months net sales. At this scale, Chewy is the number one pet pharmacy in America. We look forward to sharing more with you about the financial performance and strategic direction of our health business holistically at next week's Investor Day. As anticipated, we launched Chewy Canada at the end of September, bringing Chewy's compelling value proposition to millions of pet parents in Canada. Initial customer demand has been strong. Autoship sign-up rates are healthy, our delivery experience is compelling, and customer satisfaction is high. While it is early, we are pleased with our progress in market thus far, with key indicators of success pointing towards a bullish future. Turning to profitability, we reported gross margin of 28.5%, which is a new record in itself. Strength in gross margins reflects mixed-rate benefits, tightly managing promotional spend, and strong performance in logistics by our teams. Finally, adjusted EBITDA margin came in at 3% for the quarter, even during a period in which we had planned pronounced growth investments. Shifting gears from in-quarter results, I'd now like to provide some commentary on how we performed on Black Friday and Cyber Monday of this year. We observed strong customer purchasing intent during this important holiday shopping week. Traffic and sales exceeded our expectation across all categories, including hard goods, and conversion rates were up year over year. New customer acquisition was 40% higher than our Q3 weekly average. While we have seen trends return to pre-holiday levels, our Black Friday and Cyber Monday performance is encouraging. Specifically, while consumer spending behavior remains opportunistic in the current environment, our results illustrate that Chewy's value proposition continues to resonate loudly and will prevail when consumer demand and industry inputs improve. Before I turn the call over to Stacey, I would like to share some context regarding a couple of important company-wide developments. In November, as part of our 2024 strategic planning process, we implemented actions to reduce our headcount in certain areas of the organization. This decision was carefully considered as part of our ongoing focus on becoming an ever more agile and disciplined company and aligns our efforts into priorities which we believe will gain us the most significant customer wins and generate the highest business returns. While we consolidated some roles within the organization, we continue to invest in other high priority areas. As we head into 2024, we expect these actions to create room for us to continue investing behind our growth initiatives. We are incredibly grateful to our team members for their contributions and remain committed to supporting them during this transition. Lastly, I'm excited to announce that David Reeder will be joining us as CHUI's new Chief Financial Officer starting early in 2024. Dave joins us from Global Foundries, where he is currently CFO. He brings with him extensive experience across a multitude of operational and financial roles at Global Foundries, Lexmark, Cisco, and Broadcom, amongst others. I look forward to working with Dave as we continue to execute against the many compelling growth and margin opportunities across our ecosystem. I would also like to thank Stacey for all that she has done to support me and the Chewy team in her role as interim CFO. Following Dave's start date, Stacey will continue to serve as our Chief Accounting Officer. With that, I will turn the call over to Stacey.