Chewy, Inc.

Thank you for standing by. The TUI fourth quarter FY23 earnings call will begin shortly. If you would like to register a question at any time, please press star 1 on your telephone keypad. Thank you. Hello and welcome to the CHUI fourth quarter FY23 earnings call. My name is Elliot and I'll be coordinating your call today. If you would like to register a question during today's events, please press star followed by one on your telephone keypad. And I'd like to hand over to Jen Su, Vice President and Head of Investor Relations. The floor is yours. Please go ahead.

Thank you for joining us on the call today to discuss our fourth quarter and full year results for fiscal year 2023. Joining me today are Chewy's CEO, Smith Singh, and CFO, David Reeder. 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 financial results and performance, industry trends, strategic initiatives, and the environment that we operate in. 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 8-K filed earlier today and in our other filings with the SEC, 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 earlier today. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise stated, all comparisons discussed today will be against the comparable period of fiscal year 2022. Finally, this call in its entirety is being webcast on our investor relations website. A replay of the webcast will also be made available on our investor relations website shortly. I'd now like to turn the call over to Smith.

Thanks, Jen. And thank you all for joining us on the call today. Before we cover our fourth quarter and full year 2023 results i'm thrilled to welcome David reader who joined us in February, as our chief financial officer. Dave is a key addition to our leadership team and I look forward to having many of you engage with him in his new role, I would also like to thank Stacy Bowman for her support as interim CFO now let's review our results. The team delivered a strong finish to the year with our fourth quarter and full year 2023 performance, demonstrating our ability to deliver market share gaining growth while simultaneously expanding margins and accelerating free cash flow generation. I will provide an overview of our performance, followed by some perspectives on the pet industry and CHUI's strategic priorities as we embark on 2024. Dave will then discuss our financial results in greater detail and share our guidance for the year. Q4 net sales increased by 4% to $2.83 billion, resulting in full year 2023 net sales of $11.15 billion, representing 10% year-over-year growth. Our favorable mix of non-discretionary consumables and health categories continues to be a pillar of strength for Chewy, representing approximately 85% of full-year 2023 net sales. Additionally, our auto-ship subscription program, which delivered $8.5 billion of auto-ship customer sales in full-year 2023, continues to provide unparalleled convenience for pet parents, while enhancing customer stickiness for Chewy. Growth in ownership customer sales meaningfully outpaced overall top-line growth, increasing by 8% in the quarter and nearly 15% for the full year 2023. We continued to deepen our engagement with existing customers and delivered compelling wallet share growth. Net sales per active customer, or NESPAC, grew to $555, a year-over-year increase of approximately 12%. We believe there is significant runway for further NESPAC expansion, particularly as we continue to expand our product and services offerings across our platform. Progressing through the P&L, we are incredibly proud of our ability to deliver consistent profitability expansion over time. Our gross margin exceeded 28% for both the fourth quarter and the full year 2023, representing an improvement over the prior year periods. Our performance throughout the holiday season was in line with expectations, including as it relates to promotional activity. As planned, our sponsored ads program also continued to ramp throughout the latter half of the year and increasingly supported our gross margin performance. We achieved an adjusted EBITDA margin of 3.1% for the quarter and 3.3% for the full year, a continued improvement relative to full year 2022. Our results reflect our ability to deliver improved profitability on a steady and consistent basis, even while concurrently investing in planned growth initiatives that we expect will deliver long-term value to shareholders. Finally, expanding margins coupled with disciplined capital spending has allowed us to generate meaningful levels of free cash flow. We exceeded our 2023 free cash flow expectations and generated more than $340 million of free cash flow nearly three times our 2022 free cash flow. We have reached an exciting inflection point in this area and expect to generate substantial free cash flow on a go-forward basis. As we close the curtain on 2023, let me now spend a few moments framing our view on the pet industry and Chewy's outlook. We operate in the approximately $144 billion U.S. pet market comprised of pet food and supplies sized at roughly $87 billion, pet health contributing roughly $47 billion, and pet services representing roughly $10 billion. On top of that, following our expansion into Canada in Q3 of 2023, we now also participate in the roughly $10 billion Canadian pet market. The pet category is a recession resilient above GDP growth industry that is increasingly moving online. Chewy has been and remains a key driver and beneficiary of this trend. As we enter the new fiscal year, it is helpful to characterize 2024 industry expectations in the context of historical performance. Over a multi-decade period, the overall pet industry grew at an annual rate in the mid single digits. This growth was predicated on low single-digit unit growth in addition to low single-digit pricing growth, with further growth supported by a secular premiumization trend. Looking ahead, the pet category is projected to grow at a similar rate over a multi-year forward period. However, in 2024, year-over-year growth for the industry is expected to be lower than historical average. Unit growth is expected to be muted due to pet household formation trends that remain below historical levels. As it relates to pricing, while we are not anticipating a deflationary environment, we expect no material pricing benefit on industry growth in 2024. These inputs will most likely result in a year of modest growth for the industry, setting up the industry for a return to normality in 2025. Irrespective of the industry environment, we expect to continue to gain market share in 2024. Speaking to our profitability expectations, we expect to deliver continued adjusted EBITDA margin expansion this year, irrespective of the macro and industry growth backdrop. As a foundation, our well-established Chewy retail business is benefiting from economies of scale. On top of this, our fast-growing Chewy health business and important Chewy retail initiatives such as sponsored ads are expected to continue to drive gross margin expansion. Additionally, This year we expect our ongoing automation efforts and OPEX discipline to positively offset our investments delivering SG&A leverage in full year 2024 relative to full year 2023. These collective efforts are expected to drive increasing adjusted EBITDA flow through in 2024. When coupled with our high levels of capital efficiency enabled by the critical mass we have reached with respect to our distribution infrastructure, We expect to generate meaningful and increasing levels of free cash flow in 2024 and the years ahead. Now, let me provide commentary on some of our newer strategic initiatives that we believe will drive sustainable growth and profit in the future years. We are excited about strategic priorities such as our recently announced Chewy VetCare clinics, which allows us to expand our TAM by another approximately $25 billion to address the entirety of the $47 billion US vet health market. Chewy VetCare has the potential to drive both nest pack and active customer growth over time, while also offering a steady state margin profile materially above our current businesses. We believe Chewy VetCare is a natural extension of our ecosystem and that our thoughtfully designed clinics will be unlike anything in the market thanks to our proprietary first-party health tech platform and the seamless vertically integrated connectivity to all aspects of the Chewy ecosystem. This includes our B2C e-commerce platform for products such as core and veterinary diet food, pharmacy, and supplements, our emerging B2C services such as telehealth and insurance, as well as our B2B solutions for veterinary practitioners to streamline their operations. We anticipate opening four to eight clinics this fiscal year, with our first location slated to launch in Florida, close to our company headquarters, and several additional locations scheduled to open in the first half of 2024. We are very excited to share that our first clinic is already accepting appointments from family and friends and we expect it to be open to the public imminently. Two key leading indicators of success that we plan to track closely include wet hiring and customer demand generation. As it relates to wet hiring, we are encouraged by the early signals around our wet recruitment processes and already have our first sites fully staffed. We look forward to keeping you informed on our progress around this initiative as we progress through the year. Elsewhere, Canada continues to ramp for our expectations and overall will remain immaterial to 2024 financials, given that new markets take some time to achieve scale. We are encouraged by the initial customer and supplier response that we have received. We continue to expand our offerings for customers with assortment significantly increasing since our launch only a few months ago. We are further excited by the launch of many customer facing shopping features such as our mobile app and additional customer friendly payment and basket building mechanisms which are forthcoming in the first quarter of 2024. Success metrics that we are tracking closely, such as basket sizes and auto-ship sign-up rates, as well as other customer experience metrics such as delivery speed and reliability, remain healthy, providing positive indications for the business we are building in Canada. In summary, we remain highly focused on advancing our enduring mission of being the most trusted and convenient destination for pet parents and partners everywhere. And we are incredibly excited about the opportunities ahead for our business. We believe we are well positioned to continue driving innovation across the pet category while simultaneously creating significant value for our shareholders. With that, I will turn it over to Dave.