Chewy, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the TUI First Quarter 2024 earnings call. All lines have been placed on mute during the presentation portion of the call, with an opportunity for question and answer at the end. If you'd like to ask a question, please press star followed by one on your telephone keypad. I would now like to turn this conference call over to our host, Jennifer Duke, VP of Investor Relations. Please go ahead.

Thank you for joining us on the call today to discuss our first quarter results for fiscal year 2024. Joining me today are Chewy's CEO, Sumit Singh, and CFO, David Reeder. Our earnings release, which was filed with the SEC earlier today, has been posted to the investor relations section of our website. In addition to the earnings release, a presentation summarizing our results is also available on our website at 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, share or purchase program, 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 quarterly report on Form 10-Q 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, which was filed with the SEC today. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise stated, all comparisons discussed on today's call will be against the comparable period of fiscal year 2023. Finally, this call in its entirety is being webcast on our investor relations website. A replay of the audio webcast will also be made available on our investor relation website shortly. I'd now like to turn the call over to Sumit.

Thank you, Jen, and thank you all for joining us on today's call. We kicked off the year with strong performance, achieving solid top-line results, record-breaking profitability, and robust free cash flow. First quarter success is a testament to the unwavering dedication and hard work of every TUI team member, collectively delivering on our mission to be the most trusted and convenient destination for pet parents and partners everywhere. With that introduction, let's dive in into first quarter results. Q1 net sales exceeded the high end of our guidance range, increasing by approximately 3% to $2.88 billion. Two key factors contributed to this performance. First, our customers' loyalty in non-discretionary categories, such as consumables and health, remained strong, accounting for approximately 85% of our Q1 2024 net sales. Autoship customer sales achieved record levels totaling $2.2 billion and representing 77.6% of net sales. The convenience and value of our Autoship program continues to resonate with customers, and Autoship customer sales growth outpaced our enterprise average, yet again, increasing 6.4%. Our Autoship customer base remains healthy and is continuing to grow. Further, on the topic of customers, this quarter we saw some encouraging customer trends. The work we have been doing to sharpen our already strong value proposition, for example, through pet type personalization, began to pay off this quarter. Our efforts are driving higher response rates and had a positive effect on net new customers as well as reactivated customers, which were particularly strong in the quarter and up mid-teens relative to the prior year period. Notably, for the first time since 2022, both new customer acquisition and reactivation modestly exceeded our internal expectations in Q1. Progressing through the P&L, we set new records for the company across our profitability metrics. Gross margin for the quarter of 29.7% exceeded expectations as we benefited from the continued strength of our growing sponsored ads business, a higher mix shift into healthcare, and a rational promotional environment. Additionally, there were some one-time items that benefited our P&L this quarter, which Dave will elaborate upon later in this call. We generated $163 million of adjusted EBITDA, representing a 5.7% margin, supported by our strong gross margin performance and rigorous OPEX management. Across the company, teams at Chewy are executing methodically on all the controllable elements of our business in a highly disciplined manner. Finally, we generated more than $50 million of free cash flow in the quarter, From both a profitability and cash generation perspective, we believe that we have reached an exciting inflection point in our business. Significant free cash flow generation coupled with our strong balance sheet enables us the financial flexibility to deploy our capital in a variety of areas. As we have always done, we will continue to invest in strategic initiatives across our business that support our long-term growth and margin objectives. Additionally, as Dave will describe in more detail, we believe we have the cash generation and surplus to begin returning a meaningful portion of our cash to our shareholders. Now, I'd like to provide an update on some of CHUI's strategic initiatives and innovations. I'm excited to share that earlier this month we launched a compelling paid membership program, which we are calling CHUI+. CHUI Plus offers a range of benefits, including free shipping, cash accrual rewards, and exclusive member perks. The program is currently in its beta state, and throughout the year, we will explore different test and learn approaches to understand how it impacts discovery of our growing products and services, wallet consolidation, and net back acceleration, all while maintaining economic sensibility. We are excited about the program and look forward to sharing more over the coming quarters. Turning to Chewy Health, We are excited to share that since our last earning calls where we announced the launch of our first Chewy Wet Care Clinic, located near our company headquarters in Plantation, Florida, we have opened three additional Chewy Wet Care Clinics, two locations in the greater Atlanta, Georgia area, and one in Denver, Colorado. With four locations open today, we are excited to bring to market several more clinics later this year, reaching the high end of our stated range of four to eight clinic openings in 2024. We remain focused on our ability to attract talent and our capacity to generate strong demand for our veterinary services. And although it is early days, we are pleased with the performance across both areas. Clinic staffing and vet NPS scores remain strong, suggesting to us that our unique value proposition is resonating with vets. As it relates to demand generation, we are encouraged by the early signs of success we are observing. Net new customers to Chewy and appointment utilization are both trending better than our modeled expectations. Moving to our sponsored ads business. Our ads business continues to ramp well, delivering on the planned product roadmap of new digital products while offering our partners a compelling and high ROI channel to deploy their marketing dollars. As we articulated at our investor day, long-term, we see our sponsored ads business scaling to approximately 1% to 3% of net sales at attractive flow-through to the bottom line. Lastly, our expansion into Canada continues to ramp in line with our expectations. We rolled out customer-facing features such as mobile app and additional payment options as planned this quarter. Additionally, we continue to expand our assortment, particularly in categories such as premium consumables. Customer awareness and demand continues to gradually build. Customer NPS remains high and we remain focused on scaling a quality business underpinned by programs such as auto-ship and personalized customer care. With the pet category continuing its migration online, we believe we are well positioned to become a meaningful player in the Canadian market over time. In closing, our Q1 outperformance underscores our ability to successfully navigate this period of normalization for the pet industry. Moreover, we are cautiously optimistic that pet household formation trends are progressing in the right direction. Based on data from our shelter and rescue partners, we saw healthy growth rates in Q1 adoption on a year-over-year basis. And for the first time since 2022, we observed a positive balance between adoptions and relinquishment. While it is premature to declare an industry turnaround, we maintain our perspective that the pet industry is on track towards normalization. Meanwhile, we remain confident in our ability to execute against our strategic roadmap and to deliver compelling results for our shareholders. With that, I will turn the call over to Dave.