Chewy, Inc.

Hello, everyone, and welcome to the Chewy third quarter 2024 earnings call. My name is Emily, and I'll be coordinating your call today. After the presentation, there will be the opportunity for you to ask any questions, which you can do so by pressing start, followed by the number one on your telephone keypad. I will now hand the call over to our host, Chewy CFO, David Reader, to begin. David, please go ahead.

Thank you for joining us on the call today to discuss our third quarter results for fiscal year 2024. Joining me today is Chewy's CEO, Sumit Singh. 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 CHUI's financial results and performance, industry trends, strategic initiatives, share repurchase program, and the environment in which we operate. 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 for the first quarter of fiscal year 2024 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 assume no obligation to update any forward-looking statements except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliation 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. 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 available on our investor relations website shortly. And with that, I'd like to turn the call over to Sumit.

Thank you, Dave. And thank you all for joining us on today's call. Our third quarter results continued to build on the positive momentum we observed in Q2. We delivered top line growth exceeding the high end of our net sales guidance range, a sequential increase in active customers, continued adjusted EBITDA margin expansion, and robust free cash flow generation. These results underscore the durability of our business model and our team's relentless focus on high quality execution and operational discipline. With that, let's dive into the details. Q3 net sales increased by approximately 5% to $2.88 billion. Both the strength of our flagship Autoship program and our customers' loyalty in non-discretionary categories, particularly within consumables and health, anchored our Q3 net sales performance. Our Autoship program enables high visibility and predictability in our business and drives customer stickiness for Chewy. Autoship customer sales reached $2.3 billion in the quarter, representing 80% of Q3 net sales and a year-over-year increase of approximately 9%. Non-discretionary categories, including consumables and healthcare products and services, accounted for 85% of Q3 net sales. Customers appreciate our comprehensive product catalog and our ongoing efforts to refresh assortment across food, treats, and hard goods. Over the last few quarters, we have increased our assortment across popular categories such as pet tech, vet food, and supplements, to name a few, adding several new premium brands, most of which launched exclusively on Chewy.com. Additionally, we are continuously rolling out enhancements to our on-site and in-app experiences to ensure we are providing an even more enjoyable and convenient shopping journey for pet parents. Last quarter, I spoke about our efforts to redesign our mobile app and make the overall app experience more convenient for customers. In Q3, both unique customers who placed at least one order on the app and average app monthly active users, or app MAU, increased in the mid-teens range compared to Q3 of last year. I am excited by the strong engagement we continue to observe through our mobile app and the experience it brings to our customers. Continuing on the topic of customers, I am pleased to share that Q3 marked another quarter of sequential active customer growth, building on the momentum we established coming out of our second quarter. Our efforts to enhance shopping experiences, expand assortment, and various ongoing innovations combined with our powerful marketing and CRM strategy continue to drive outperformance, while macro normalization steadily continues in the background. we ended the third quarter with approximately 20.2 million active customers, up 160,000 sequentially. We now expect to end fiscal 2024 with active customers up modestly over last year, a trend which we expect to continue to strengthen in 2025. Turning to profitability, we generated $138 million of adjusted EBITDA in the quarter, representing a 4.8% margin and approximately 180 basis points of margin expansion year over year. Our Q3 adjusted EBITDA results reflect the continuation of our strong gross margin performance, a disciplined approach to cost management, and the ongoing benefits of fixed cost leverage as we scale. Our increasing profitability has enabled us to continue to return meaningful capital to shareholders as reflected by the incremental $342 million we deployed to shareholders in the third quarter. Now, let me provide an update on some of CHUI's strategic initiatives and innovations. The sponsored ads business continues to perform well, and as expected, we remain on track to reach the low end of our previously stated long-term target range of 1% to 3% of net sales in fiscal 2024. We remain on track with our one P technology migration and look forward to starting the new fiscal year fully converted to our one piece software platform. Moving to choose healthcare offerings I am proud of the progress, our team has made this year across healthcare products and services, especially to event care or CVC. With the launch of Chewy Vet Care Clinics earlier this year, we not only unlocked the $25 billion vet services TAM opportunity, but we are also observing compelling complementarities across the entire Chewy ecosystem. We have six clinics open today and expect to reach the high end of our previously stated target range of four to eight clinic openings in 2024, later this fiscal year. Performance across our clinic footprint is promising, And I'm happy to share that the early signs of success we spoke about last quarter have continued through Q3. The proportion of new to Chewy customers acquired through Chewy VetCare continues to outperform relative to expectations. Additionally, broader ecosystem benefits, including cross-category shopping and post-clinic visit purchases on Chewy.com have strengthened since last quarter. indicating that our ability to seamlessly connect care with commerce is resonating with pet parents. I would also like to take a moment to talk about Chewy Plus, our paid membership program. Recall that we launched Chewy Plus in summer 2024 to a representative sample of customers. Since launching the program, we have been carefully studying the shopping behavior of Chewy Plus members and are tracking several key indicators of success including the program's potential to accelerate wallet share consolidation and drive stronger cross-category engagement. Based on the data we have analyzed over the last several months, we are seeing that Chewy Plus members consistently place more orders, have higher cross-category penetration, and greater mobile app engagement relative to non-Chewy Plus customers. Furthermore, we are seeing higher auto-ship adoption rates from this early cohort of customers, signaling a potentially compelling flywheel effect of the Chewy Plus program. While contribution to the overall enterprise remains immaterial, we are encouraged by these early results and look forward to introducing the program to our broader base of customers. Touching on Canada, where we completed a full year of operations in Q3. The Canadian business, while still relatively small and immaterial to the overall scale of Chewy, continues to improve across key metrics including auto-ship penetration, net sales growth, and profitability. Additionally, we remain focused on strengthening brand awareness in Canada and are excited by the brand partnership we've recently signed with the Toronto Maple Leafs hockey team. We believe Chewy's passion for pets perfectly aligns with Torontonians' passion for the Maple Leafs, and we are bringing this to life with dynamic advertising and interactive fan moments during games at Scotiabank Arena. Lastly, I would like to acknowledge a notable milestone for CHUI with our recent inclusion in the S&P 400 Index as of November 6th. We view our inclusion in this index as an endorsement of our performance, our enduring business, and our compelling growth opportunities ahead. In closing, I would like to thank all of our dedicated CHUI team members for their hard work and strong execution in the third quarter. We are now focused on executing through our final quarter of 2024 and are excited about the customer engagement we have seen thus far through this holiday season and look forward to ending fiscal year 2024 on a high note. With that, I will turn the call over to Dave.