Chewy, Inc.

Good morning, everyone, and a warm welcome to TUI's first quarter 2025 earnings call. My name is Emily, and I'll be coordinating your call today. After the presentation, you'll have the opportunity to ask any questions, which you can do so at any time by pressing start, followed by the number one on your telephone keypad. I will now hand over to our host, Natalie Nowak, Director of Investor Relations to begin. Natalie, please go ahead.

Thank you for joining us on the call today to discuss our first quarter results for fiscal year 2025. 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 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. These statements involve certain risks, uncertainties, and other factors that could cause actual results to differ materially from our forward-looking statements. We encourage you to review our FCC filings, including the section titled Risk Factors in our most recent Form 10-K for a discussion of these risks. 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. 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. 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 2024. 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.

Thanks, Natalie. And good morning, everyone. The momentum at CHUI continues. Our team delivered a strong start to 2025, achieving top-line results exceeding expectations, continued growth in active customers, and solid profitability and free cash flow generation. Our Q1 results are a testament to the hard work and dedication of every Chewy team member and Chewy's ability to continue to take market share amidst a resilient pet category. Now, let's review the specifics. Q1 net sales exceeded the high end of our guidance range, increasing by over 8% to $3.12 billion. Net sales performance was underpinned by strong participation from new and existing customers across a variety of Chewy's offerings and our favorable mix of core consumables and health and wellness categories. Also notable this quarter was the 12.3% year-over-year growth we delivered within hard goods. Over the last several quarters, you have heard me talk about our ongoing efforts to refresh assortment and improve overall experience. And we believe that customers appreciate the new offerings available in this category. Further, our auto-ship subscription program continues to be a pillar of strength and differentiation for Chewy, enabling high visibility and predictability in our business while also enhancing customer loyalty. First quarter auto ship customer sales of $2.56 billion represented approximately 82% of Q1 net sales, reaching a record high for the company. Growth in auto ship customer sales once again outpaced overall top line growth, increasing by nearly 15% in the first quarter. Moving on to the topic of active customers, The momentum we spoke about last quarter continued through Q1, and we ended the quarter with 20.8 million active customers, reflecting 3.8% year-over-year growth and an increase of approximately 240,000 customers sequentially. Active customer growth was driven by continued strength in gross additions, along with improvement in gross churn. Moving down the P&L, gross margin came in at 29.6% for the quarter. Recall that last year we highlighted approximately 70 basis points of one-time items that benefited the Q1 fiscal 2024 P&L. Adjusting for these one-time benefits in the comparable prior year period, we expanded gross margin by approximately 60 basis points year over year. Dave will provide additional color on our gross margin performance. We generated $192.7 million of adjusted EBITDA in the quarter, representing a 6.2% adjusted EBITDA margin and a year-over-year increase of approximately 50 basis points. Accounting for the previously mentioned one-time items, which positively impacted first quarter 2024, adjusted EBITDA margin increased approximately 120 basis points year-over-year. Our adjusted EBITDA performance in Q1 reflects our strong gross margin performance, continued OPEX discipline, and the timing of certain marketing campaigns resulting in modest advertising and marketing leverage inside the quarter. And finally, we generated nearly $50 million of free cash flow and deployed $23.2 million towards share repurchases in the quarter in line with our internal expectations. Now, I would like to provide an update on some of CHUI's strategic initiatives, starting with CHUI VetCare or CVC. Since our last earnings call, we have opened three additional CHUI VetCare practices, bringing our current CVC count to 11 locations across four states. The encouraging signs of success we have spoken about over the last several quarters remain strong through Q1. Our current footprint, continues to outperform relative to expectations in terms of demand generation and driving broader ecosystem benefits as customers deepen their commitment to CHUI. Additionally, we continue to gain valuable insight and learnings from each of our CVC locations as they ramp, allowing us to apply those learnings to our recently opened and future clinics as we drive more efficient unit economics. We remain on track to open eight to 10 new clinics in fiscal year 2025, and we look forward to keeping you updated on our progress as we continue to build this business. Our sponsored ads business continues to perform well and grew sequentially quarter over quarter. The successful migration to our 1P platform that I spoke about last quarter has enabled us to broaden our suite of ad products and content capabilities including the expansion of offsite ads. We are thoughtfully ramping offsite across search and social with demand exceeding internal expectations. We continue to be excited about our sponsored ads business. Elsewhere, I am excited to share that we have transitioned the Chewy Plus membership program out of beta phase following a successful testing period. While still in its nascency, we are excited about our ability to drive even stronger loyalty as we expand access and engagement with the CHUI Plus paid membership program. Before I wrap up, I would like to briefly share my perspective on CHUI's long-term outlook. We have a strong and growing confidence in our ability to deliver on the strategic roadmap and long-term financial model that we outlined at Capital Markets Day in December 2023. That confidence is grounded in our execution to date and the meaningful progress we are making towards those goals. To illustrate, achieving the midpoint of our FY 2025 adjusted EBITDA margin guidance range would represent over 220 basis points of margin expansion from 3.3% to approximately 5.6% in just two years. Importantly, consistent with last year, approximately 80% of that profitability is expected to convert into free cash flow, translating to approximately $550 million, all while continuing to fund our strategic growth initiatives through the P&L. Key verticals like health, sponsored ads, and private brands remain early in their life cycle, and programs such as Autoship, our retail business and broader competitive modes continue to scale. These developments support our path to achieving our long-term adjusted EBITDA margin target of 10%. Lastly, as you know, earlier this month, we announced that Dave Reeder, our CFO, will be leaving Chewy to pursue a CEO role in the semiconductor industry. Dave will remain in his role for the next several weeks to ensure a smooth transition. We thank him for his contributions and wish him continued success. With strong internal talent, a differentiated strategy, and solid momentum, we remain confident in our ability to deliver a share-gaining FY 2025 and sustain long-term value for our shareholders. With that, I will turn the call over to Dave.

Thank you, Sumit, and thank you all for joining us today. Our strong first quarter results showcase the resilience of the pet industry, the durability of Chewy's business model, and continued momentum in the business. First quarter net sales grew 8.3% year over year to 3.12 billion, exceeding the high end of the Q1 guidance range we provided last quarter. We saw continued momentum and active customer growth and ended Q1 with 20.8 million active customers, reflecting a year-over-year increase of approximately 3.8%. Once again, we outperformed internal expectations and delivered year-over-year improvement across all elements of the active customer equation. New customers and reactivations grew year-over-year, while gross churn improved over the same period. Autoship customer sales increased by 14.8% to $2.56 billion in the first quarter With growth in auto ship customer sales outpacing overall top line growth by approximately 650 basis points. Additionally, auto ship customer sales represented 82.2% of our total net sales in Q1, a new high for the business. NESPAC reached $583 as of Q1, representing an increase of 3.7% year over year. Moving to profitability. We reported first quarter gross margin of 29.6%. As Sumit mentioned, last year in our first quarter 2024 earnings script, we identified approximately 70 basis points of one-time items that benefited the Q1 fiscal 2024 P&L, resulting in a normalized gross margin of approximately 29% in the first quarter 2024. Adjusting for these one-time benefits in the comparable prior year period, We expanded first quarter 2025 gross margin by approximately 60 basis points year over year. Sponsored ads continues to be the largest driver of gross margin improvement year over year, combined with strong auto-shift base load and products mix shift into margin accretive categories. Shifting to operating expenses, please note that my discussion of SG&A excludes share-based compensation expense and related taxes. In the first quarter SG&A was $575.1 million or 18.5% of net sales. For fiscal year 2025, we expect to deliver modest SG&A leverage driven by at scale fixed cost infrastructure and ongoing discipline and efficiency with respect to corporate payroll. First quarter advertising and marketing expense was $193.8 million or 6.2% of net sales. Based on the timing of certain marketing campaigns, this expense category delivered modest leverage benefit in the first quarter. For the year, we continue to expect advertising and marketing expense to be largely in line with the results we've delivered in the last two years for approximately 6.7 to 6.8% of net sales in fiscal year 23 and fiscal year 24, respectively. This remains consistent with our previously stated long-term target range of 6% to 7% of net sales. First quarter adjusted net income was $148.9 million, representing an 8.6% increase year over year. We delivered $0.35 of adjusted diluted earnings per share, the high end of our guidance range. First quarter adjusted EBITDA came in at $192.7 million, representing a 6.2% adjusted EBITDA margin, which equated to approximately 50 basis points of year-over-year margin expansion. Excluding the 70 basis points of one-time benefit and first quarter 2024 gross margin, our adjusted EBITDA flow through for Q1 2025 was approximately 21%. In the first quarter, we reported free cash flow of $48.7 million, which reflects $86.4 million of net cash provided by operating activities and $37.7 million of capital expenditures. For full year 2025, we expect approximately 80% of adjusted EBITDA to convert into free cash flow, and that capex will be at the low end of our previously stated range of 1.5% and 2% of net sales. We continue to reinvest back into the business using our free cash flow while also returning capital to shareholders. We continue to periodically execute open market repurchases pursuant to the $500 million share repurchase authorization we announced at this time last year. In the first quarter, we repurchased approximately 665,000 shares for a total of $23.2 million under our existing program. At the end of the first quarter, we had approximately $383.5 million of remaining capacity under our existing program for future repurchases. We ended the quarter with approximately $616 million in cash and cash equivalents, and we remained debt-free with an overall liquidity position of approximately $1.4 billion. Now I'd like to discuss our second quarter and full year 2025 outlook. We expect second quarter 2025 net sales of between 3.06 and 3.09 billion, or approximately 7% to 8% year-over-year growth. And we are maintaining our full-year 2025 net sales outlook of between 12.3 and 12.45 billion, or approximately 6% to 7% year-over-year growth when adjusted to exclude the impact of the 53rd week in fiscal year 2024. Our first quarter results and second quarter net sales guidance indicate we are trending towards the upper half of our full year net sales guidance range. Given we still have much of the year ahead of us, we are reserving the flexibility to adjust the range upward as we continue to progress throughout the year. Moving to profitability guidance, we are maintaining our full year 2025 adjusted EBITDA margin outlook of 5.4 to 5.7%. The midpoint of our guidance range indicates approximately 75 basis points of year-over-year margin expansion, and consistent with our comments last quarter and what we delivered in fiscal year 2024, we expect approximately 60% of our adjusted EBITDA margin expansion to be driven by improvements in gross margin. As such, and given our Q1 results, we expect to deliver sequential improvement in gross margin in the second quarter. Additionally, consistent with our comments last quarter pertaining to the 2025 quarterly progression of adjusted EBITDA margin, we expect first quarter results to represent the high point and expect modest sequential declines throughout the year due to typical seasonality and the timing of investments. We also expect second quarter adjusted diluted earnings per share in the range of 30 to 35 cents. For the full year of 2025, we also anticipate Share based compensation expense, including relating taxes to be approximately 315 million and weighted average diluted shares outstanding of approximately 430 million. We expect 2025 net interest income of approximately 25 to 30 million, and we expect our effective tax rate to be in the range of 20 to 22% for the year. And finally, as we discussed on our earnings call last quarter, we continue to embed in our guidance minimal expected impact from tariffs. In closing, I echo Sumit's perspective on Chewy's long-term outlook. The company has a clear, differentiated strategy and a strong leadership team focused on delivering exceptional customer experiences. These strengths position Chewy well to execute its roadmap, drive strong financial performance, and continue to enhance shareholder value. Leaving Chewy is a bittersweet decision. I'm grateful for the opportunity to work alongside Sumit and the talented team here. Thank you to all the Chewy team members for all your dedication and discipline. I wish the company continued success in the years ahead. With that, I will turn the call over to the operator for questions.

Thank you. We will now begin the question and answer session. As a reminder, if you would like to ask a question today, please do so now by pressing star followed by the number one on your telephone keypad. If you change your mind or you feel like your question has already been answered, you can press star followed by two to withdraw yourself from the key. Our first question today comes from Curtis Nagel with Bank of America. Curtis, please go ahead.

Great. Maybe just for a first one. Could we just dig into, you know, customer ads exceeded, you know, the expectations pretty nicely in one queue. Is low single-digit growth still the right framework, you know, for customer growth for the full year?

Hey, Kurt. This is Sumit. Good morning. Yeah, so we were super pleased with the rate and the momentum that has continued from last quarter through Q1. And importantly, you know, these results, as I've talked about in the previous quarter, we believe are predominantly due to the strength of execution and our own efforts. And so, as the market continues to normalize in the background, you know, that should only serve as tailwind. That tailwind is not incorporated in our guidance, and so everything that we're delivering and what's incorporated in guidance is primarily our execution and our efforts. And so I think it's a pretty good baseline to take the low single-digit rate, although obviously we're starting to operate at the higher end of that. And the reasons are pretty clear. We're adding more customers on the gross ad side, and we're driving retention up, and so therefore gross churn is down significantly. And the algorithm is essentially spitting out a nice cohort of customers which are higher quality, you know, relative to, you know, relative to kind of what we've seen coming out of the pandemic. So we're sort of pleased with both the rate of acquisition of customers, the rate of ads, as well as the quality of ads driven the efforts that we've done here in the last two to three quarters.

Got it. Understood. And then maybe just a quick update in terms of how you're thinking about growth for the industry this year. I think you pointed to still expecting normalization. But in terms of growth and how to think about household formation, just an update on kind of where that sits now from last quarter would be awesome. Thanks.

Yeah, sure, sure, sure. So there's a couple of different data points that we're triangulating. First of all, when you look at growth of the industry is primarily Manoj Mistry- From an options and relinquishments point of views and then also formation has been flat, so it hasn't gone backwards. Manoj Mistry- relative to where we were in in or how we came into the year you know it's trending fairly flat, which is, you know and. Manoj Mistry- A continued kind of encouraging side number two overall when we look at the top line growth of the industry, we are estimating. Manoj Mistry- You know, based on the sources that we have in front of us roughly a three to 4% growth of the market. And clearly our guidance, you know, that we've provided is a share gaining plan growing at roughly two times the growth of the market. And, you know, from a pricing standpoint, you know, we're not really baking in any sort of, you know, inflation throughout the year. Although it may not be surprising to hear that as sort of, you know, tariffs continue to roll out, you know, the industry might actually react by adjusting some pricing in hard goods or categories that are discretionary. And if that's the case, you know, we stand ready to respond to that. But right now, what you're seeing in our guidance is structural growth driven primarily by growth of active ads as well as share of wallet increases. Do you have anything to add? Well summarized. Thank you, Kerry.

Thanks. Thank you. Our next question comes from Eric Sheridan with Goldman Sachs. Please go ahead.

Thanks so much for taking the question. Just want to build on some of the comments in the prepared remarks on the advertising opportunity. How are you guys thinking about the investments that need to be made, especially against the off-site advertising opportunity as we look not only across 2025 but out on a multi-year view? And maybe you can give us a little bit more characterization of how the conversations with advertisers continue to evolve both on and off-site and what that might mean for ads as a percentage of the business over the longer term and whether you have any updated views on that. Thank you.

Maybe I'll start with the first part of that, Eric, and Sumit, maybe you can come in later and talk a little bit about some of the conversations with our suppliers. We feel great about the progress that we've made with respect to sponsored ads, both in 2024 as well as entering 2025. Uh, we're particularly excited as we've talked about previously about the 1st party platform migration that we executed at the beginning of this year to to remind you. That's our 1st party software stack that really kind of complete. So, although we're always updating it, it kind of completes the portfolio and suite of products that we wanted to be able to offer to our suppliers specifically. It gives us the ability to. support new content formats such as video. We're able to do more self-service. It enables us to do both onsite, like we did primarily last year, as well as offsite, which we're increasingly doing this year, given the pent-up demand there. And it just really enables us to kind of more fully offer to our partners the sponsored ads experience that they expect. So we're quite pleased with how it's performed. the momentum from fourth quarter last year and really all of 2024 has continued into 2025 and it looks like a good year for us in sponsored ads. Sumit, you want any comments on the

Yeah, Eric, I would, you know, the framework that I would put in your mind, just building on what Dave said is, you know, we're thinking of this as a demand side and supply side house, obviously. You know, so last year we focused on on-site product ramp and opening up supply primarily in, you know, let's say the consumables category. And so, you know, this year we're expanding the suite of products, as Dave mentioned, into social and off-site. and we're going to expand this into other categories. So what you're seeing us is rapidly opening up supply and our teams internally are very closely aligned with our partners, both activating more partners as well as more dollars from pocket to be able to apply to the supply that we're opening up on the website to drive our utilization rates. We're super pleased with the utilization. And between our partners and us, we're super transparent and having a really good high-quality conversation on the ROI expected. And so far, we've continued to exceed ROI expectations, therefore pretty nicely balancing the demand and supply side. And then on top of that, you want to put the 1P platform that essentially allows us to flow through a greater portion to our bottom line and improve experience for our suppliers, including greater analytic capability that we didn't have or may not have had at the same level in the past. And so, you know, we're fairly pleased with the bespoke product that we're building in the early stages, but we've quickly ramped up into getting to the 1%, a little bit beyond that. We are true to the 1% to 3% ranges that we've provided. The only implication you need to think about is, you know, as we move from on-site into off-site, you know, we're still going to flow through at pretty high margins, albeit slightly lower than just the on-site product.

Thank you.

Thank you. Our next question comes from Mark Mahaney with Evercore ISI. Please go ahead, Mark.

Okay, thank you. Could you talk about the sustainability of the active customer growth by drilling down a little bit into what's enabling you to drive retention up? for existing customers, and are there new sources of gross ads that you're able to tap into now that you weren't in the past? So just talk about both sides of that equation and the sustainability going forward. Thank you.

Yeah, Mark, I'll start, and Dave will add. So we feel pretty good about the sustainability. We're bullish, and we feel we're in early stages of, you know, gaining momentum, and momentum we continue to gain, as you've sort of seen from the last three quarters of compiled results. Internal efforts, you know, primarily point to the work that we've done, you know, in taking a broader marketing funnel and strategy to the market. Internally, they point to a better product, whether it's the storefront or whether it's the app. And internally, the quality of customer is what kind of drives confidence in the retention and the future sort of revenue flywheel of these type of customers. So just to give you some data points, when you look at new customer nest pack for the Q125 cohort, it is trending low single digits higher. Right now, I'm just taking simple averages, so bear with me because the data is still early. It's trending low single digits, you know, percentage higher on a year-over-year basis relative to Q1 2024 cohort. And, you know, you would, and so what are the inputs of that? The inputs of that are, as Dave talked about and I talked about earlier, it's the increasing mix of ownership base load. It's the, you know, mix towards repeatable categories like consumables and health, that drive about 85% of our revenue. And so you would expect, you know, this then leading to improved reorder rates. Well, then you'd go over and see, well, did reorder rates actually improve? So when you look at new customer reorder rates, new customer reorder rates also showed a steady improvement year over year, right? And relative to the cohorts of the previous 2024, you know, reorder rates are also up by about low single digit percentage points. And so the combined, you know, tells you both sort of the gross ad tactics are working as well as I guess our efforts to retain these customers are driven by more structural initiatives and actions that are more controllable rather than kind of taking advantage of any sort of industry trending that may or may not happen. That's how we're looking at the rest of the year.

Okay. Thank you, Sumit.

Thank you. Our next question comes from Nathan Feather with Morgan Stanley. Please go ahead.

Hey, everyone. Congrats on the really strong quarter here. I wanted to get a little bit into TweetPlus with our program Moonside of Data. Any way to kind of think about the adoption rates you've received on that tier? And, you know, how should we kind of contextualize the changes in both unit economics and wallet share once people join that program? Thank you.

Hey, Nathan, we had difficulty understanding your question. Would you mind perhaps repeating it for us?

Hey, yeah, sorry about that. I wanted to talk about Chewy Plus, potentially here are the adoption rates you've received on that program and any way to think about the changes in unit economics or wallet share once people onboard. Thank you.

Yeah, Nathan, I'll start and Dave will add as he sees pertinent. Let's talk about Chewy Plus. So we had, just to refresh our facts, we had a successful beta in 2024 from May, June of 24, all the way through January, February of this year, right? And now we've chosen to expand the Chewy Plus, which is a paid program, to all of our customers starting sort of, you know, late February, early March. So it's early stages. Also to recap, Chewy Plus offers members free shipping, 5% rewards that are aggregated in their accounts, and then limited time exclusive offers. Members enjoy a free 30-day trial and then pay an introductory fee of $49 for the year for the membership. So now here are the results. Since expanding, Chewy Plus has continued to show strong membership growth and positive customer feedback. We're measuring active sessions for members that are higher. So active sessions are higher. Orders and frequency is higher. Cross-category penetration is higher, which was one of the, you know, hypotheses or learning interests in the program to be able to see, hey, does it promote discoverability and does it promote attach rate? And, you know, we're seeing that relative to the cross-category penetration of a non-CHUI plus member versus a CHUI plus member, right? And these numbers are up both on a year-over-year basis as well as compared to a similar cohort of non-members. So, you know, what you're essentially seeing is while Chewy Plus continues to show strong net sales growth, given the net pack is expanding and expanding faster than a non-Chewy Plus member, costs, right, have stayed in line with expectations, and these members are now driving incremental contribution profit, right? We're going to stay away from providing specific details today, but to give you early reads, The rate of membership signups is now, we've now expanded the program. You can essentially see it on the website across our shopping funnel. We're still ramping up, so it's not fully ramped yet. And you should expect us to continue to ramp up. And on the background, we're gonna keep it very disciplined on contribution profit and drive member growth on the front end. Dave, anything to add?

Yeah, Nathan, if I could just broaden out the commentary just for a moment and talk a little bit more about Not all of our loyalty programs and not just Chewy Plus. You saw Autoship have a tremendous quarter, 460 bps on a year-over-year basis. Continued engagement with that cohort of customers that have decided that they like the value proposition as well as the convenience of Autoship. So when you kind of put this together in a constellation, you've got growing brand awareness for Chewy Plus. You've got more conversion of that brand awareness to active customers. You've got that active customer growth that is, you know, more likely than not to be propensed to move into categories such as auto ship or Chewy Plus. You've got reduced then engagement, reduced, or excuse me, increased engagement, reduced churn. And then you've got customers that have left realizing that they like the Chewy experience and coming back. All of this is coming together in the active customer growth that you're seeing, as well as the nest pack that you're seeing. Quite pleased with the first quarter, quite pleased with the momentum that we're carrying into second quarter, and optimistic, albeit early, optimistic for the implications for the year.

Great. Thank you.

Thank you. Our next question comes from Doug Anmuth with JP Morgan. Please go ahead.

Good morning. Thanks for taking the questions. I just want to follow up on the Autoship comments, David and Sumit. In particular, we've seen Autoship customer sales, I think, improve from about 66% of the total several years ago at the IPO to 82% today. So I think you could just talk about the path new customers are taking to becoming Autoship customers and how that's evolved over the years. And then 2nd, can you just talk about hard? Good a little bit the drivers of the 12% growth that you're seeing there and some of the changes you're making in terms of assortment and experience how that's improving. Thanks.

Sure, I'll start and they will, they will add to it. So, when you, you know. deconstruct it as a business in itself, the fundamental principles that we're applying are retention into auto share is acquisition into auto share followed by settlement and therefore retention into auto share. And so in terms of acquisition into auto share, the roadmap follows some concepts that you would call a brilliance in the basics of retail, which is you know, assortment, high in stock, and essentially, you know, paired with what you would consider is Chewy's moat and differentiation, which is a super convenient and high-powered personalized digital experience that allows customers discoverability and therefore a higher rate of conversion than what you would expect or see in the rest of the industry. So broadly, you know, that's been the template in how we've, you know, continued to grow the program. And kudos to our partners for continuing to believe in support, given how good a program this is to drive loyalty for a specific supplier brand and therefore generate lifetime value for long periods of time. Now, on the retention side, we followed a similar playbook. allowing our personalized approach and one-on-one connection with customers to be able to really get them to feel like they're getting value out of the program. We talk about loyalty, and Dave said this well. When you talk about customer loyalty, we think about a model that is built in concentric circles. It starts with the way that we go to market with our high-touch service. It then builds around programs like ownership, It then builds, you know, introduces newer programs like Chewy Plus that are now complementary to ownership, and we're seeing both play off of each other. The app ecosystem essentially keeps customers, you know, more engaged and therefore highly propensed to more discoverability and growth of share of wallet. So anyway, I'll get back to the point on ownership. So I think over the last few years, you've seen us, you know, add assortment, improve experience, both purchase and post-purchase, and that's the path from 66 to 82. Your second question was around hard goods growth. This one I would say is, you know, again, brilliance in the basics and the team's resilience and the quality of execution being driven from the team. So you heard us talk about freshness and newness of assortment. You heard us talk about better lifecycle management of inventory. You heard us talk about discoverability. And then you heard us talk about a personalized approach that drives a better experience on the website. So it's all sort of combination of that. David, anything to add?

Yeah, I mean, while you were speaking, I was just, you know, refreshing my memory across all of the subcategories within hard goods. And Doug, as I look at the data here on a year over year basis, all of I mean, almost all of the categories that I've been kind of spot checking are up year over year in hard goods. I think that speaks both to all of the things that we've discussed with respect to active customer growth, continued penetration with respect to share of wallet, as well as refresh of assortment that the team has done an excellent job on getting that refreshed assortment not only into our fulfillment centers, not only with our third-party shippers, as well as first-party fulfillment, but also getting those products in front of customers at the point of time in which they are willing and able to make a discretionary purchase. All those things came together for us in first quarter, and that momentum looks quite positive.

To give you a few data points, I mean, we've added over 150 brands, new brands, on the portfolio over the last two quarters. We've reduced time to onboarding SKUs by about 40% to 50%. And so what you're essentially, if you put them together, you're saying, okay, you guys have more choices for customers, and your go-to market is two times faster than where it was last year. I mean, all of this translates to time, and then you put the effort of discoverability and post-purchase experience that we deliver. It drives the flywheel a bit more efficiently, and that's what you're seeing. Great.

Thank you both.

Thank you. Our next question comes from Rupesh Parikh with Oppenheimer. Please go ahead.

Good morning. Good morning. And thanks for taking my question. So I guess I just want to go back to the top line, you know, very strong, very strong momentum, broad based category momentum as well. From a share perspective, where do you guys believe you're gaining market share and any changes versus recent quarters?

Oh, yes, no doubt about it. I mean, whether you come at it from, you know, the industry growth at 3 to 4% and our guidance, or you come at it from, you know, if you break that down mathematically, what you would find is, so let's say, let's assume kind of real-time math. Let's say 3% of the industry at about $140 billion. You know, that means the industry will add roughly $4 billion this year, you know, on a year-over-year basis. If you consider a penetration of somewhere in the 30 to 35% online, and do the math of Chewy's revenue, what you would find is that we're picking up roughly 50 cents of every dollar that is moving online, which is higher than in the past. We've talked about 40 to 42 cents of every dollar that's moving online. So there's clearly a share gain plan built in, and we're pleased with the way the team they're executing.

Great. Thank you, Dave. Best of luck.

Thanks, Rupesh.

Thank you. Our next question comes from David Bellinger with Mizuho. Please go ahead, David.

Hey, good morning. Thanks for the questions and thanks to Dave as well. Two questions from us. First one, just on gross margins within the core and understanding the 70 basis point one-time benefit you had last year, it still seems like something might be changing within the gross margin line. So could you just help us understand the moving pieces there and excluding the sponsored ads and that being the largest driver of margin expansion, are you seeing something, promotions or something else within the core Chewy retail business where the gross margins are weakening in some way? And then just the second question on the operating expense line, not much leverage despite the automation efforts, just anything that stood out in Q1 and what's leading to the stronger leverage that's planned through the rest of the year? Thank you.

Thanks, David. A couple items to note with respect to gross margin. One, internally we were pleased with our gross margin. It came in largely as we expected. Two, on a normalized basis, it expanded more than 60 bps year over year. If you recall in our first quarter of 2024, that script which you referenced, we did identify roughly 70 bps of one-time items that benefited us in gross margin last year. that resulted in a first quarter 24 gross margin of 29%. So you normalize for that on a year-over-year basis, up 60 bps. Three, in this call's prepared commentary, we indicated that we expect gross margin to increase sequentially from Q1 to Q2. We also reiterated that we expect our year-over-year EBITDA increase to be majority driven, roughly 60% by gross margin. Kind of a lot to like about our first quarter results, the market share, gaining revenue, active customer growth, normalized year-over-year gross margin expansion, record EBITDA margin, continued momentum in the second quarter, you know, a lot to like. The puts and takes for gross margin, obviously gross margin on a year-over-year basis, normalized, as I mentioned, single biggest contributor sponsored ads, followed by product mix accretion. Michael Prast- followed by, of course, the normal kind of fixed cost absorption that you get in those lines, so we expect that playbook to to continue in a very similar vein is is what we saw last year. Michael Prast- Moving to the operating expenses and you know we were we were pretty happy with the operating expenses. Michael Prast- For Q1 obviously you can't get to that EBITDA margin of 6.2% without being happy with a lot of the lines and the P&L. We expect to get a little bit more contribution from gross margin in the second quarter as well as the latter half of the year. I'm talking about on a year-over-year basis. And we expect to continue to get leverage from the OPEX lines. We did have, as we called out, lower advertising and marketing expense in the first quarter. That was largely just a result of the timing of certain campaigns. So you've kind of seen that number on any specific quarter kind of bounce around between that 6% to 7% range. But we think for the year, advertising and marketing will be very consistent with what we've posted in prior years, so roughly 6.7%, 6.8% of net sales. So no real surprise on that line for the year. But, of course, on any specific quarter, you may see a little movement just based on timing.

Great. Thank you. Very helpful.

Thanks, David.

Thank you. Our next question comes from Shweta Pujaria with Wolf Research. Please go ahead.

Thanks a lot for taking my question. I have one on CVC. So you talked about three new additions, 11 locations across four states. Could you help us Think about how big of an opportunity this could be for you, especially as it relates to demand gen and how do you think about expanding call it one to three years out? Thanks a lot.

I think what you're seeing us continue to do on CVC is just take a very measured approach. with respect to rolling out vet clinics. As you know, we were very happy with the performance of the clinics that we rolled out in 2024. We expect to end this year in the high teens vet clinics, so call it roughly 10 plus minus a little bit vet clinics that we expect to roll out in 2025. The performance of the vet clinics that are maturing, we've been quite pleased with. We continue to grow their utilization and their bookings forward booking rates remain quite strong and continue to strengthen actually. We've been happy with the new customers that are being introduced to Chewy, which are significantly higher than what we originally modeled. And so that's been a very pleasant surprise to us. And then as we've mentioned on some prior calls, And those new customers that are coming into the vet clinics, and that's their first experience with Chewy, about half of them are then following that visit up within, you know, 30 days and actually purchasing from Chewy.com. So I would say in terms of, you know, vet retention, in terms of, you know, performance of individual four wall clinic, you know, kind of all metrics green. by and large for the vet clinics. And so we're quite pleased with that performance. And I think you'll continue to see us take a measured approach with respect to rolling out vet clinics. In terms of the opportunity, you know, I think the opportunity is clear. You've got, you know, roughly 20 billion plus type of markets for vet services in the U.S., This enables us to tap a portion of that market, albeit, you know, with a slow rollout as we kind of perfect our offering. It also enables us to continue to grow our pharmacy business and get more insight into all of the pharmacy that's offered within vet clinics, not just the portion that we're currently kind of seeing through our existing business. And so I think from that perspective, in terms of opening up a large TAM for us, David. On a go forward basis we're quite pleased we're pleased with the results, our customers are pleased with the with the services. and the care that they're getting, and perhaps that's the most important thing. Sumit, do you have anything to add?

I'd say two comments, starting with the TAM and then working backwards into how to think about CBC in addition to what Dave said. So starting with the TAM, the $20, $25 billion that Dave's talking about doesn't fully encapsulate newer tech or newer technologies like either telehealth triage or insurance or software opportunities, given how much opportunity there is to be able to bring a one-piece solution to a fragmented software space or the data space in the pet health sector. And if you recall from our Capital Markets Day presentation, we laid out a pretty compelling vision of the stack that we're building and that the industry is starting to benefit from. So we're super excited about that in terms of how we can contribute to expanding the TAM beyond what is currently captured. Number two, when you think about CVC, You have to also think about CVC in similar lines as to how you think about Autoship or Chewy Plus. These are ecosystem-type concepts that allows a customer to discover Chewy in a new place and then expand their engagement with Chewy regardless of their point of entry into Chewy. And so, you know, these are highly defensible modes in the way that they bring customers in and keep customers in. And as we compound these modes, you know, we only had Autoship several years ago. Now we have, you know, Autoship. In the future, we're going to have, you know, CVC. In the middle, we have the app and the Chewy Plus programs. And so we're sort of excited about how we think about, you know, customer engagement and growth of share of wallet in addition to opportunity of acquiring new customers through these varied channels.

OK, thanks so much. Thanks Dave. Dave, congrats and all the best.

Thanks.

Thank you. We have time for one final question and so our last question today comes from Steven Zaccone with Citigroup. Steven, please go ahead.

Good morning. Thanks very much for taking my question. I had two two kind of quick ones. First one just on pricing. You know, what have you seen from a pricing standpoint? You know, tariffs are probably starting to impact some of the product costs out there in the industry. So has anything changed on your view of the year? And then the second is, from an underlying category perspective, dogs versus cats, we've heard about more strength in the cat category this year. Has that been the case in your business as well?

Sure. I'll take pricing and submit. Maybe you want to comment on dogs and cats. Look, from a pricing perspective, like for like, we see very little inflation in the industry right now. So again, I'm talking like for like products. That stated, we do see, we continue to see humanization of pets, and that humanization is leading to premiumization in terms of customers wanting, you know, more medicine, better supplements, better food. for their pets to improve their overall pet health. And so while we're seeing, we're continuing to see the trends towards premiumization, we are not seeing kind of on a like-for-like product basis much inflation right now. And I'm including the hard goods into that category. If you take the hard good category, even some of the ones that perhaps could be impacted by tariffs, you know, you have to really look at how much inventory is physically in individual suppliers' locations onshore And so that inventory is still in place and I would say you haven't yet seen any increase from tariffs kind of flow through the hard goods category. So, you know, stay tuned on that front. As, you know, from our perspective, the vast majority of our portfolio is consumables, you know, 85 percentage plus. of our portfolio is consumables with domestic input source streams. So we see very little impact from tariffs on CHUI in fiscal year 25 and what we have seen we've embedded in our guidance. Sumit, any comments on dogs versus cats?

Yes. We love them all equally. And yes, in the previous call, you know, we've come into the year sort of seeing, you know, the proportion of cats or cats being a popular choice. The data doesn't refresh as often, but we've continued to see strengthening of the cat business and at the same time, the dog business as well, given that we drove 6% year-over-year growth in consumables, which accounted for roughly 50% of the growth overall for Chewy. So happy with the performance.

Thanks for the information.

Thank you. Those are all the questions we have time for today and so this concludes our call. Thank you all for your participation. You may now disconnect your lines.