Q3 2019 Earnings Call

December 9, 2019

Ladies and gentlemen, thank you for standing by and welcome to be Chewy third-quarter earnings call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Chewy Q3 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Kelsey Turcotte. Thank you. Please go ahead.

At this time all participants are in a listen only mode.

After the speakers presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one on your telephone.

Please be advised to this today's conference is being recorded.

If you require any further assistance, please press star zero. I would now like to hand, the conference over to your speaker today Kelsey Turcotte. Thank you. Please go ahead. Thank you for joining us on the call today to discuss the results for third-quarter fiscal 2019. Joining me on today's call are Sumit Singh and Mario Marte, our CEO and CFO respectively.

Thank you for joining us on the call today to discuss the results for third quarter fiscal 2019, joining me on today's call arsenic, saying Mario more current two Reid CEO and CFO respectively.

Kelsey Turcotte: Thank you for joining us on the call today to discuss the results for our Q3 of fiscal 2019. Joining me on today's call are Sumit Singh and Mario Marte, Chewy's CEO and CFO, respectively. Our earnings release and a letter to shareholders, which we filed with the SEC on Form 8-K earlier today, have been posted to the investor relations section of our website, investor.chewy.com. A link to the webcast of today's conference call can also be found on our site. We will be making forward-looking statements on this call, including statements concerning Chewy's future prospects, financial results, business strategies, and industry trends. Such statements are forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to materially differ from those contemplated by our forward-looking statements.

Our earnings release and a letter to shareholders, which we filed with the SEC on Form 8-K earlier today have been posted to the Investor Relations section of our website investor.chewy.com. A link to the webcast of today's conference call can also be found on our site. We will be making forward-looking statements on this call, including statements concerning Chewy's future prospects, financial results, business strategies and industry trends.

Linked to the webcast of today's conference call can also be found on our site.

We will be making forward looking statements on this call, including statements concerning series future prospects financial results.

Strategies and industry trends.

Statements are forward-looking statements under the Private Securities Litigation Reform Act of 1995. And are subject to certain risks and uncertainties, which could cause actual results to materially differ from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance.

And are subject to certain risks and uncertainties, which could cause actual results to materially differ from those contemplated by our forward looking statements.

Kelsey Turcotte: Reported results should not be considered as 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. For further information, please refer to the risk factors and other information in Chewy's 10-Q filed with the SEC on 17 September 2019, the Form 8-K that we filed earlier today, and our other filings with the SEC. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are maintained on our investor relations website, including the earnings release and letter to our shareholders, which were filed with the SEC on Form 8-K earlier today. These non-GAAP measures are not intended to be a substitute for GAAP results.

Reported results should not be considered as 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. For further information, please refer to the risk factors and other information in 10-Q filed with the FCC on September 17th 2019. The form 8-K that we filed earlier today and our other filings with the SEC.

We disclaim any obligation to update any forward looking statements, except as required by law.

For further information please refer to the risk factors and other information into <unk> 10-Q filed with the FCC on September 17th 2019.

Form 8-K that we filed earlier today.

<unk> other filings with the FCC.

Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are maintained on our Investor relations website, including the earnings release and letter to our shareholders. Which were filed with the SEC on Form 8-K earlier today. These non-GAAP measures are not intended to be a substitute for GAAP results. Finally, this call in its entirety is being webcast on our Investor Relations website. A replay of this call will be available on our IR website shortly. I'd now like to turn the call over to Sumit.

Which were filed with the actually see on form 8-K earlier today.

non-GAAP measures are not intended to be a substitute for GAAP results. Finally this call in its entirety is being webcast on our Investor Relations website.

Kelsey Turcotte: Finally, this call in its entirety is being webcast on our investor relations website. A replay of this call will be available on our IR website shortly. I'd now like to turn the call over to Sumit.

A replay of this call will be available on our IR website shortly.

I'd now like to turn the call over to Smith.

Sumit Singh: Thanks, Kelsey, and thanks to all of you for joining us on the call. As Kelsey mentioned, our shareholder letter is posted to our investor relations website, and I encourage you to review it. I'll start this afternoon by sharing financial highlights of the quarter. Then I'll discuss a few business updates. Finally, I will turn the call over to Mario to discuss our financial results and guidance. Net sales for the quarter grew 40% year over year to $1.23 billion, reflecting the strength of our business model as active customers grew 33% year over year to 12.7 million. Net sales per active customer grew 11% to $360.

Thanks, Kelsey, and thanks to all of you for joining us on the call. As Kelsey mentioned, our shareholder letter is posted to our Investor Relations website and I encourage you to review it. I'll start this afternoon by sharing financial highlights for the quarter, then I'll discuss a few business updates and finally, I will turn the call over to Mario to discuss our financial results and guidance. Net sales for the quarter grew 40% year over year to $1.23 billion, reflecting the strength of our business model as active customers grew 23% year over year to 12.7 million. Net sales per active customer grew 11% to $360 and ownership customer sales as a percent of net sales reached 70.4%.

I'll start this afternoon by sharing financial highlights for the quarter, then I'll discuss a few business updates and finally, I will turn the corner, where dimario to discuss our financial results and guidance.

Net sales for the quarter grew 40% year over year to $1.23 billion, reflecting the strength of our business model as active customers grew 23% year over year to 12.7 million net sales for active customer grew 11% to $360 and ownership customer sales as a percent of net sales reached 70.4%.

Sumit Singh: Autoship customer sales as a percent of net sales reached 70.4%. The higher spending among existing customers and strong Autoship sales are a result of growth and assortment across new and existing verticals, including a more than 25% year-over-year expansion in SKUs, improved site merchandising, and continuous innovation around the customer experience. Gross margin for Q3 was 23.7%, up 410 basis points year-over-year. Finally, our adjusted EBITDA margin of -2.5% improved 530 basis points versus Q3 2018 as a result of the growth and margin expansion across the businesses, as well as scaling of our marketing spend as a percentage of net sales. Chewy's mission is to be the most trusted and convenient online destination for pet parents everywhere.

The highest spending among existing customers and strong ownership sales are a result of growth and assortment across new and existing verticals, including more than 25% year over year expansion in skews improved merchandising and continuous innovation around the customer experience. Gross margin for Q3 was 23.7% up 410 basis points year over year. Finally, our adjusted EBITDA margin of negative 2.5% improved 530 basis points, where since Q3 2018 as a result of the growth and margin expansion across the businesses as well as scaling up or marketing spend as a percentage of net sales. Chewy's mission is to be the most trusted and convenient online destination for pet parents everywhere.

Gross margin for Q3 was 23.7% up 410 basis points year over year. Finally, our adjusted EBITDA margin of negative 2.5% improved 530 basis points, where since Q3 2018 as a result of the growth and margin expansion across the businesses as well as scaling up or marketing spend as a percentage of net sales. Chewy's mission is to be the most trusted and convenient online destination for pet parents everywhere.

End to end up net sales.

Whose mission is to be the most trusted and convenient online destination for pet parents everywhere.

Sumit Singh: We believe we are positively transforming the industry with a superior value proposition that keeps our customers at the center of everything we do, from our high-touch customer service to our broad assortment of brands, to delivering on the core tenets of e-commerce of speed and convenience. We are maniacally focused on providing a truly unique and personalized shopping experience that builds trust, brand loyalty, and drives repeat purchasing. Our team is executing well against our mission, and the business continues to demonstrate strong forward momentum. We believe that there is significant market opportunity ahead of us and remain focused on our strategy of sustainable top-line growth at scale and margin expansion. Recent investments in both private brands and Chewy Pharmacy, two pillars of our growth and margin strategy, contributed positively to both our year-over-year increase in net sales and gross margin expansion in the quarter.

We believe we are positively transforming the industry with a superior value proposition that keeps our customers at the center of everything we do, from our high touch customer service to our broad assortment of brands to delivering on the core tenets of e-commerce speed and convenience. We are focused on providing a truly unique and personalized shopping experience that builds trust, brand loyalty and drives repeat purchasing.

But I couldn't be focused on providing a truly unique and personalized shopping experience that builds trust brandloyalty and drives repeat purchasing.

Our team is executing well against our mission and the business continues to demonstrate strong forward momentum. We believe that there is significant bucket opportunity ahead of us and remain focused on our strategy of sustainable topline growth at scale and margin expansion. Recent investments in both private brands and Chewy pharmacy, two pillars for growth and margin strategy contributed positively to both our year over year increase in net sales and gross margin expansion in the quarter.

We believe that there was significant bucket opportunity ahead of us and remain focused on our strategy, how sustainable topline growth at scale and margin expansion.

Recent investments in both private brands and two apartment see two pillars for growth and margin strategy contributed positively to both our year over year increase in net sales and gross margin expansion the border.

Sumit Singh: I will now provide some color on both of these important strategic verticals. Chewy private brands remain an important part of our proposition to delight customers with high-quality products. Over the past year, we have grown our Chewy private brands assortment by over 80%, a significant portion of which was in higher margin hard good products. As part of this process, we work backwards from customer needs and bring high quality, exceptional customer-rated products to life. For example, our Frisco branded beds, dog apparel, and waste management products enjoy an average of 4.5 out of 5 stars or higher rating and over 90% customer repeat purchase recommendations. As a result of high-quality assortment growth and continued focus on smart site merchandising, Chewy private brand sales grew more than 60% year-over-year in our Q3 or 1.5 times our overall net sales growth.

I will now provide some color on both of these important strategic [inaudible]. Chewy's private brands remain an important part of a proposition to delight customers with high-quality products. Over the past year, we have grown Chewy private brands assortment by over 80% a significant portion of which was in high margin hard good products. As part of this process, we work backwards from customer needs and bring high-quality exceptional customer rated products to life. For example, our first Cobranded beds, dog apparel and based management products enjoy an average of 4.5 out of five stars or higher rating and over 90% customer repeat purchase recommendations.

Two we private brands remain an important part of a proposition to delight customers with high quality products over the past year, we have grown actually private brands assortment by over 80% a significant portion of which wasn't high margin hard good products.

So this process, we work backwards from customer need and bring high quality exceptional customer rated products to life.

For example, our first Cobranded bed.

Doug apparel and based management products enjoy an average of 4.5 out of five stars or higher rating and over 90% customer repeat budgeted recommendation.

As a result of high-quality assortment growth and continued focus on smart site merchandising, Chewy private brand sales grew more than 60% year over year in our third quarter or 1.5 times, our overall net sales growth. These private brands now enjoyed double-digit share of sales at chewy in several growing subcategories, such as frozen foods, jerky treats and natural bones and chews. Similarly, in hard goods Frisco potty pad, poop bags, apparel and leashes have reached over 30% of sales in their specific subcategories.

Sumit Singh: These private brands now enjoy double-digit share of sales at Chewy in several growing subcategories, such as frozen foods, jerky treats, and natural bones and chews. Similarly, in hard goods, Frisco potty pads, poop bags, apparel, and leashes have reached over 30% of sales in their specific subcategories. Our private brands portfolio has the potential to contribute meaningfully over time and is yet another proof point against our strategy of delivering growth and incremental profitability. Chewy Pharmacy continues its rapid expansion as the fastest growing vertical in the company and continues to receive favorable reviews from our customers who love our overall value proposition in this space and then evangelize to their network of friends and family. We believe that we are playing an important role in pet health and wellness.

These private brands now enjoyed double digit chair of sales at chewy in several growing sub categories, such as frozen foods, Yoki treats and natural bones and choose.

Similarly in hard good Frisco, potty pad, who bags apparel and leashes have reached over 30% of sales in their specific subcategories.

Our private brand portfolio has the potential to contribute meaningfully over time and is yet another proof point against our strategy of delivering growth and incremental profitability. Chewy Pharmacy continued its rapid expansion as the fastest-growing vertical in the company and continues to receive favorable reviews from our customers who love our overall value proposition in the space and then evangelize with their network of friends and family. We believe that we are playing an important role in health and wellness. In addition to driving growth in that vertical, we are focused on building a structurally profitable and then during franchise.

Sure. We pharmacy continued its rapid expansion has the fastest growing vertical in the company and continues to receive favorable reviews from our customers who love our overall value proposition in the space and then evangelize with their network of friends and family.

We believe that we are playing an important role at health and wellness.

Sumit Singh: In addition to driving growth in this vertical, we are focused on building a structurally profitable and enduring franchise. Gross margin for the pharmacy business improved more than 650 basis points year-over-year in Q3, driven by mix of existing customers converting to pharmacy, MAP pricing discipline, as well as improved logistics costs as we ramp up our Phoenix operation to service West Coast customers. Additionally, we continue to work on products and process improvements behind the scenes to raise the productivity and efficiency of our pharmacy operations. As a result of these efforts, pharmacy's fulfillment and customer service costs improved by over 1,000 basis points year-over-year, and the business reached profitability at the order level.

In addition to driving growth in that vertical we are focused on building a structurally profitable and then during franchise.

Gross margin for the pharmacy business improved more than 650 basis points year over year in Q3, driven by a mix of existing customers converting to pharmacy, net pricing discipline as well as improved logistics costs as we ramp up our Phoenix operation to service [Vescom] customers. Additionally, we continue to work on products and process improvements behind the scenes to raise the productivity and efficiency of our pharmacy operations. As a result of these efforts, pharmacies fulfillment and customer service costs improved by over 1,000 basis points year over year and the business reached profitability at the order level.

Additionally, we continue to work on products and process improvements behind the scenes to raise the productivity and efficiency of our pharmacy operations.

As a result of these efforts pharmacies fulfillment and customer service costs improved by over 1000 basis points year over year and the business reached profitability at the order level.

Sumit Singh: On the product side, an increasing number of pharmacy customers continue to use our My Pet Prescriptions product, which helps them better manage information and accessibility of their pet's prescriptions and easily order prescription refills, therefore driving up engagement with our platforms. These data points continue to lend confidence that our service and overall value proposition is resonating with customers, and that we are making progress towards our mission of becoming the destination for food, supplies, and medication for pet parents. Overall, for Chewy, we ended Q3 with 12.7 million active customers, an increase of 3.1 million customers versus Q3 2018, and 2.1 million versus the end of fiscal year 2018.

On the product side, an increasing number of pharmacy customers continue to use our MyPet prescription product, which helps them better manage information and accessibility of their pets' prescriptions and easily older prescription refills, therefore, driving up engagements in our platform. These data points continue to lend confidence that our service and overall value proposition is resonating with customers and that we're making progress towards our mission of becoming the destination for food supplies and medication for pet parents.

These data points continue to lend confidence that our service an overall value proposition is resonating with customers and that we're making progress towards our mission of becoming the destination for food supplies and medication for but that's.

Overall for Chewy, we ended the third quarter with 1.7 million active customers an increase of 3.1 million customers worst as Q3, 2018, and 2.1 million versus the end of fiscal year 2018. Customer retention rates continue to be stable and we are pleased that initiatives such as increased assortment, improvements insight merchandising and maturation in both pharmacy and private brands are contributing to ongoing expansion and lifetime value and an equal or foster payback period that proves out the efficacy of investment and new customer acquisition. We believe we can further drive growth and profitability through innovation and technology that makes the process of finding and buying the right products easy, convenient and enjoyable. Our pet profiles feature has provided us valuable insight into our customers and their pets.

Sumit Singh: Customer retention rates continue to be stable, and we are pleased that initiatives such as increased assortment, improvements in site merchandising, and maturation in both pharmacy and private brands are contributing to ongoing expansion in lifetime value and an equal or faster payback period that proves out the efficacy of investments in new customer acquisition. We believe we can further drive growth and profitability through innovation and technology that makes the process of finding and buying the right products easy, convenient, and enjoyable. Our Pet Profiles feature has provided us valuable insights into our customers and their pets. We now have more than 5 million pet profiles which enable us to provide pet parents with a more personalized experience that helps them discover new products, including treats and toys that are breed and age-appropriate.

Somewhat retention rates continue to be stable and we are pleased that initiatives such as increased assortment improvements insight merchandising and maturation in both pharmacy in private brands are contributing to ongoing expansion and lifetime value and an equal or foster payback period that proves out the efficacy of investment and new customer acquisition.

We believe we can further drive growth and profitability through innovation and technology that makes the process of finding and buying the right products easy convenient and enjoyable.

Petrol finds feature has provided us valuable insight into our customers and their pets.

We now have more than 5 million pet profiles, which enabled us to provide pet parents with a more personalized experience that helps them discover new products, including treats and toys that are breed and age-appropriate. In addition, we recently upgraded our core shopping checkout experience by launching digital payment products, starting with Paypal, which is recognized as a leading name and payment as a payment option across all of our shopping platforms. This represents another step in our journey of providing current and future customers with easy to use and broadly accepted payment options. Foundational to Chewy's success and leadership in our industry is our customer-centric culture fueled by the common purpose of our team members. United by our love for pets, we are building a great place to work for more than 12,000 chewtopians located at corporate offices customer service centers and fulfillment centers across the country. Growing our Boston team has been a strategic priority that has allowed us to tap into one of the leading U.S. markets for top talent.

Sumit Singh: In addition, we recently upgraded our core shopping checkout experience by launching digital payment products, starting with PayPal, which is recognized as a leading name in payments as a payment option across all of our shopping platforms. This represents another step in our journey of providing current and future customers with easy to use and broadly accepted payment options. Foundational to Chewy's success and leadership in our industry is our customer-centric culture, fueled by the common purpose of our team members. United by our love for pets, we are building a great place to work for more than 12,000 Chewtopians located at corporate offices, customer service centers, and fulfillment centers across the country. Growing our Boston team has been a strategic priority that has allowed us to tap into one of the leading US markets for top talent.

In addition, we recently upgraded our core shopping checkout experience by launching digital payment products, starting with Paypal, which is recognized as a leading name and payment as a payment option across all of our shopping platform.

This represents another step in our journey of providing current and future customers with easy to use and broadly accepted payment option.

Foundational to choose success and leadership in our industry is our customer centric culture fueled by the common purpose off our team members United by I'd Love for pets. We are building a great place to work for more than 12000 should topia ins located at corporate offices customer service centers and fulfillment centers across the country.

Growing or Boston team has been a strategic priority that has allowed us to tap into one of the leading U.S. markets for top talent.

Sumit Singh: Today, our Boston co-headquarter is home to over 325 Chewtopians. Recently, we were publicly recognized as an employer of choice in Boston. We are proud of this recognition as it represents our commitment to building a great place to work, a strong culture, and an engaged workplace community. As a city that is recognized as a hub for tech innovation, we look forward to further developing our Boston headquarters and deepening our presence in the community. From our dual headquarters to our pharmacy sites and our customer service and fulfillment centers throughout the US, we have put in place an experienced team that is focused on providing a high-bar customer experience, delivering a unique customer value proposition, and driving outsized value for our shareholders. Before I turn the call over to Mario, I'd like to take a few minutes to talk about our Q4 holiday season.

Today, our Boston core headquarter is home to or 325 chewtopians. Recently, we were publicly recognized as an employer of choice in Boston, We are proud of this recognition as it represents our commitment to building a great place to work, a strong culture and engaging workplace community. As a city that is recognized as a hub for tech innovation, we look forward to further developing our Boston headquarters and deepening our presence in the community.

Recently, we were publicly recognized as an employer of choice in Boston, We are proud off this recognition as it represents our commitment to building a great place to work a strong culture and engage workplace community.

As a city that is recognized as a hub for tech innovation, we look forward to further developing our Boston headquarters and deepening our presence in the community.

From our dual headquarters to a pharmacy sites on our customer service and fulfillment centers throughout the U.S., we have put in place an experienced team that is focused on providing a high bar customer experience delivering a unique customer value proposition and driving outsized value for our shareholders. Before I turn the call over to Mario, I'd like to take a few minutes to talk about our Q4 holiday season. These animals celebrations allow us to tap into that unique bond between pet parents and their family members delivering more joy to everyone.

Before I turn the call over to Mario I'd like to take a few minutes to talk about our Q4 holiday season.

Sumit Singh: These annual celebrations allow us to tap into that unique bond between pet parents and their furry family members, delivering more joy to everyone. This year, we launched a fully coordinated holiday shop, which provides a broad yet personalized selection of holiday products for every type of pet and pet parent. The holidays provide us an opportunity to expand our assortment and category depth in our most popular seasonal categories of holiday toys, treats, costumes, and apparel, and particularly in hard goods and our private brands. For example, this year, we launched seasonal toys and dog beds as part of our private label brand, Frisco, and have already seen a positive customer response to the newly launched categories.

These animals celebrations allow us to tap into that unique bond between pet parents and their free family members delivering more joy to everyone.

This year, we launched a fully coordinated holiday shop, which provides a broad yet personalized selection of holiday products for every type of pet and pet parent. The holidays provide us an opportunity to expand our assortment and category depth in our most popular seasonal categories in the holiday toys, treats, costumes, and apparel and particularly in hard goods and our private brands. For example, this year, we launched seasonal toys and dog beds as part of our private label brands Frisco. And I've already seen a positive customer response to the newly launched categories. To further support our holistic assortment, we implemented an integrated marketing approach to amplify visibility off our holiday shop through a combination of smart and well taught out social media email on-site and digital tactics. Last but not least, we enhanced our recommendation engine leveraging our vast amount of data to make better and more targeted products suggestions.

The holidays provide us an opportunity to expand our assortment and category depth in our most popular seasonal categories of Hollywood toys treats costumes, and apparel and particularly in hard goods and our private brands.

Example, this year, we launched seasonal toys and dog beds as part of our private label brands Frisco and I've already seen a positive customer response to the newly launched categories.

Sumit Singh: To further support our holistic assortment, we implemented an integrated marketing approach to amplify visibility of our holiday shop through a combination of smart and well-thought-out social media, email, on-site, and digital tactics. Last but not least, we enhanced our recommendation engine, leveraging our vast amount of data to make better and more targeted product suggestions. This strategy, which we designed to be even more deliberate this year, given the shorter holiday calendar, has been well-received by our new and existing customers. We are thrilled that Black Friday and Cyber Monday were record-setting days, with Cyber Monday being the single biggest shopping day in our company's history. Overall, we are pleased with our Q3 results and the underlying strength of our business.

To further support our holistic assortment, we implemented an integrated marketing approach to amplify visibility off our holiday shop through a combination of smart and bell taught out social media email on site and digital tactics last but not least we enhanced our recommendation engine leveraging our walked amount of data do make better and more targeted products.

Yeah.

This strategy, which we designed to be even more deliberate this year given the shorter holiday calendar has been well received by our new and existing customers. We are thrilled that Black Friday and cyber Monday were record-setting days, with cyber Monday being the single biggest shopping day in our company's history. Overall, we're pleased with our Q2 results and the underlying strength of our business. We continue to deliver market-leading growth at scale given by our commitment to our customers and informed by a long-range mindset that allows us to make decisions and investments, which maximize value. We look forward to a busy holiday season, and a strong finish to the year. Now I will turn the call over to Mario who will provide a more detailed review of our Q3 results and walk you through our financial outlook. Mario.

We are thrilled that black Friday, and cyber Monday were record setting days, but cyber Monday being the single biggest shopping day in our company's history.

Overall, we're pleased with our Q2 results and the underlying strength of our business, we continue to deliver market leading growth at scale given by our commitment to our customers and informed by long range mindset that allows us to make decisions and investments, which maximize value. We look forward to a busy holiday season, and a strong finished the year.

Sumit Singh: We continue to deliver market-leading growth at scale, driven by our commitment to our customers and informed by a long-range mindset that allows us to make decisions and investments which maximize value. We look forward to a busy holiday season and a strong finish to the year. Now, I will turn the call over to Mario, who will provide a more detailed review of our Q3 results and walk you through our financial outlook. Mario?

Now I will turn the call over to Mario who will provide a more detailed review of our Q3 results and walk you through our financial outlook Mario.

Mario Marte: Thank you, Sumit. Good afternoon, everyone. Our third quarter results highlight our business philosophy and focused execution. Net sales reached $1.23 billion, an increase of 40% compared to $875.6 million in Q3 2018, driven by growth in our customer base, catalog expansion, particularly in hard goods and private brands, and growth in our pharmacy business. Autoship customer sales reached $865.2 million, an increase of 49.2% compared to $579.9 million in Q3 2018. Again, outpacing growth in overall net sales. We ended the third quarter with 12.7 million active customers, an increase of 3.1 million customers versus Q3 2018, and 2.1 million versus the end of fiscal year 2018.

Thank you, Sumit. Good afternoon, everyone. Our third-quarter results highlight our business philosophy and focused execution. Net sales reached $1.23 billion, an increase of 40% compared to $875.6 million in Q3, 2018, driven by growth in our customer base, kettle of expansion, particularly in hard goods and private brands and growth in our pharmacy business. Auto-ship customer sales reached $865.2 million, an increase of 49.2% compared to $579.9 million in Q3, 2018. Again outpacing growth in overall net sales.

Good afternoon, everyone.

Our third quarter results highlight our business philosophy and focused execution.

Net sales reached $1.23 billion, an increase of 40% compared to $875.6 million in Q3, 2018, driven by growth in our customer base kettle of expansion, particularly in hard goods and private brands and growth in our pharmacy business.

Auto ship customer sales reached $865.2 million, an increase of 49.2% compared to $579.9 million in Q3, 2018 again outpacing growth in overall net sales.

We ended the third quarter with 12.7 million active customers, an increase of 3.1 million customers versus Q3 2018 and 2.1 million versus the end of fiscal year 2018. As a reminder, the increase in active customers in a reporting period captures both the inflow of new customers as well as the outflow of customers who have not made a purchase and the last 364 days. Gross margin for the quarter was 23.7%, a 410 basis point increase year over year, driven by gross margin expansion across all business verticals, including improvements in the margin profile of private brands and pharmacy. Q3 operating expenses, which are comprised of SG&A in advertising and marketing were $370.6 million or 30.1% of net sales. SG&A was $258.5 million or 21% of net sales. The increase in SG&A, as a percent of net sales, was driven by share-based compensation, which increased $36.1 million year over year. And the incremental costs associated with being a public company, driven primarily by do you know insurance as well as legal and audit expenses. Excluding these two items, SG&A as a percent of net sales was nearly flat year over year. Recall that SG&A for us includes fulfillment labor in facilities as well as customer service costs merchant fees and corporate payroll in facilities.

2.1 million versus the end of fiscal year 2018.

Mario Marte: As a reminder, the increase in active customers in a reporting period captures both the inflow of new customers as well as the outflow of customers who have not made a purchase in the last 364 days. Gross margin for the quarter was 23.7%, a 410 basis point increase year over year, driven by gross margin expansion across all business verticals, including improvements in the margin profile of private brands and pharmacy. Q3 operating expenses, which are comprised of SG&A and advertising and marketing, were $370.6 million or 30.1% of net sales. SG&A was $258.5 million, or 21% of net sales. The increase in SG&A as a percent of net sales was driven by share-based compensation, which increased $36.1 million year over year.

As a reminder, the increase in active customers in a reporting period captures both the inflow of new customers as well as the outflow of customers, who have not made a purchase and the last 364 days.

Gross margin for the quarter was 23.7%.

410 basis point increase year over year, driven by gross margin expansion across all business verticals, including improvements in the margin profile of private brands and pharmacy.

Q3, operating expenses, which are comprised of SGN, a in advertising and marketing were $370.6 million or 30.1% of net sales.

As Ginny was $258.5 million or 21% of net sales.

The increase in SGN, a as a percent of net sales was driven by share based compensation, which increased $36.1 million year over year.

Mario Marte: The incremental costs associated with being a public company, driven primarily by D&O insurance as well as legal and audit expenses. Excluding these two items, SG&A as a percent of net sales was nearly flat year over year. Recall that SG&A for us includes fulfillment labor and facilities, as well as customer service costs, merchant fees, and corporate payroll and facilities. I'd like to note that the team's disciplined execution drove a 40 basis points year over year cost reduction, driven by improvement in labor productivity and fixed fulfillment costs, which was offset by enterprise software investments, which we believe to be short-term in nature and scalable. Advertising and marketing was $112.1 million, or 9.1% of net sales, scaling 230 basis points year over year.

And the incremental costs associated with being a public company driven primarily by do you know insurance as well as legal and audit expenses.

Excluding these two items as DNA as a percent of net sales was nearly flat year over year.

Recall that as you in a for US includes fulfillment labor in facilities as well as customer service costs merchant fees and corporate payroll in facilities.

I'd also like to note the teams disciplined execution drove a 40 basis points year over year cost reduction driven by improvements in labor productivity and fixed fulfillment costs, which was offset by enterprise software investments, which we believed to be short term in nature and scalable. Advertising and marketing was $112.1 million or 9.1% of net sales, scaling 230 basis points year over year. As Sumit mentioned, our customer retention rates continue to be stable and we're pleased that our various initiatives and investments in growth and customer experience enhancements are contributing to ongoing expansion in customer lifetime value or LTV, which we measure as the cumulative contribution profits the right from the cohorts. This is valuable to us because we measure the efficiency of our new customer acquisition on the basis of LTV to CAC and we're observing an equal or faster payback period that continues to prove the efficacy of our marketing investment strategy.

Advertising and marketing was $112.1 million or 9.1% of net sales scaling 230 basis points year over year.

Mario Marte: As Sumit mentioned, our customer retention rates continue to be stable, and we are pleased that our various initiatives and investments in growth and customer experience enhancements are contributing to ongoing expansion in customer lifetime value, or LTV, which we measure as the cumulative contribution profits derived from the cohorts. This is valuable to us because we measure the efficiency of our new customer acquisition on the basis of LTV to CAC, and we are observing an equal or faster payback period that continues to prove out the efficacy of our marketing investment strategy. It may also be helpful to recall that our repeat orders from customers are profitable, and we reinvest those profits to acquire more new customers in a disciplined and data-driven manner while keeping a keen eye on these marketing efficacy metrics.

Submitted mention our customer retention rates continue to be stable and we're pleased that our various initiatives and investments in growth and customer experience enhancements are contributing to ongoing expansion in customer lifetime value or LTV, which we measure as the cumulative contribution profits the right from the cohorts.

This is valuable to us because we measure the efficiency of our new customer acquisition on the basis of LTV to CAC and we're observing an equal or faster payback period that continues to prove out the efficacy of our marketing investment strategy.

It may also be helpful to recall that our repeat orders from customers are profitable and we reinvest those profits to acquire more new customers in a disciplined and data-driven manner while keeping a keen eye on these marketing efficacy metrics. Q3 net loss was $79 million nearly flat versus Q3 2018 due to the impact of share-based compensation, which was $39.3 million in Q3 2019 and $3.2 million in Q3 2018. Net margin was negative 6.4%, improving 260 basis points year over year. Excluding the impact of share-based compensation in both Q3 2019 and Q3, 2018, net loss improved $35.7 million or 47.4% and net margin of negative 3.2% improved 540 basis points year over year.

Mario Marte: Q3 net loss was $79 million, nearly flat versus Q3 2018 due to the impact of share-based compensation, which was $39.3 million in Q3 2019 and $3.2 million in Q3 2018. Net margin was -6.4%, improving 260 basis points year-over-year. Excluding the impact of share-based compensation in both Q3 2019 and Q3 2018, net loss improved $35.7 million or 47.4%, and net margin of -3.2% improved 540 basis points year-over-year. Q3 adjusted EBITDA loss was $30.2 million, an improvement of $38.4 million compared to Q3 2018. Our adjusted EBITDA margin was -2.5%, improving 530 basis points year-over-year.

Q3, net loss was $79 million nearly flat versus Q3 2018 due to the impact of share based compensation, which was $39.3 million in Q3, 2019 and $3.2 million in Q3 2018.

Net margin was negative, 6.4%, improving 260 basis points year over year.

Excluding the impact of share based compensation in both Q3 2019 in Q3, 2018, net loss improved $35.7 million or 47.4% and net margin of negative, 3.2% improved 540 basis points year over year.

Q3 adjusted EBITDA loss was $30.2 million, an improvement of $38.4 million compared to Q3 2018. Our adjusted EBITDA margin was negative 2.5%, improving 530 basis points year over year. Improvements in both adjusted EBITDA and adjusted EBITDA margin reflects our ability to grow the top line while improving the bottom line. Executing against the strategy of long term sustainable growth and margin expansion. As we have shared previously, our adjusted EBITDA is a managed output. We earned profits from repeat orders and we take those profits plus the cash we generate from a favorable working capital strategy to invest in acquiring new customers.

Our adjusted EBITDA margin was negative, 2.5%, improving 530 basis points year over year.

Mario Marte: Improvements in both adjusted EBITDA and adjusted EBITDA margin reflect our ability to grow the top line while improving the bottom line, executing against a strategy of long-term sustainable growth and margin expansion. As we have shared previously, our adjusted EBITDA is a managed output. We earn profits from repeat orders and we take those profits plus the cash we generate from our favorable working capital strategy to invest in acquiring new customers. Free cash flow was a net use of $12.8 million in Q3 2019 and was comprised of cash from operations of +$1.6 million and capital investments totaling $14.4 million. In Q3, capital investments were primarily comprised of cash outlays for IT equipment, capitalization of internal and external labor, and spend associated with our Dayton, Ohio and Salisbury, North Carolina fulfillment centers.

Improvements in both adjusted EBITDA and adjusted EBITDA margin reflects our ability to grow the top line, while improving the bottom line.

Executing against the strategy of long term sustainable growth and margin expansion.

As we have share previously our adjusted EBITDA is a managed output.

We burn profits from repeat orders and we take those profits plus the cash we generate from a favorable working capital strategy to invest in acquiring new customers.

Free cash flow was a net use of $12.8 million in Q3 2019 and was comprised of cash from operations of positive $1.6 million and capital investments totaling $14.4 million. In the third quarter, capital investments were primarily comprised of cash outlays for IT equipment, capitalization of internal and external labor and spend associated with our Dayton, Ohio, and Salisbury, North Carolina fulfillment centers. We ended the third quarter was $135.9 million in cash and cash equivalents.

In the third quarter capital investments were primarily comprised of cash outlays for equipment capitalization of internal and external labor.

And spend associated with our Dayton, Ohio, and Salisbury, North Carolina fulfillment centers.

Mario Marte: We ended Q3 with $135.9 million in cash and cash equivalents. Now I'll turn to guidance. As we have shared previously, fiscal year 2018 was a 53-week year, while fiscal 2019 will be a 52-week year. The revenue contribution for this 53rd week in 2018 was approximately $83 million, which will be a headwind to year-over-year growth for full year 2019, and more meaningfully for Q4 2019, as well as a mid-single digit headwind to Q4 net sales per active customer. More information about the net sales impact of the extra week in 2018 can be found in our shareholder letter. Finally, we expect share-based compensation, which is reported in the SG&A of approximately $40 million in Q4 and Q1, Q2, and Q3 of 2020.

We ended the third quarter was $135.9 million in cash and cash equivalents.

Now I'll turn to guidance. As we've shared the previously, fiscal year 2018 was a 53 week year, while fiscal 2019 will be a 52 week year. The revenue contribution for this 53rd week in 2018 was approximately $83 million, which will be a headwind to year over year growth for full-year 2019. And more meaningfully for Q4 2019. As well as a mid-single dollar headwind to fourth-quarter net sales per active customer. More information about the net sales impact of the extra week in 2018 can be found in our shareholder letter.

As we've shared previously fiscal year 2018 was a 53 week year, while fiscal 2019 will be a 52 week here.

The revenue contribution for this 50 Threerd week in 2018 was approximately $83 million, which will be a headwind to year over year growth for full year 29 team and were meaningfully for Q4 2019.

As well as a mid single dollar headwind to fourth quarter net sales per active customer.

More information about the net sales impact of the extra week in 2018.

Can be found in our shareholder letter.

Finally, we expect share-based compensation, which is reported in the SG&A of approximately $40 million into the fourth quarter and first three quarters of 2020. We will provide additional guidance for fiscal year 2020 on our Q4 earnings call. For Q4, 2019, we expect net sales between $1.33 billion and $1.35 billion. Representing year over year growth of between 32% and 34% excluding the extra week in Q4 2018. For fiscal year 2019, we are raising guidance as follows. Net sales between $4.82 billion and $4.84 billion, representing year over year growth of 40%, excluding the extra week in fiscal 2018. This increase in guidance reflects third quarter outperformance as well as our improved outlook for the fourth quarter.

Mario Marte: We will provide additional guidance for fiscal year 2020 on our Q4 earnings call. For Q4 2019, we expect net sales between $1.33 and $1.35 billion, representing year-over-year growth of between 32% and 34%, excluding the extra week in Q4 2018. For fiscal year 2019, we are raising guidance as follows, net sales between $4.82 and $4.84 billion, representing year-over-year growth of 40%, excluding the extra week in fiscal 2018. This increase in guidance reflects Q3 outperformance as well as our improved outlook for the Q4. Adjusted EBITDA margin for the fiscal year is expected to improve 440 to 460 basis points versus fiscal 2018.

We will provide additional guidance for fiscal year 2020 on our Q4 earnings call.

For Q4, 2019, we expect net sales between $1.33 billion and $1.35 billion.

Representing year over year growth of between 32% and 34% excluding the extra week in Q4 2018.

For fiscal year 2019, we are raising guidance as follows.

Net sales between $4.82 billion and $4.84 billion, representing year over year growth of 40%, excluding the extra week in fiscal 2018.

This increase in guidance reflects third quarter outperformance as well as our improved outlook for the fourth quarter.

Adjusted EBITDA margin for the fiscal year is expected to improve 440 to 460 basis points versus fiscal 2018. This represents an increase to both the low end and high end of our previously provided guidance range. As we have previously shared, our EBITDA guidance includes costs related to operating as a public company. Financial and operating results through the first three quarters of 2019 demonstrate our ability to execute against our strategic plan and provide strong momentum as we close up 2019 and look ahead to 2020. With that, I'll turn the call over to the operator for questions. Operator.

Mario Marte: This represents an increase to both the low end and high end of our previously provided guidance range. As we have previously shared, our EBITDA guidance includes costs related to operating as a public company. Financial and operating results through Q1, Q2, and Q3 of 2019 demonstrate our ability to execute against our strategic plan and provide strong momentum as we close out 2019 and look ahead to 2020. With that, I'll turn the call over to the operator for questions. Operator?

This represents an increase to both the low end in high end of our previously provided guidance range.

As we have previously shared or EBITDA guidance includes costs related to operating as a public company.

Financial and operating results through the first three quarters of 29 team demonstrate our ability to execute against our strategic plan and provide strong momentum as we close up 29 team and look ahead to 2020.

With that I'll turn the call over to the operator for questions.

Later.

As a reminder, to ask a question you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. We will be taking one question and one follow up. Please standby, while we compile the Q&A roster. Your first question comes from the line of Doug Anmuth with JPMorgan. Your line is open.

Operator: As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. We will be taking one question and one follow-up. Please stand by while we compile the Q&A roster. Your first question comes from the line of Doug Anmuth with JPMorgan. Your line is open.

Please standby, while we compile the Q and a roster.

Your first question comes from the line of Doug Anmuth with JP Morgan Your line is open.

Cory Carpenter: Hey, it's Cory Carpenter on for Doug. Thanks for taking the question. Our question on gross margins, you know, up sequentially, despite what is typically a seasonally lower quarter for you guys. It sounded like pharmacy and private label were nice tailwinds. Could you just talk more about the initiatives having the biggest impact on overall gross margins? And then is there anything we should think about in terms of Q4 seasonality? Thanks.

Hey, it's Cory Carpenter on for Doug. Thanks for taking the question. Our question on gross margins up sequentially despite what is typically a seasonally lower quarter for you guys. It sounded like pharmacy in private label were nice tailwinds, but could you just talk more about the initiatives having the biggest impact on overall gross margins. And then is there anything we should think about in terms of 4Q seasonality? Thanks.

And then is there anything we should think about in terms of Fourq you seasonality. Thanks.

Hi, Cory, this is Mario. I'll sort of the answer and then Sumit can add maybe more color as we go through. You know we saw a strength in pricing across the business in the quarter. And as you can tell by what we included in the script and in the shareholder letter, we're excited about the contribution of the new verticals, both pharmacy and private brands. And in the quarter, we were pleased to see the impact of map pricing in pharmacy in the back half for the quarter. So the business overall is performing well. Cory, happy to take a follow up if you have one.

Mario Marte: Hi, Cory. This is Mario. I'll start off the answer and then Tameka can add maybe more color as we go through. You know, we saw strength in pricing across the business in the quarter. As you can tell by what we included in the script and in the shareholder letter, we're excited about the contribution of the new verticals, both pharmacy and private brands. In the quarter, we were pleased to see the impact of MAP pricing and pharmacy in the back half of the quarter. The business overall is performing well. Cory, happy to take a follow-up if you have one.

You know we saw strength in pricing across the business in the quarter.

And as you can tell by what we included in the script and in the shareholder letter. We're excited about the contribution of the new verticals, both pharmacy and private brands.

And in the quarter, we were pleased to see the impact of map pricing in pharmacy in the backup for the quarter.

So the business overall is performing well.

[noise].

Pretty happy to take a follow up if you have on [noise].

Your next question comes from the line of Lauren Cassel with Morgan Stanley. Please go ahead.

Operator: Your next question comes from the line of Lauren Cassel with Morgan Stanley. Please go ahead.

Lauren Cassel: Great. Thanks for taking my question. Maybe just following up on pharmacy, any update on what percentage of the business that should represent at the end of this year? Any other milestones you reached in that business during the quarter that you could share? Just one follow-up on Black Friday, Cyber Monday, any commentary on the promotional environment for yourself and for competitors around those few days? Thanks.

Great. Thanks for taking my question, maybe just following up on pharmacy. Any update on what percentage of the business that you represent at the end of this year and any other milestones you reach and that business during the quarter to you could share. And then just one follow up on Black Friday, Cyber Monday any commentary on the promotional environment for yourself and for competitors around those few days? Thanks.

In for competitors around those those few days thanks.

It's a similar type.

Sumit Singh: This is Sumit, hi. On pharmacy, you know, we're still growing the business, and we're very happy with the way that we're growing the business. I think the meaningful input this time is the fact that as we continue to invest behind the growth and the customer experience, we're also driving to be a meaningful and profitable franchise, which is reflected in the way that we've grown gross margins, both by the support of assortment. I think one of the hypotheses that we've said in the past is, you know, Autoship subscribe rates to pharmacy, you know, should be higher and attractive, and we're seeing those kind of data points start to come true. The business is still in its growth phase, and so, we are going to continue to invest and grow it in a meaningful manner.

On pharmacy.

On pharmacy, w are we're still growing the business and we're very happy with the way that we're growing to business. I think the meaningful and put it this way this time is the fact that as we continue to invest behind the growth and the customer experience, we're also driving to be a meaningful and profitable franchise, which is reflected in the way that we've grown gross margins both by the support of assortment. I think one of the hypotheses that we've said in the past is ownership subscribers to pharmacy should be higher and attractive and we're seeing those kinds of data points start to come true. [inaudible] still in its growth phase and so we are going to continue to invest and grow it in a meaningful manner. Not much more to comment there today.

by the support of assortment. I think one of the hypotheses that we've said in the past is ownership subscribers to pharmacy should be higher and attractive and we're seeing those kinds of data points start to come true. [inaudible] still in its growth phase and so we are going to continue to invest and grow it in a meaningful manner. Not much more to comment there today.

Ownership subscriber adds to pharmacy should be higher an attractive and we're seeing those kind of data points start to come true then still in its growth phase and so.

we are going to continue to invest and grow it in a meaningful manner. Not much more to comment there today.

Sumit Singh: Not much more to comment there today. On Black Friday, Cyber Monday promotional activity, look, I think first thing to be said is we planned diligently, thoroughly, and executed flawlessly in the way that we went to market. We were happy to see that promotional environment, you know, as far as we were concerned, was relatively stable, and there's not much to mention outside of that.

On Black Friday, Cyber Monday promotional activity look I think the first thing to be said is we planned diligently entirely and executed flawlessly in the way that we went to market. We were happy to see that promotional environment. As far as we were concerned was relatively stable. And there's not much to mention outside of that. Great. Thank you.

As far as we were concerned was relatively stable.

And there's not much to mention outside of that.

Great. Thank you.

Lauren Cassel: Great. Thank you.

Your next question comes from the line of Brent Thill with Jefferies. Your line is open.

Operator: Your next question comes from the line of Brent Thill with Jefferies. Your line is open.

Hi. This is John [inaudible] on for Brent Thill. Thanks for taking my question. Revenue guidance in Q4 implies growth [accelerates] sequentially quite a bit even after adjusting for one less week. Can you discuss the puts and takes of your Q4 revenue guidance and how we should think about be outlook in terms of your forward growth potential? Thanks.

John Colantuoni: Hi, this is John Colantuoni on for Brent Thill. Thanks for taking my question. Revenue guidance in Q4 implies growth accelerates sequentially quite a bit even after adjusting for one less week. Can you discuss the puts and takes of your Q4 revenue guidance and how we should think about the outlook in terms of your forward growth potential? Thanks.

Revenue guidance in Q4 implies growth celebrates sequentially quite a bit even after adjusting for one less week can you discuss the puts and takes of your Q4 revenue guidance and how we should think about be outlook in terms of your forward growth potential. Thanks.

Yes. Hey, John. This is Mario. I'll take that one first. When you're talking about it in total absolute dollar terms, it still implies a significant growth year over year. But the base is getting larger so just naturally you will see as the revenue base gets larger, we would see a decrease in terms of percentage. But I would say this, the range for full year. And by connection for fourth quarter on the revenue side, both the low end and high end went up in this guidance.

Mario Marte: Yeah. Hey, John, this is Mario. I'll take that one first. We're talking about in total absolute dollar terms. It still implies significant growth year over year. The base is getting larger, so just naturally, you'll see, as the revenue base gets larger, we would see a decrease in terms of percentage. I would say this, the range for full year, and by connection for Q4 on the revenue side, both the low end and the high end went up in this guidance.

When you're talking about it in total absolute dollar terms, it's still implies a significant growth year over year.

But the base is getting larger so just naturally you will see a as a percent as the revenue base gets larger we would see a decrease in terms of percentage, but I would say this we should be the range for full year.

And by connection for fourth quarter on the revenue side, both the low end and high end went up and discarded.

Great and we also noticed during the quarter that the first order auto-ship discount fluctuated at certain periods of the quarter. Can you discuss if this was a reflection of promotions around the holiday, the competitive reaction of some sort or you just continuing to test the right balance of promotions? Thanks.

John Colantuoni: Great. We also noticed during the quarter that the first order Autoship discount fluctuated at certain periods of the quarter. Can you discuss if this was a reflection of promotions around the holiday, a competitive reaction of some sort, or are you just continuing to test the right balance of promotions? Thanks.

During the quarter that ought be on the first order autoship discount fluctuated at certain periods of the quarter can you discuss if this was a reflection of promotions around the holiday competitive reaction of some sort or you just continuing to test the right balance of promotions. Thanks.

John, I think you may be referring to the temporarily we increased our first-time autoship order to about 60% off with a couple of about $30 and that's just natural it when during the holidays. And then well when we see competitors doing something similar, we remain competitive. In the market, but that was very limited. I think it less at about three days, possibly.

Sumit Singh: John, I think you may be referring to temporarily we increased our first time Autoship order to about 60% off with a cap of about $30. That's just natural during the holidays. When we see competitors doing something similar, we remain competitive in the market. That was very limited. I think it lasted about 3 days, possibly.

In the market, but that was a very limited I think it less at about three days, possibly.

Great. Thank you so much. Your next question comes from the line of Erin Wright with Credit Suisse. Your line is open.

John Colantuoni: Great. Thank you so much.

Your next question comes from the line of Aaron right with Credit Suisse. Your line is open.

Operator: Your next question comes from the line of Erin Wright with Credit Suisse. Your line is open.

Erin Wright: Great. Thanks. Can you speak to your efforts to align yourself with veterinary practices to capture greater share in pharmacy? Where are you at in the process or even a pilot process, in terms of better partnering with the veterinarians that still control the vast majority of scripts? Thanks.

Great. Thanks. Can you speak to your efforts to align yourself with the veterinary practices to capture a greater share in pharmacy, where are you add in the process or even a pilot process in terms of better partnering with the veterinarian site still control the vast majority of scrap? Thanks.

Sumit Singh: This is Sumit. I'll take that. Thanks for the question. We continue to have meaningful conversations with our veterinary partners across the country. Notice that, you know, first, we believe that we are meaningfully contributing to health and wellness for pets in the pet space. There's a couple dimensions in that answer. One is we, with the way that we know our customers, the way we track their information, the way the relationships are built, we have a unique ability to interact with them, educate them, and make them aware of, you know, the health and wellness space, but also, you know, the advantage of taking their pets to the vet at the required frequency.

System It will take that.

Thanks for the question. We continue to have meaningful conversations with our veterinary partners across the country. Notice that, first we believe that we are meaningfully contributing to health and wellness for pets and pets' parents. There's a couple dimension to that answer. One is we witnessed way that we know our customers. The way we track their information, the way that relationships are built we have a unique ability to interact with them. And educate them and make them aware of the health and wellness space, but also you know the advantage of taking their pets to those that at the required frequency. One other things that plagues the industry today is the fact that compliance overall in the veterinarian space is lower than it really should be or could be and we are stepping in into the middle of that via products like autoship and [inaudible] our deep connection with our customers and our marketing tools and our directive capability to be able to go out and create that education and awareness with them drive that traffic back into veterinarian channels. So that's one. Number two, I think the second conversation that we're having is look, veteranians are spending a lot of time in their offices.

Notice that a unfortunately believed that we are meaningfully contributing to health and wellness for patent about space and if there's a couple dimension them that answer one is we witnessed way that we know our customers. The way we track their information the wave that relationships are built we have a unique ability to interact with them [noise].

And educate them and make them aware off the health and wellness space, but also you know the did wantage of taking their pets to those that at the required frequency one other things that plagues. The industry. Today is the fact that compliance overall in the veterinarian space is lower than it really should be or could be and we are stepping.

Sumit Singh: One of the things that plagues the industry today is the fact that compliance overall in the veterinarian space is lower than it really should be or could be. We are stepping into the middle of that via products like Autoship and via our deep connection with our customers, and our marketing tools, and our directed capabilities to be able to go out and create that education and awareness, but then drive that traffic back into veterinarian channels. That's one. Number two, I think the second conversation that we're having is, look, veterinarians spend a lot of time in their offices. You know, vets should be focused on taking care of their pets, and they love doing that. We're stepping into that equation and developing or having conversations about developing the products and tools that will help increase productivity in the vet space.

the middle of that via products like autoship and [inaudible] our deep connection with our customers and our marketing tools and our directive capability to be able to go out and create that education and awareness with them drive that traffic back into veterinarian channels. So that's one. Number two, I think the second conversation that we're having is look, veteranians are spending a lot of time in their offices.

You know they should be focused on taking care of their pets and they love doing that and so we're stepping into that that equation, then developing or having conversations about developing the products and tools that will help increase productivity in the vet space. And the early days in the conversation and there are many different dimensions that we will consider and we're happy about the way that we're treating it right now. If there is a specific follow up happy to take it.

Sumit Singh: Early days in the conversation, and there are many different dimensions that we will consider, and we're happy about the way that we're treating it right now. If there's a specific follow-up, happy to take it.

If there is a specific follow up happy to take it.

Erin Wright: Yes. I do have a follow-up. It's quite specific, but I do have a follow-up. I am curious both on the prescription side and over-the-counter side, your positioning and exposure to parasiticides, particularly heading into next year. That would include flea, tick, and heartworm preventatives, both over the counter and prescription. Just heading into next year, there will be a new combination flea, tick, and heartworm product that will hit the market in Q1. Do you think you're at risk for some cannibalization of your OTC business, or how should we anticipate that will impact pricing across that category? It is a highly seasonal category, it'll be more important kind of heading into next year. But, I guess, will this dynamic be material from a financial perspective for you?

Yes, I do have. It's quite specific but I do have a follow-up. So I am curious both on the prescription side and over the counter side you're positioning and exposure to parasiticides, particularly heading into next year. So that would include flea,> tick and heartworm preventive supposed to over the counter and prescription just heading into next year, there will be a new combination flea tick and heartworm product that will hit the market in the first quarter. Do you think you are at risk for some cannibalization of your OTC business or how should we anticipate that will impact pricing across that category? It is a highly seasonal category. So it'll be more important kind of heading into next year, but I guess will this dynamic be material from a financial perspective for you?

Into next year, there will be a new combination flea tick and heartworm product.

That will hit the market in the first quarter.

Do you think you are at risk for some cannibalization of your OTC business or how should we anticipate that will impact pricing across that category? It is a highly seasonal category. So it'll be more important kind of heading into next year, but I guess will this dynamic be material from a financial perspective for you?

Sumit Singh: I think, yeah, our tenet is to bring the broadest assortment to the customers and offer it in the most competitive prices at the best experience. That philosophy will not change for us, regardless of how the mix changes in the industry. We're, you know, we're here to play and watch the game alongside with you.

I think our [tenant] is to bring the broadest assortment to the customers and offer it at the most competitive prices at the best experience. And that philosophy will not change for us regardless of how the mix changes in the industry. So we're here to play and what's the game alongside with you. Okay. Thank you.

Okay. Thank you.

Erin Wright: Okay. Thank you.

Your next question comes from the line of Mark Mahaney with RBC capital markets. Your line is open.

Operator: Your next question comes from the line of Mark Mahaney with RBC Capital Markets. Your line is open.

Okay, great. Thanks, just one question the autoship penetration rose. I think that was a record high. Just if you could please talk to the drivers of that and how to think about that going forwards. Thank you.

Mark Mahaney: Hey, great, thanks. Just one question. The Autoship penetration rose. I think that was a record high. Just, if you could, please talk to the drivers of that and how to think about that, going forward. Thank you.

Penetration Rose think that was a record high just if you could please talk to the drivers of that and how to think about that oh going forwards. Thank you.

Sumit Singh: Hi, Mark. Good to hear from you. This is Sumit. I'll take that one. I think the first input is the assortment growth that we are proudly positioning at 25% increase in year-over-year assortment. A bunch of that was in consumables, a bunch of that was in hard goods. Number two, I would attribute it to the increase in the targeting capability that we have, both driven by an improvement in our recommendation science, but also in a way that we are able to extract data from Pet Profiles to be able to make more meaningful basket size recommendation at the point that the customer is interacting with us. Last but not least, I would point back to the newer subverticals, particularly pharmacy in the way that these businesses are growing and starting to mix in.

Hi, Mark. Good to hear from you. This is Sumit, I'll take that one. I think the first input is the assortment growth that we're proudly positioning at 25% increase in year over year assortment. A bunch of that was in consumables, a bunch of that was in hardgoods. Number two, I would attribute it to the increase in the targeting capability that we have both driven by an improvement in our recommendation science, but also in a way that we're able to extract it up on pet profiles to be able to make more meaningful basket size recommendation at the point that the customers interacting with us. Last but not at least, I would point back to the newer sub verticals, particularly pharmacy and the way that these businesses are growing and starting to mix and those three are a combination. And that's what's driving the rate.

In science, but also a in a way that we're able to extract it up on pet profiles to be able to make more meaningful basket size recommendation at the point that the customers interacting with us.

Last but not at least, I would point back to the newer sub verticals, particularly pharmacy and the way that these businesses are growing and starting to mix and those three are a combination. And that's what's driving the rate.

Sumit Singh: Those three are a combination, and that's what's driving the rate.

And that's what's driving the rate.

Okay. Thank you, Sumit. Your next question comes from the line of Deepak Mathivanan with Barclays. Your line is open.

Mark Mahaney: Okay. Thank you, Sumit.

Operator: Your next question comes from the line of Deepak Mathivanan with Barclays. Your line is open.

Your next question comes from the line of Deepak Math, Fannie with Barclays. Your line is open.

Deepak Mathivanan: Hey, guys. Thanks for taking the question. First on the private label business, seems like there's strong penetration already in some of the categories like hard goods. What do you need to do to achieve, you know, similar penetration on bigger categories like consumables over the next few quarters? Second question on the pharmacy business, gross margin. You called out 650 basis points improvement, but how should we think about the gross margin profile of pharmacy products currently versus other categories like consumables? How do you expect that to be long term? Thank you.

Hi, guys. Thanks for taking the questions. So first on the private label business, seems like the strong penetration opportunity in some of the categories like hard goods, what do you need to do to achieve similar penetration on bigger in categories like consumable over the next few quarters? And then second question on the pharmacy business. Gross margin you called out 650 basis points improvement. But how should we think about the gross margin profile of pharmacy products currently with these other categories like consumables? And also how do you expect that to be long term? Thank you.

Gross margin you called out 650 basis points improvement.

But how should we think about the gross margin profile of pharmacy products currently with these other categories like consumables? And also how do you expect that to be long term? Thank you.

And also how do you expect that to be long time. Thank you.

Hi, Deepak, this is Sumit. I'll take that. The core inputs for us growing private label, we're happy with the way that we're growing penetration of these categories. These categories are you know. In terms of the growth our assortment built is not completely built out so in meaningful category and highest B categories, such as crates, such as dog beds, we're still really rolling out assortment. That's one in the way that we grow assortment and in the way we see penetration, increasing and hard goods. On the consumable side, I think recall that we had said you know we're careful about creating brands that are competitive in nature. And in that way, we have great brands products like tie leave behind which were getting and making sure that these newer type subcategories right. We've mentioned freeze-dried year industrial bond and choose. These are really premium categories that were getting behind to be able to grow them into a meaningful share. And then last but not least, our American Journey brand of products, which is a full suite of products across food up different grades as well as different treats it's something that we are starting to integrate back into our merchandising to go to market in a much more coherent and smart merchandise manner. So that's the answer to the private brand. On the RX, I think recall that we have said that over the long term, we expect RX to be 300 to 500 basis points gross profit accretive to the base business and we're maintaining that stand as of today's call.

Sumit Singh: Hi, Deepak. This is Sumit. I'll take that. Look, the core inputs of us growing private label, we're happy with the way that we're growing penetration of these categories. These categories are, you know, in terms of the growth, our assortment built is not completely built out. So in meaningful, you know, categories, high ASP categories such as crates, such as dog beds, we're still really rolling out assortment. That's one in the way that we grow assortment in the way that we see penetration increasing in hard goods. On the consumable side, you recall that we've said, you know, we're careful about creating brands that are competitive in nature. In that way, we have great brands products like Tylee's behind which we're getting and making sure that these newer type subcategories, right?

In terms of the growth our assortment built is not completely built out so in meaningful category and highest be categories, such as Craig such as dawn beds were still really rolling out assortment. That's one in the way that we grow assortment and in the way the B C penetration, increasing and hard goods on the consumable side I think recall that.

I had said you know we're careful about creating a brands that are competitive in nature and in that way, we have great brands products like tie leave behind which were getting and making sure that these these newer type subcategories right. We've mentioned freeze dried year industrial bond and choose these are really premium categories that were getting behind.

Sumit Singh: We've mentioned freeze-dried here and natural bones and chews. These are really premium categories that we're getting behind to be able to grow them into a meaningful share. Last but not least, our American Journey brand of products, which is a full suite of products across food of different grades as well as different treats, is something that we are starting to integrate back into our merchandising, to go to market in a much more coherent and smart merchandise manner. That's the answer to the private brands. On the Rx, I think, recall that we've said that over the long term, we expect Rx to be 300 to 500 basis points, gross profit accretive to the base business. We're maintaining that stand, as of today's call.

to be able to grow them into a meaningful share. And then last but not least, our American Journey brand of products, which is a full suite of products across food up different grades as well as different treats it's something that we are starting to integrate back into our merchandising to go to market in a much more coherent and smart merchandise manner. So that's the answer to the private brand.

So that's the answer to the private brand.

On the RX, I think recall that we have said that over the long term, we expect RX to be 300 to 500 basis points gross profit accretive to the base business and we're maintaining that stand as of today's call.

Deepak Mathivanan: Okay. Thanks, Sumit.

Okay. Thanks, Sumit. Your next question comes from the line of Brian Fitzgerald with Wells Fargo. Your line is open.

Your next question comes from the line of Brian Fitzgerald with Wells Fargo. Your line is open.

Operator: Your next question comes from the line of Brian Fitzgerald with Wells Fargo. Your line is open.

Brian Fitzgerald: Thanks. A couple questions. It's been a couple quarters or a quarter and a half since you put the new DMP in place. How would you grade your integration and execution there? Any color on what you're seeing in terms of channel breadth or exercising more strategic and tactical marketing muscles as we progress through Q4? On the RxManager, you talked a bit about the RxManager. Did you mention what the penetration is there? And maybe what customer acquisition channels are giving you the most bang for the buck there? Thanks.

Thanks, a couple of questions. It's been a couple of quarters or a quarter and a half since it's a new DMT in place. How did you grade your integration execution there? Any color on what you're seeing in terms of channel breath or exercising more, strategic and tactical marketing muscles as we progress through Q4. And then you've talked a bit about the VR expenditure. Did you mention what the penetration is there and maybe what customer acquisition channels or give me the most banks for the buck there. Thanks.

And then on the you've talked a bit about the VR expenditure.

Did you mentioned with the penetration is there and maybe what customer acquisition channels or give me the most banks for the Buck there. Thanks.

Sumit Singh: Sure. Two-part question, DMP in general and then pharmacy. I'll take the first one first. DMP, we are seeing, we're continuing to experiment with the DMP, and we have utilized it both in our private brands segmentation exercises, as well as our go-to-market with pharmacy. You know, these are smaller verticals, but they're allowing us to prove out the efficacy of the DMP. In the holiday season, particularly when we went to market across the Cyber Week, we did use the DMP to be able to cross-check against smart segmentation. From that point of view, early days for us, not much more than that to comment.

Sure. So two-part question, DMP in general and then pharmacy. I'll take the first one first. DMP, so we are seeing we're continuing to experiment with the DMP and we have utilized it both in our private brands segmentation exercises as well as our go-to-market with pharmacy. And you know these are smaller verticals but there are allowing us to prove out the efficacy of the DMP. In the holiday season, particularly we went to market across the fiber week. We did you use the DMP to be able to cross-check against smart segmentation. And so from that point of view early days for us not much more than that to comment, but you can see it lends you insights into the way that we're utilizing the data and the capability of the management data management platform to be able to perform small segmentation and tie that to our marketing channel mix and go to market overall, that's the first part of the answer. The second question was on RX manager progress.

DMP. So we are we are seeing we're continuing to experiment with the DMP and we have utilize it both in our private brands segmentation exercises as well as our go to market with pharmacy and a you know these are smaller word to goes but there are allowing us to prove out the efficacy of the DMP into holiday season, particularly.

market across the fiber week. We did you use the DMP to be able to cross-check against smart segmentation. And so from that point of view early days for us not much more than that to comment, but you can see it lends you insights into the way that we're utilizing the data and the capability of the management data management platform to be able to perform small segmentation and tie to our marketing channel mix and go to market overall, that's the first part of the answer. The second question was on RX manager progress.

Sumit Singh: You can see it lends you insight into the way that we're utilizing the data and the capability of the management data management platform to be able to perform smart segmentation and tie that to our marketing channel mix and go to market overall. That's the first part of the answer. The second question was on RxManager progress. Look, we believe we are in early days in terms of product innovation across Rx products. We're happy with the way My Pet Prescriptions is going. As of this point, you know, about 10% to 15% of our customers are engaging with it. That is pretty tremendous progress considering that we launched that product less than four months ago.

To tie that to our marketing channel mix and go to market overall, that's the first part of the of the answer the second question wasn't Rx manager progress.

We believe we had early days in terms of product innovation across Rx products were happy with the way MyPet prescriptions is going. And as of this point and you know about 10% to 15% of our customers are engaging with it and that is pretty tremendous progress considering that we lump that product less than four months ago. In terms of customer acquisition channels that are performing best, I think the way I would say that is we have a tremendous proposition in front of us to be able to make sure that we can expose our 12.7 million existing customers to pharmacy. And they loved that proposition. Along the same way, we've opened up a channel that is a new channel of acquisition for Us and we're happy about that as well. I think that's, I would limit my comments to that for now.

And as Adam as of this point and you know about 10% to 15% of our customers are engaging with it and that is pretty tremendous progress considering that we lump that product less than four months ago.

Sumit Singh: In terms of customer acquisition channels that are performing best, I think the way I would say that is, look, we have a tremendous proposition in front of us to be able to make sure that we can expose our 12.7 million existing customers to pharmacy, and they love that proposition. Along the same way, we've opened up a channel that is a new channel of acquisition for us, and we're happy about that as well. I think that's. I will limit my comments to that for now.

In terms of customer acquisition channels that are performing best, I think the way I would say that is we have a tremendous proposition in front of us to be able to make sure that we can expose our 12.7 million existing customers to pharmacy. And they loved that proposition. Along the same way, we've opened up a channel that is a new channel of acquisition for Us and we're happy about that as well. I think that's, I would limit my comments to that for now.

I think that's that's a a limit my comments to that for now.

Great. Thanks. Your next question comes from the line of Mark Kelly from Nomura. Your line is open.

Brian Fitzgerald: Great. Thanks, Sumit.

Your next question comes from the line of Mark Kelly from Nomura. Your line is open.

Operator: Your next question comes from the line of Mark Kelley from Nomura. Your line is open.

Mark Kelley: Great. Thanks, guys. The first question is, you know, looking back at Q4 of last year. I think that was the first quarter where you guys stepped up your first Autoship order discount to 30% from 15%. Curious if you can remind us how much of a bump do you think that provided to annual growth last year just to kind of level set. Number 2, I know it's a little early to think about next year. You gave us a little bit of color on some of the stock-based comp stuff, which is helpful. Just curious if you can give us a little bit of help on, you know, the seasonality and cadence of gross margins next year.

Great. Thanks, guys. The first question is looking back in Q4 of last year, I think that was the first quarter when you guys stepped up your first auto-ship order discount to 30% from 15. I'm curious if you could remind us how much of a bump you think that provided to annual growth last year, just to kind of level said. And then number two, I know it's a little early to think about next year, you gave us a little bit of color on some of the stock-based comp stuff, which is helpful. Just curious if you can give us a little bit of help on the seasonality and cadence of gross margins next year. I would imagine it's similar to this year given that you're launching the North Carolina F.C. in Q2, and it's kind of the same size a statement, but any thoughts there would be really helpful. Thank you, guys.

First question is looking back in Q4 of last year I think that was the first quarter. When you guys stepped up your first auto ship order discount to 30% from 15 curious if you could remind us how much of a bump you think that provided a to its annual growth last year, just to kind of level said.

And then number two, I know it's a little early to think about next year, you gave us a little bit of color on some of the stock-based comp stuff, which is helpful. Just curious if you can give us a little bit of help on the seasonality and cadence of gross margins next year. I would imagine it's similar to this year given that you're launching the North Carolina F.C. in Q2, and it's kind of the same size a statement, but any thoughts there would be really helpful. Thank you, guys.

Mark Kelley: I would imagine it's similar to this year, given that you're launching, you know, the North Carolina FC in Q2, and it's kinda the same size as Dayton. Any thoughts there would be really helpful. Thank you, guys.

In Q2, and it's kind of the same size a statement, but any thoughts there would be really helpful. Thank you guys.

Sumit Singh: Okay. I'll take the first one. It's nice to hear from you, Mark. Mario will take the second one. The Autoship, the way to think about that, it's actually not a clean way to think about it in the way that you're asking the question. Autoship, remember, is a four-quarter rolling number in the back. Look, we are extremely data-driven, disciplined, and we spend cash in a responsible manner. When we change discount levels, we are careful about not only the subscription rate that comes in at the top of the funnel, we're also careful about the cancellation rate that might occur at the bottom of that funnel, and we try to find that point of optimality where we actually go out and price the Autoship discount and cap it to the dollar value.

Okay, I'll take the first one. I'll take the first one, Marion will take the second one. The autoship. The way we think about that exactly not a clean way to think about it in the way that you're asking the question, Autoship remember is a full quarter rolling number in the back. So our increased look we are extremely data-driven disciplined. And we spend cash in a responsible manner. So when we change discount levels, we are careful about not only the subscription rent that comes in at the top of the funnel, we're also careful about the cancellation rent that might occur at the bottom of the funnel and we tried to find that point of optimality where we actually go out and price the autoship discount and cap it to the dollar value. That's how we think about it. So the level that we're at right now is the optimal level for us and we're happy about that. That's really the way to think about autoship.

And we spend cash in a responsible manner. So when we change discount levels, we are careful about not only the subscription rent that comes in at the top of the funnel, we're also careful about the cancellation rent that might occur at the bottom of the funnel and we tried to find that point of optimality where we actually go out and price the autoship discount and cap it to the dollar value.

Sumit Singh: That's how we think about it. The level that we're at right now is the optimal level for us, and we're happy about that. That's really the way to think about Autoship. Mario?

That's how we think about it. So the level that we're at right now is the optimal level for us and we're happy about that. That's really the way to think about autoship.

Yeah, I'll take the question on stock-based compensation. So two things about it. I believe your question is. What do you expect on that going forward and as we said in the prepared remarks, the expense of $40 million is only we capture both in Q2, Q3, and we expect in Q4 and at least the first three quarters of 2020. I can expand on that if you have any additional questions. Yes, sorry, I meant more gross margin, Mario, sorry about that. With data with North Carolina coming on and just kind of the moving pieces as we go through the year, that would be great. Thank you. Yeah. No, certainly I think your question then on next year. Two things, one is there are many factors that go into a gross margin and what we've shown is so we can expand gross margin while continuing to grow the top line. We have a showing a record of that. Seasonality, we don't experience much for seasonality in the business as you've seen in our historical financials. But quarter to quarter, you would expect some fluctuations and that's driven by discounting market dynamics. The fact that we're launching a new facility in North Carolina would be helpful, like every other facility we've launched helps close the arc to the customer. But the reality is are there are so many other factors not necessarily related to that specific not to that to the network topology, let me put it that way.

Mario Marte: Yeah, I'll take the question on stock-based compensation. So two things about it. I believe your question is what should you expect on that going forward? As we said in the prepared remarks, the expense of $40 million is something that we capture both in Q2, Q3, and we expect in Q4 and at least the first three quarters of 2020. I can expand on that if you have any an additional question.

What do you expect on that.

Going forward and as we said in the prepared remarks.

The <unk> the expense of $40 million is only a we capture both in.

Q2, Q3, and we expect in Q4 in at least the first three quarters of 2020.

I can I can expand on that if you have any.

Additional question, yes, sorry, I meant more gross margin Mario sorry about that no got it.

Mark Kelley: Yeah, sorry. I meant more gross margin, Mario. Sorry about that.

Mario Marte: Oh, got it.

Mark Kelley: Yeah.

Mario Marte: Yeah.

Mark Kelley: Just, you know, with North Carolina coming on and just kinda the moving pieces as we go through the year, that would be great. Thank you.

Just.

With data with North Carolina coming on and just kind of the moving pieces as we go through the year, that would be great. Thank you. Yeah. No, certainly I think your question then on next year. Two things, one is there are many factors that go into a gross margin and what we've shown is so we can expand gross margin while continuing to grow the top line.

Mario Marte: Yeah, no, certainly. I think your question then on next year, two things. One is there are many factors that go into gross margin, and what we've shown is that we can expand gross margin while continuing to grow the top line. We have shown a record of that. Seasonality, we don't experience much with seasonality in the business, as you've seen in our historical financials. Quarter to quarter, you would expect some fluctuations, and that's driven by discounting market dynamics. The fact that we're launching a new facility in North Carolina would be helpful. Like, every other facility we've launched helps close the arc to the customer.

Two things one is there are many factors that go into a gross margin and what we've shown it. So we can expand gross margin while continuing to grow the top line.

We have a showing a record of that. Seasonality, we don't experience much for seasonality in the business as you've seen in our historical financials. But quarter to quarter, you would expect some fluctuations and that's driven by discounting market dynamics. The fact that we're launching a new facility in North Carolina would be helpful, like every other facility we've launched helps close the arc to the customer. But the reality is are there are so many other factors not necessarily related to that specific not to that to the network topology, let me put it that way.

Seasonality or we don't experienced much what seasonality in the business as you've seen in our historical financials.

But it quarter to quarter, you would expect some some fluctuations and that's driven by discounting market dynamics.

The fact that we're launching new facility in North Carolina.

I would be helpful. Like every other facility, we've launched helps close the arc to the customer but the reality is are there. There's so many other factors not necessarily related to that specific not to that to the.

Mario Marte: The reality is that there are so many other factors, not necessarily related to that specific, not to the, let's say network topology. Let me put it that way.

It's a network topology, let me put it that way.

Mark Kelley: Okay. Thank you, guys.

Okay. Thank you. Your next question comes from the line of Erin Wright with Credit Suisse. Your line is open.

Mario Marte: Mm-hmm.

Your next question comes from the line of Aaron Right Credit Credit Suisse. Your line is open.

Operator: Your next question comes from the line of Erin Wright with Credit Suisse. Your line is open.

Erin Wright: Great. Thanks for taking a couple of follow-ups here. My first one is on FDA warnings on grain-free dog food that cause canine cardiomyopathy. I guess, do you think that has created an opportunity for you to switch customers over to higher margin private label or premium options that are not grain free? Has this caused any sort of disruption or opportunity for you? A separate question is on MAP pricing. I guess, how much did that benefit consolidated growth margin, and when will you officially lap that benefit next year? Thanks.

Great. Thanks for taking a couple of follow up here. And so my first one is dying FDA warnings on grain-free dog food that caused canine cardiomyopathy. I guess do you think that that is created an opportunity for you to switch customers overdue higher-margin private label or premium options that are not grain-free. And has this cost any sort of disruption or opportunity for you? And then a separate question is on that pricing I guess, how much did that benefit consolidated gross margin and when will you officially lap that benefit next year? Thanks. I'll take the second question first. The map pricing that we talked about, I believe is in pharmacy and it just came into perspective about roughly six to eight weeks ago, so not much more to comment there.

Cost any sort of disruption or opportunity for you and then a separate question is on that pricing I guess, how much did that benefit consolidated gross margin and when will you officially lap that benefit next year. Thanks.

[noise] take the second question for the map pricing that we talked about I believe is in pharmacy and it just came into perspective about roughly six to eight weeks ago, so not much more to comment there.

Sumit Singh: Take the second question first. The MAP pricing that we talked about, I believe, is in pharmacy, and it just came into perspective about roughly six to eight weeks ago, so not much more to comment there. On the FDA warnings on grain-free dog food, look, it definitely provides us an opportunity because we're having meaningful conversations with customers as they call in, and that is one of the strengths of the Chewy business model as well as our proposition to our customers. The impact that we're seeing is proportional to the impact that the industry is seeing, but our ability to be able to have meaningful conversations and drive, you know, the right amount of recommendation and mix shift is also something that is really attractive to us. Yes, both of those are happening.

On the FDA warnings on grain-free dog food, look it definitely provides us with an opportunity because we're having meaningful conversations with customers as they call in. And that is one of the strengths of the Chewy business model as well as our proposition to our customers. The impact that we're seeing is proportional to the impact that the industry is seeing, but our ability to be able to meaningful conversations then drive the right amount of recommendation and mix shift is also something that is really attractive to us. So yes, both of those are happening.

Patients and drive.

The right amount of recommendation and mix shift is also something that is really attractive to us yes. Both of those are happening.

Okay, great. Thank you. There are no further questions at this time. I will turn the call back over to Sumit. Thank you for your attention and participation today and happy holidays. We look forward to seeing many of you for the rest of the quarter. Have a nice evening. Thanks. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Erin Wright: Okay, great. Thank you.

There are no further questions at this time I will turn the call back over to semi.

Operator: There are no further questions at this time. I will turn the call back over to Sumit.

Thank you for your attention and participation today and happy holidays, we look forward to seeing many of you to the rest of the quarter over 19.

Sumit Singh: Thank you all for your attention and participation today, and happy holidays. We look forward to seeing many of you through the rest of the quarter. Have a nice evening.

Thanks.

Mario Marte: Thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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