Q4 2019 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the June 4th quarter, and full year 2018 financial results Conference call.
At this time all participants are in a listen only mode.
The speakers presentation, there will be a question answer session.
Ask a question during the session, we'll need to press star one on your telephone.
Please be advised to today's conference is being recorded if your for any further assistance. Please press star zero.
I'd now like to have the conference over to your speaker today, well before Vice President Investor Relations in capital markets. Thank you. Please go ahead.
Thank you for joining us on the call today to discuss our fourth quarter and full year 2019 results. Joining me today are truly CEO summit sing and CFO Mario Marty.
Earnings release, and letter to shareholders, which were filed with the FCC on form 8-K earlier today have been posted to the Investor Relations section of our web site.
Faster Dot chewy dotcom linked to the webcast of today's conference call is also available on our site.
Our call today, we will be making forward looking statements, including statements concerning chuys future prospects financial results business strategies industry trends and our ability to successfully respond to business risks, including those related to the spread of cold at 19, including any adverse impacts our supply chain.
Workforce fulfillment centers, all their facilities customer service operations and future plans.
Such statements are considered forward looking statements under the private Securities Litigation Reform Act of 1995 and are subject to certain risks or uncertainties, which could cause actual results to differ materially from those contemplated by our forward looking statements.
Reported results should not be considered as 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 and she was 10-K in 8-K filed earlier today and in our other filings with the FCC.
Also during this call we will discuss certain non-GAAP financial measures.
Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided on our Investor Relations Web site.
And in our earnings release and letter to shareholders, which were filed with the FCC on form 8-K earlier today.
These non-GAAP measures are not intended as a substitute for GAAP results.
Additionally, as a reminder, prior period results. This quarter include an extra week.
So on an as reported basis Q4, 2019 results reflects 13 weeks of operations. While Q4 2018 results reflect 14 weeks Likewise full year fiscal 2019 results reflect 52 weeks of operations, while full year fiscal 2018 results reflect 53.
Three weeks of operations.
In our reported results for Q4 and full year fiscal 2018, the extra week contributed $82.9 million in additional net sales, which included $49.1 million autoship customer sales for comparability during our call today, all year over year growth rates.
Discussed regarding net sales autoship customer sales and net sales per active customer reflect comparable 13 or 52 week periods.
Finally, this call in its entirety, just being webcast on our Investor Relations website.
A replay of this call will also be available on our IR website. Shortly I'd now like turn the call over to submit.
Thanks, Bob and thanks to all the people joining us on the call before I got started I want to welcome Bob to the Treaty. He brings extensive experience on both the sell side and Investor relations areas I'm very excited to have them on the team as we enter a secondary or as a public company.
Why 2019 children, a hideout and 2020 got off to a similarly strong start suddenly the wall changed in a big way.
As we have seen the Kogan 19 outbreak has caused significant disruption to global commerce and financial markets.
Our hearts go onto those directly affected by this disease and those suffering from the economic and social dislocation that followed and let's make it does in times like these been our mission to be the most trusted and convenient online destination for pet parents every bank makes tour than ever.
Pet parents, we know, how especially I'm confident the bond as between humans and pets, especially in these festival types, how suiting a simple act like a game of fetch with your dog. According up on the couch with your cat can be.
We devote ourselves every day to supporting the especially relationships.
Were here for a pet parents and their pets working 24 seven to meet their needs like caring for the safety and data being of our team members our shop at home business as proven resilient amidst the current economic disruption.
Alliums have increased as customers have chosen to stay at home and take advantage of the shopping convenient step you provide.
We will discuss the financial impact of current trends and our guidance a little later in this call.
Taking care of 14 members health and wellbeing is essential to olafson between leadership team and we had being highly proactive untold response to the cold with 19 outbreak.
Constant communication to plan and adapt as swiftly as possible to these rapidly evolving conditions and our cobot 19 response team is providing daily updates to our keep members across the company.
We have expanded our health benefits underlies, our P.T. O and sick they policies can meet evolving needs help. This unique situation. Additionally, we have but to really increased cleaning <unk> sanitizing procedures to all go look sites, including our customer service sites and fulfillment centers.
We have instituted work from home at a corporate locations as well as for a portion of what customer service teams.
Regarding our fulfillment centers and customer service centers, we have detailed contingency plans in place should be experience an onsite covered 19 outbreak you have the ability to dive works, so sediment and or customer service contacts to other facilities will be isolate and restore the effective facility.
We believe they can absorb the facility being offline for a short period of time, but minimal incremental disruption to customer service levels.
So with that let's discuss our Q4 financial performance and some of the key milestones and achievements contained in our full year 2019 results I'll update you on some business initiatives and then turn the call over Tomorrow, you can discuss our Q4 and full year results in more detail adds to discuss our guidance.
As I indicated because 2019 at a high note in Q4 net sales grew 35% to $1.4 billion or one point Fivex full year sales just three years ago underscoring the power of our business model.
We ended the quarter and here with 13.5 million active customers an increase of 2.9 billion customers compared to the end of fiscal 2018, and our net sales per active customer grew 10% to $360.
Our subscription like ODESZA business remains strong with ownership customers representing over 70% of called unit sales in Q4.
Higher spending from existing customers and growing autoship sales reflect strong business momentum as more customers continue to shift their spending to choose driving increased basket size and higher repeat purchase activity.
In Q4, you were again able to expand margins while growing the topline.
Q4, gross margin expanded 320 basis points worse as prior year fourth quarter Eattwenty, 4.1%.
Q4, adjusted EBITDA margin expanded 470 basis points or Q4, 2018 to negative 0.4%, reflecting the progress we have made on gross margin expansion and the ongoing skilling offer advertising and marketing spend.
Looking broadly at 2019, the some of our efforts came through in our results for the full yes, we do net sales by 40% to $4.85 billion expanded gross margin by 340 basis points to 23.6% and improved our adjusted EBITDA margin by 480 basis point.
Means to negative 1.7%.
We continue to got big Foster, while getting fit fast as demonstrated by growth in our topline and improvement in our bottom line.
We know the opportunity in front of house remains large and now even more so that's some of you may already know in 2019, the treaty made great strides towards becoming the most trusted and convenient destination for pet parents W. Baird.
We innovate to that pace made smart investments in marketing and site merchandising and introduce new products and solutions that enhanced and streamlined the shopping experience for pet parents, Buda greater crust towards our brand.
We continue to grow and make targeted investments in our strategic pillars private brands and she'll be pharmacy, and we expanded our network fulfillment centers.
The American Pet products Association, or <unk> recently announced that U.S. sales of pet products and services surpassed $95 billion in 2019 and are projected to reach nearly $100 billion in 2020.
So not only is the addressable market larger than previously estimated but the pace of growth remains robust.
No research from EPA indicates that 72% of pet owners reported making at least one online purchase for their pets in the past 12 months.
Those making subscription based purchases of pet products, 94% report that they're buying frequency has increased well stayed the same in the past 12 months clearly these trends all bode well for the future sustainability.
Our overall value proposition in this space.
When you combine a growing category customer migration from offline to online and trees unique shopping experience and award winning customer service. We believe that we are still.
The early innings off our growth.
This ends the core inputs off our businesses continue to trend positively we remain but likely focus on execution and are delivering the best possible customer experience for pet parents.
We are convinced that we are positively transforming and industry by creating a truly unique and personalized shopping experience one that builds trust brandloyalty and drives repeat purchase.
Our focus on these pillars ultimately supports our long term goals of sustainable topline growth at scale and incremental margin expansion.
Now I would like you said a few business highlights from our fourth quarter and broadly full year 2019, and also provide insight into our thinking for fiscal year 2012.
As I noted on the Q3 earnings call in December we went into the Q4 holiday cycle unplanned and ready to delight customers, a thoughtful and integrated go to market approach resonated well with customers and reflected in both our demand and conversion metrics leading to record setting days when cyber Monday Big the single biggest shopping day company's history.
We continue to remain disciplined and data driven and every investment related decision that we make for instance, and marketing we closely track key metrics like customer acquisition cost and lifetime value and I have been investing in tools to optimize our Bobby and drive further efficiencies.
Data management platform for the DMP combined with our ongoing optimization and marketing data science is enabling us to more efficiently target existing and new customer audiences across the industry, resulting in more efficient use of our marketing spend.
For example in Q4, our performance marketing teams in conjunction with our marketing science teams use the D N P to dog at new prospect of audiences.
But the specific channels, where people are most utilizing our DMP, we observed favorable trends in both customer acquisitions add cost per acquisition.
Looking back at 2019, we are pleased with the progress we have made across two private brands and treat healthcare two areas will discuss in some detail on last quarter's call.
Both a critical components of the overall value proposition be offered to customers and in 2020, we will build upon the momentum established last year and these two important business lines.
As we look ahead to 2020, we're staying ahead of the curve and driving innovation the areas that not only enhance the customer experience, but also increased efficiency and streamline cost structures.
One such area. This year is off assuming that's look bad barring any disruptions related to a broadening optical would 19 prices. We are planning to launched two new fulfillment centers or sees and that's why twentytwenty, starting with our new facility and Salisbury, North Carolina, which is planned to launch later this month.
This would be our 10th Pepsi and will enable us to more quickly and efficiently reach millions of customers across the mid Atlantic and southeast region.
Then later in the year barring any unforeseen delays or schedule changes caused by Kogan 19 related government mandates, we expect to launch our 11th F.C. and Archibald, Pennsylvania, which is currently under construction.
This will be our first automated fulfillment center and we are very excited about it.
This study will be out facility will raise the bar on future upgrades to our fulfillment network over the last few years, we have made significant improvements across that's it doesn't operations, which you may recall is largely manual and driven by lean manufacturing principles, driving efficiency and reducing our fixed and variable fulfillment cost per unit and the process.
These initiatives have yielded meaningful cost savings that over time will accelerate our S DNA efficiency curves.
[noise] automating, the Oxford fulfillment center and enable us to increase throughput capacity up this building, what's the similarly sized facilities by more than 25% increased labor productivity by more than 50% and as a direct result of all of the above enable us to farther lower our fixed and variable fulfillment cost per unit by over 30%.
Equally importantly, it will create a safer and more productive environment for our team members to work with it.
Leaving on our discipline data driven approach, we make bold investments in areas, where we believe we can improve experience and generate outsized returns for our shareholders put a rigorous measurement framework around it and the aim to execute flawlessly to achieve the results.
The same framework is an application here and we expect to generate attractive returns on investments, we're making into our fulfillment network.
As in many ways. The payback is more direct the investments, we make and driving efficiencies and fulfillment network, which you'll see it our S. DNA and topics resulted direct cost savings, which fall dollar for dollar straight to the bottom line and are meaningful profitability accelerators.
A final built up over 19 situation before I conclude.
I touched on the demand side of this equation in my opening remarks, but I know many of you are also curious about potential bundled abilities in our supply chain.
When you look at the details of our supply chain consumable, it's mostly food and treats represent over 70% of ourselves.
These products are sourced almost exclusively in the U.S. and we were proactive jointly planning supply in transportation requirements without strategic vendors.
Our hardgoods sourcing is more diversified and we actively manage our inventory levels to protect against potential disruptions in the supply chain given the long lead times from order to having the inventory on hand.
Last but not least our proactive and extensive cleaning <unk> sanitizing procedures throughout our work sites, including our fulfillment centers on customer service sites have thus far prevented any could quote unquote 19 cases across our book sites minimizing any disruptions to our network.
So far we have not seen material disruptions in our operations or supply chain.
However, the situation is evolving on a daily basis, and we continue to monitor the impact on our business and our future plans for the business.
Regarding guidance given their beyond the fourth quarter, we are comfortable provided guidance for the current quarter and Mario will discuss the shortly do that evolving situation, but the coated 19 outbreak as well as the active risk. It goes to all of us, including our partners and network. We do not think it prudent to provide full year guidance at this time.
We did not take this move likely especially because at this time as I indicated in my opening remarks volumes are running ahead of our expectations from earlier in the quarter.
That said in light of the unprecedented nature of the current pandemic steps being taken to mitigate the outbreak and the sheer number of other variables outside our control. We believed that this is the best course of action. We thank you and had lots for your understanding on this matter and we hope to be able to update you would more clarity on our Q1 called in early June.
2019 was an important deal for choose and while I note that we were pleased with our IPO last June it was just one step in the long journey.
We continue to believe that we are early stages off a large market opportunity off offering pet parents, a unique value proposition.
We are working towards building, an enduring franchise through exceptional rigor that delivers topline growth and expanded operating margins and disciplined cash flow management.
We are as excited as ever about the opportunity ahead of us and we look forward to a great 2020.
Now I will turn the call over to Mario who will provide the details on our Q4 results and walk you through our current financial outlook Mario.
Thank you submit good afternoon, everyone. Our fourth quarter results highlight our disciplined execution in the power of a customer centric model combined with the convenience of E Commerce independent category.
Fourth quarter net sales reached $1.35 billion, bringing our total fiscal 2019 net sales to $4.85 billion, removing the impact to the extra week in the fourth quarter last year. This represents 35% growth in the quarter and 40% growth for the year driven by continued growth in or customer base and net sales breakfast.
[noise] automotive customer sales growth outpaced overall net sales growth for both Q4 and full year 2019, Autoship customer sales for the fourth quarter 29 team were $954.2 million, representing 70.4% of total net sales and reflected 40.8% growth compared to the fourth quarter 2018.
[noise] autoship customer sales for the full year were $3.36 billion were 69.4% of total net sales, reflecting 47.9% growth compared to 2018.
We ended the fourth quarter end year with 13.5 million active customers, an increase of 2.9 million customers versus the end of fiscal year 2018.
The increase in active customers is new customers out of the period minus any customers who have not made a purchase in the last 364 days.
Net sales per active customer for fiscal 2019 increased 10.4% year over year to $360. As a reminder, that Phil Spector of customer for any period equals that periods trailing four quarter net sales divided by the number of active customers at the end of said period.
Net sales for active customer in fiscal 2018, and first three quarters of 2019 benefited by approximately seven to $8 from the inclusion of the extra week in Q4 2018 without any corresponding increase inactive customers.
[noise] Q4, gross margin increased 320 basis points to 24.1%.
For the full year gross margin increased 340 basis points to 23.6%.
So we have shared previously our goal is to deliver a gradual and incremental gross margin expansion on an annual basis.
2019 gross margins benefited from growth in average order values higher autoship sales, increasing mix from our newest verticals and the overall leveraging of our cost structure.
Q4 operating expenses, which include as June a in advertising and marketing were $386.8 million or 28.6% of net sales.
For the full year 29 team operating expenses totaled $1.4 billion or 28.8% of full year net sales.
That's your name, which comprises all fulfillment costs customer service credit card processing fees corporate June a public company costs, and corporate payroll, including share based compensation totaled $284.9 million into fourth quarter or 21% of net sales.
Excluding share based compensation and public company costs, such as you know insurance and increased audit and legal services SGN. He was 17.2% of net sales in the fourth quarter between 19 compared to 15.8% last year.
For full year 2019, as Jumei was 20% of net sales compared to 16.7% in 28.
Excluding share based compensation and public company costs SGN eight was 16.8% of net sales in 2019 compared to 16.3% and 2018.
We continue to aggressively manage IRS unit cost structure.
The operational area, So best unit.
Filament in customer service represent most of this line item.
In these areas, we have successfully scaled our headcount and reduce our related expenses as a percent of net sales by 20 basis points and 29 team.
The rate of growth we saw in as you named joining 19 in excess of our net sales growth was almost exclusively related to the share based compensation and the additional professional services and other costs associated with becoming and being a public company.
As we look forward. We believe we will continue to scale. That's you know and that on a fully loaded basis annually as June a as a percentage of net sales should decline versus fiscal 2019.
Looking at Us DNA, excluding share based compensation and public company expenses, we expect to see positive leverage materialize towards the back half of 2020.
Q4, advertising and marketing was $101.8 million or 7.5% of net sales scaling 330 basis points year over year.
For the year advertising and marketing improved 230 basis points to 8.8% of net sales.
As for mid mentioned customer retention remains strong and we're pleased that our various growth initiatives and investments and enhancing the customer experience are contributing to ongoing expansion into lifetime value or LTV of our customers.
LTV measures the cumulative contribution profit we derived from each of our cohorts when we compare a customer acquisition costs or CAC two lifetime values on our most recent marketing investments, we are finding equal or faster payback periods. The prove out the efficacy of our recent efforts.
Fourth quarter net loss was $60.9 million us net margin improved 160 basis points of negative 4.5%.
Excluding share based compensation of $45.9 million, our fourth quarter net loss was $15.1 million and then margin improved 460 basis points to negative 1.1%.
For the full year net loss was $252.4 million and net margin improved 240 basis points to negative 5.2%.
Excluding share based compensation of $136.2 million, our net loss was 116.1 million.
And net margin improved 480 basis points to negative 2.4%.
Our Q4, adjusted EBITDA loss was $5.8 million and our adjusted EBITDA margin improved 470 basis points when they go to 0.4%.
For the full year 2019, adjusted EBITDA loss was $81 million and our adjusted EBITDA margin improved 480 basis points negative 1.7%.
Improvements in both adjusted EBITDA and adjusted EBITDA margin reflect the ability to grow the top line improvements in gross margin scaling of advertising and marketing and improved efficiencies and that's you know all of which is consistent with our strategy of long term sustainable growth and margin expansion.
Adjusted EBITDA continues to be a managed output and that we invest the prop as we earned from repeat orders and the cash regenerate for managing a working capital into new customer acquisition.
In Q4, we generated positive free cash flow $60.42 million with 74.3 million a positive cash from operations offset by $10.1 million in capital investment.
Q4 is a seasonally strong cash generating quarter for us, whereas in Q1, we expect to be a net use of cash.
Q4 capital investments will primarily comprised of cash outlays for equipment.
But illustration of internal and external labor.
And payments associated with our new fulfillment centers in Dayton, Ohio, and Salisbury North Carolina.
For the full year 2019 free cash flow was negative $2.1 million $46.6 million of positive cash from operations offset by $48.7 million in capital investments.
We ended the year with $212 million in cash and cash equivalents on the balance sheet.
As evidenced by our full year results in 2019, we successfully reinvested or profits from existing customers cash from working capital to essentially breakeven on a free cash flow basis.
Now I'll turn to guidance.
[noise] entering 2020, our team is singularly align on our mission and we continued to see investment opportunities that were bolstered order growth strategy and further extend our market leadership.
I submit mention the disruption caused by the Cobot 19 outbreak has altered consumer shopping behavior in recent weeks. We've seen this a true that's concern pet parents stocked up on necessities like food and other essentials and that's customer shift of their shopping from offline to online channels and support of social distancing efforts.
<unk>.
Beginning in late February we saw an acceleration in sales, which has continued through today in our first regarding reflects these trends.
So for the first quarter 2020, we are expected.
Net sales between $1.50 billion and $1.52 billion, representing year over year growth of between 35% and 37%.
To reiterate some its comments we are still in a rapidly evolving situation.
One in which we're planning and adapting to swiftly and appropriately and at this time, we do not believe it is prudent to provide full year guidance.
Well, we're not giving full year guidance at this time I will leave you with a few things to keep in mind as you build your models.
Hi, operational tempo required to meet peak demand periods like we are experiencing now can impact efficiency on the fulfillment side.
Also when the Corona virus situation Abates, we may experience, some moderation of demand as customers draw down there stockpiled supplies.
As you would expect from us by now we are monitoring all relevant metrics and we'll make decisions based on all available data keeping the long term strategic goals in mind.
[noise] My last modeling notice a reminder, that 2020 like 29 team will be a 52 week here in fact, we won't have another 53 week here until 2024.
I will conclude by saying, we're pleased with our full year 2019 results and look forward to full year 2020.
With that I'll turn the call over to the operator for questions.
Operator.
As a reminder, ask a question let me to press Star one on your telephone.
Your question, that's the pound or hockey.
So one question and one follow.
The other participants time for questions. Please standby we've compiled it too many roster.
Your first question comes from.
Oregon.
Line is open.
Great. Thanks, so much I wanted to ask about de acceleration that you've seen since late February maybe give us some color on what the key drivers of that acceleration have bad has it Ben you know existing customers, placing larger orders are ordering more frequently or have you actually seen an acceleration in new customer growth and <unk> over the past four to five weeks.
They learned some it I'll take that so first of all the things as we anticipate our business continues to be a you know a recession resilient. During this time and we're proud to be serving millions of customers who are relying on us a we've seen you know the acceleration in demand and the elevated demand patterns are coming from both sides, we've seen our existing customers.
18.5 million of them order in but we've also seen a meaningful lift in new customers coming in through to the platform. So at this point, it's a combination.
Okay, Great and then just any incremental color on you know not specific number so just sort of the cadence on de acceleration you know as has was there a peak maybe two weeks ago when things have moderated better you're still seeing really you know strong demand even this week.
We're continuing to seeing strong demand crude as Mario mentioned in the script through the end of February up until as of yesterday.
Great. Thanks, so much.
Your next question comes from Doug.
He Morgan your line is open.
Thanks for taking the question first I just wanted to ask about gross margins. We saw the 320 basis points of your over your expansion can you just update US where you are on private label and how big you think that can be calm and then anything too specifically point out in terms of where you saw some other leveraging scale.
Partners and then just on a the cobot 19 impact or just trying to understand kind of your view and confidence in your ability to handle the extra demand and you know now that I understand why you wouldn't give a guidance for the full year, but given the fact that your two thirds.
Through the quarter as you pointed out.
So why not give the one Q profit guide thanks.
Hey, Doug Summit I'll take that one so private brands continues to be a strategic vector for US. We were you know we continued to see private brands grow at the rate of one point Fivex. We also continued to see private brands improved profit margin.
Roughly 500 basis points year over year.
And and and most of that was led by our focus on hard goods because as you remember from our strategy. We are careful about going into market not creating one for one skewed a their customers might have loyalty to certain brands, but where product lines are commoditized or whatever you can find differentiated value proposition. We are are.
Opportunistic about offering buffering the that that assortment.
Two and convenience to customers. So that's how I would I wouldn't look at that in terms of Ur Cobot. Your second question was Uh Huh do we hang on handing the extra demand.
Can you get the second question, though.
ER confidence in handling the extra demand that you're seeing in terms of common in the warehouses and then why not at least guide to profitability for fiscal one Q. Okay. Okay Yep Yep, So super proud off the internal team at two we at this time coming together in the way that we have we continue to take care of our team members in our team members.
I continue to take care of our customers a portion of demand requires executing to it and we're executing to our demand. We don't have a you know concern or all of the controllable factors, which we control over him and I fully focused on and we believe our ability to execute is and confidence towards executing that demand remains high.
In terms of not guiding to a profit I you know we believe that we're still in a rapidly evolving situation. We're making you know we're seeing headwinds and tailwinds that might a you know that that do not provide us the full clarity on this time for example, we're making meaningful investments in personnel and a you know to make sure.
At our employees feel valued at this time and we're also investing in making sure that we are hiring 6000 210000 more people. During this time, so our level of operation and investment is as you would expect to see during peak periods. We've also invested and elevated sanitization and cleaning procedures.
On the flip side you know on if you look at the demand side, we're seeing a you know increased deal we and increased participation from customers, but we're also seeing an increase meaningful lift the new customers that actually you know wherever you have to a you know provide the first time discounts and ownership discounts that are going out a and then finally.
You know, we're just not sure up any kind of disruptions that might occur from this point onward. So.
At this point, we don't believe it's prudent to provide profit guidance.
Is that 6000 to 10000, you mentioned is that all in fulfillment centers or is some of that in customer service as well. It. It is primarily in fulfillment centers to handle the the demand trough that we've seen we're seeing slightly elevated levels of backlog and to handle that backlog, we're upping our forecast.
Just went for labor, which were proud off I mean supporting him unemployment at this time in the marketplace is something that that very proud that we're doing.
Great. Thank you spent.
Your next question comes from Brian Fitzgerald with Wells Fargo. Your line is open.
These guys wanted to ask about what knockouts, an extended shipping times, what impact that is having on demand. It does not seem to be sweeting purchases. We've done some simple polling and it says hey, I'm I may not be getting the beef, but I'm switching over to chicken that type of thing can you talk about dissuading purchases are causing breakage or is it instead.
Substitution or maybe into more private label can you unpack that a bit force.
Sure. So we've seen a in a no material disruption to supply chain or customer ordering behavior. Our conversion for the most pod remains intact and the reason for that as a as you intuited, a you know even even though a small percentage of our portfolio is out of stock. Most customers are two points. There one we pre empting protests.
Act and reserve inventory allocation for our ownership customers and then to most customers are able to either switch into a different pattern design or brand a it out. So the overall you know over on loss at this point is minimal driven by out of stocks were also jointly a you know deep with.
The planning and recovery efforts with our suppliers and vendors.
Who are being super supportive at this point.
Thanks, so much appreciate it.
Sure.
Your next question comes from Mark Mahaney with RBC. Your line is open.
That's good chart two questions. Please first that increase in is APC, if you P.A. <unk> estimate of pet sales.
So what do you have any detail behind that you know what would've caused them to increase their estimates or any color. There I assume you probably have a little bit of the background on that and then in terms of new customers that have come on you talked about that the acceleration in growth greater than expected growth whatever this quarter being both existing into new customers do you have any read into what the quality of these new car.
Customers is like in the first for six weeks are they acting like new customers having to pass is anything to suggest that they are going to be less loyal less spending in the future with you that they're migrating faster or slower has anything to suggest that they're going to act differently than your prior cohorts or is it just too early to tell thank you.
Hi, Mark both good questions I'll take the second one first up you know it is too early for us to tell we know that we are offering the same great service and and similar value proposition. Some of the core input metrics of L., we and a and units per order and basket size into mixing seems very similar to our existing cohorts, but then again.
You know we're acquiring these customers during duress, a and a and an unprecedented time and so it's hard for us to really.
As calculated at this time, how sticky these customers are going to be or how much similarly, they're going to behave to our existing cohorts that being said we are going to work very hard on our side to ensure that we have a you know we engendered long term loyalty from this particular cohort that requiring during this time so the bid so that's sort of the.
Checks and balances out I was talking about when I was answering doug's question earlier as well.
In terms of the first question I think the increase is driven by a couple of different a you know trends one a there's a lot more awareness about Pat.
And and and as millennials come into the marketplace. There's a there's a higher degree of pet ownership that we're seeing from that segment number two we've always known and talked about the premiumization in this space, which is actually pushing up espeed for newer and pressure categories that are entering the marketplace right now that might materialize over the next few years.
Yeah, that's a likely likely combination there oh, we continue to monitor and what's this one.
Okay. That's it's very interesting here. Thank you summit.
Your next question comes from Eric Sheridan, Yes. Your line is open.
Thanks, So much for taking my question and thanks for the update summit <unk> from you and the team up everyone's family and friends are well no dealing with what we're dealing with wanted to ask a question about the data driven marketing push this but a lot of dislocation in digital and offline advertising over the last.
46 weeks, you guys need a lot of investments around data driven marketing.
You guys are doing in terms of changing the channels, where you might be allocating a investments to drive positive ROI marketing decisions are you talking any changes in the way, you're making investments where are you seeing any changes in ROI in the corner environment. Thanks, So much.
Hi, Thank you for the question I hope, you're safe and well as well.
Yeah, I won't speak to the specific channels for a in a competitive sensitivity reasons I've been for wide overall color. We have seen a strong influx off organic demand and a you know, we're utilizing and doubling down on on our relationship and content driven marketing in this time to be able to reach consumers and utilizing.
Those chat those channels to be able to educate consumers not only on the benefit of health and wellness, but also on the you know how to engage with pets during during during stay at home. So what that done to authorize it's driven you know we've taken advantage of this period and I can be scaled back on marketing, where we believe it's not prudent or spend during this time and.
And our banking on those efficiencies during this time fully realizing that we don't really really really know the quality of the cohort that bird acquiring so we might have to go back and actually invest a little bit of that back into retention, but a you know we will continue to be data driven and disciplined around that as well.
Thank you.
Your next question comes from Erinn right.
Okay.
Great. Thanks.
Big as your Pharmacy segment now does that include prescription is well over the counter therapeutics and now you see more meaningful traction just in the current environment, our veterinarians more willing to work with you in light at the code that disruption.
Yes.
Uh huh.
Hi, there and I'll start with the second one where we're not seeing material disruption at this point there a couple of things that are observing a India, India environment in the field right. Now we're seeing you know that's a more and more either reduce their hours or reduce the availability of services to more critical type services.
That being said you know parasiticides on how to them that drive primarily the share in that category, we haven't seen them and we haven't seen we actually have seen continued growth and acceleration across the across the pharmacy business for us during this time.
Fully realizing were in peak I think another thing that we are benefited by is our scripts that are on Autoship continue to continue to be fulfilled and on the flip side and we haven't seen a drop in approval rates. During this time, so on a macro level, we're not seeing much a in a hard for them.
Description is where you do need to go see the wet and if so that does close if there was any impact we wouldn't be seeing it right now because there's a bit of a lag because only the scripts direct better expiring in the last few weeks wouldn't be subject to to do that particular condition. So that's hopefully that provides a little bit of a color overall, we continue to see strong demand and the same.
Acceleration in our Rx business as well and then no but you know in our pharmacy, when we talk about pharmacy, we speak only specifically prescription we don't consider we were not counting ODC drugs as part of that.
Okay, Great and then we also noted this is another health care question, but we also notice you had a meaningful presence at the next day here for the first time are you seeing material traction we need tablets units formal relationships with veterinarians and and utilization of your prescription management platform I guess can you speak to you today.
Economics behind some of those relationships directly with the veterinarians, where you've been able to accomplish that.
A good question.
We we were actually Emax because we continue to believe you know that we are a brand that that can drive meaningful penetration into the category by educating consumers and driving more and more consumers to visit vet clinics, which then expands the overall share of the share of the Tam that is currently available not only by increasing the visits about old.
So increasing repeat purchase rates for prescription.
On the basis of that we are we were there educating a you know displaying our products that essentially go towards that you're getting customers. We were also showcasing our products that weve developed for vet offices and for events to be able to increase that productivity a in office and also to invite them to ride for four.
For pet M.D., which is which is a tremendous asset that they engage read that provides benefit back into our customers and the that's actually are compensated for that so there's a lot in the in the evolution right. Now we were pleased to be there. We will continue to talk about how we can add meaningful value and also find opportunities where we could meaningfully partner with.
Veterinarians, but still early in the journey there.
Your next question comes from I pod.
Barclays. Your line is open.
Hey, guys. Thanks for taking the questions. Good questions from off so first Mario can you elaborate a little bit on the first quarter guidance marched accelerated nicely with SAP compared to fab are you expecting acceleration in April in your outlook and is there anyway, you can kind of maybe quantify the March transmission as fats and then.
Big picture question for Sumit, where do you think online offline mix would be in the fourth goal with 19 would you know do you expect any meaningful disruption to the offline channels, you know that could accelerate the online penetration gains in the next 12 to 18 months.
Hey, D., but a good to talk to you.
To your question on wasn't what we expect in April look we just provided guidance and the fact is a we're we're operating in an unprecedented time in this situation is evolving as we speak. So at this time I think we're comfortable providing the guidance that we just shared a few minutes ago.
And there's probably nothing more due out in terms of a speed over a velocity and for April.
You book Hi, This is summit in terms of the second question. We've always maintained the data that we've known is a you know the the online penetration should get too.
North of 20, 25% over the next couple of years, we remain bullish on that trend. We don't know why online penetration cannot get north of 35, 40, 45% and a in occurrences like the one that we're in right now.
Provide a motivation and tailwind to to a shift in consumer pattern and behavior.
We are yet to obviously see how much of that is gonna be sticky over the long term, but there's definitely going to be an impact here over the long term.
Got it okay. Thanks, that's very helpful.
Thanks.
Your next question comes from Mark Kelly anymore. Your line is open.
Great. Thanks, guys two quick ones. The first one just on the acceleration that you're seeing I'm curious if it's concentrated in the hardest sit areas like in New York.
New York City area or is it is a broader than that and second.
We love to hear what you guys are seeing on the advertising front given that your AD budget is fairly broad you gave some color on the DMP a bit but curious you know where are you seeing the biggest opportunities with a less demand.
We're testing from thank you.
Hey, Mark good to hear from you.
No. We're not we're not seeing any any major concentrations in the way that that demand is right now segregated we're seeing a fairly uniform lift across the country and we're fulfilling that across our fulfillment centers, yeah, Hello, all across the country in terms of a advertising channels I haven't referred.
And from speaking specifically to the advertising channels again for four four sensitivity reasons.
But you know we as you would expect I mean, you know people are folks have more time to be able to engage with Clinton driven driven channels and we are fairly fairly a you know observant of that and we're adapting to our strategy in.
Similar manner and also pulling back on on channels, where we don't believe is optimal due to due to the organic matter of people translating.
There, there queries, and therefore being able to find doesn't and organic fashion.
Hopefully that provide some color.
That does thank you Sir.
Your next question comes from Brent <unk> with Jefferies. Your line is open.
Thanks, just on the headcount side. If you took the midpoint of your headcount hiring that would be 67% increase from the February.
And I'm just curious how you think about.
Deficiency, those hires and there's been a lot of conversations around.
The cost of hiring right now.
Give a sense of how you're you're able to build dine out with.
Controlling the expense scale.
We continue to see headcount leverage.
Across our businesses that are stable and mature across corporate headcount and were very a you know very prudent and very disciplined in the way that we invest for that headcount.
To give you a perspective, you know where a company off a somewhere between 30 and 14000 employees and our corporate at even at this point I'd being the scale that we are is roughly 1200 people Oh. So most of our investments are in fulfillment and customer service and the we're continuing to invest in our.
In our fulfillment capabilities and customer service to be able to service customers because that really is our mode. In the way that we aren't trust and maintain long term loyalty.
And when you think about the positive momentum you're seeing does that give you more conviction to experiment and look at adjacent spaces, where you're out or are you, saying. This courageous stay focused on your core mission right now which is on.
The core products, you're serving today.
We continue to remain focus and making sure that experience is protected and a and and.
And our services are coming across to customers and I'll have fidelity high accuracy manner.
Great. Thanks.
Your next question comes from Matt.
Bank of America. Your line is open.
Yes, I think that's.
My question might have been touched on several other places, but as you've seen a acceleration in Q1, particularly as we come into stay at home and work at home environment.
Our you've also seen a drop in the marketing costs to acquire those customers. Both from the fact that they're more customers coming in the door, but additionally, it have other companies pulled out of marketing channels sort of loud you to <unk> and now make.
Less expensive options available.
Both of those both of those assumptions are correct.
I I won't go into quantifying each of them versus the other but yes. There is a high degree of marketing efficiency in a greater yield a and the dollar invested is going much farther.
But then then again remember we we're not sure of the quality of the cohort that very acquiring so we stand ready to ensure that we're engaging with customers and and reinvesting to.
Two for long term retention properties.
Well I know you said that there was a little bit of what you think of is kind of.
Panic buying or according mentality that people were building up supply <unk> of your new customers coming in where they are the similar percentage there were signing up for your ownership as normal.
More or less yes.
Okay. Thank you.
Your next question comes from Oliver International with Evercore ISI. Your line is open.
Hi, Thanks, very much yeah, I'm just a on the existing customers that are they don't know spending more is it more.
Ticket or traffic. So in other words is it more do they spend more or do they just got you know come more often right now.
And the.
Really the question to that is off the sales is that mostly consumable or do you also see hard goods and pharma sales.
Hi, Oliver this is Mario I'll take that one it's a combination of both so existing customers buying up some bigger baskets and also placing orders.
In terms of what we're seeing in the mix of what they are buying it is a as as in the past, we cede a larger uptick.
A greater percentage of the sales being on the consumable side and is there kind of behavior you would expect if you're starting to penetrate.
I can provide some more color there so you're seeing essential.
Number one we're seeing you know with also the pet adoption trend thats up so a lot of new that's being brought home, we're seeing a healthy uptake on the hard goods side everything that a pet parent would need to service that need a and then the category that might be really impacted at this time across the industry is truly discretionary spend such as pets.
Okay.
Your next question comes from Dylan Cardinal with William Blair. Your line is open.
Thanks, very much just curious read something to suggest things like fostering an adoption is maybe up in this environment.
Are you seeing of the new customers come in can you tell how many of those are actually new pet owners as well and then can you remind us sort of what happened in the last recession as per the acceleration this space sort of what drove that well maybe you're expecting from here.
Could you repeat the question. Please we didn't quite catch it.
Sorry about that you just curious if you're seeing any of the new customers coming in in this environment. If you can tell how many are <unk> is also a new pet owners and if theres any sort of reason to suggest that might be a stick. Your long term customer and then why the industry itself accelerated in the last recession, what was sort of the driving force behind that.
So we haven't really going back to the drawing board and pull that data it would be dependent upon customers, creating a pet profile and telling US really you know how many are new pet parents or so it's a little bit harder to sort of really get up that right now.
We're focused on really handling the demand truck and making sure that her experience and fulfillment remains intact or on the on the increase I mean, you know the.
You did the fact that the nature of this business is recurring staple port disease.
And during that time attention and care for pets actually goes up.
A combination of all of that is what in our mind, you know maintains and drive the spending patterns during the times during times like these.
Ladies and gentlemen, you have reached the end of the of all the time for the question and answer session I will turn the call back over to management for closing remarks.
Thanks, all for the contingent interest century, please stay safe stay healthy and we will talk to you again in June Thank you.
This concludes today's conference call you may now disconnect.
[music].