Q1 2020 Chewy Inc Earnings Call
Ladies and gentlemen, this is the operator today's conference call scheduled to begin momentarily until that time your lines what can be placed on hold thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Q, We first quarter 2020 earnings conference call.
At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session you'll need to press star one on your telephone if you acquire any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Bob the floor, Vice President of Investor Relations in capital markets.
Please go ahead.
Thank you for joining us on the call today to discuss our first quarter 2020 results. Joining me today are chewy CEO summit thing and CFO Maria 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 on our website investor Dot Chewy Dot com.
Linked to the webcast of today's conference call is also available on our site.
On the 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 cobot 19, including any adverse impacts on our supply chain workforce fulfillment centers other 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 and uncertainties, which could cause actual results to differ materially from those contemplated by our forward looking statements.
Reported results should not be considered an indication of future performance also note that the forward looking statements on this call are based on information available to us as of todays 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-Q, an 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 website 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.
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 submit.
Thanks, Bob and thanks to all the people joining us on the call.
Shortly after we spoke in April three quarters of the U.S. population was under shelter in place orders.
Two things became clear very quickly of course, the pandemic put to use a unique position to provide essential services to pets and pet parents.
And second we needed to prepare for a significant change and operating conditions.
Over the past two month, you have continued to adapt and this fall and rapidly to service millions of new and existing customers, while carrying for the safety and that'd be my heart team members.
I'm proud of the incredible spirit of innovation that'd be have sustained across the company as well as our team's ability to adapt and respond to covert 90.
For instance in Q1, two is busiest quarter ever be launched gift cards, what pet parents.
This is a virtual product that customers have been asking us to offer for years and the early adoption signs are in cards.
Our teams also built in led champions, which shelters and rescues across the United States raising awareness about this community and making over $7 million a charitable contributions.
And then we also quickly develop effective work from home technology solutions from scratch that enabled us to move our entire customer service operation from zero to 100% work from home in a matter of weeks.
The pandemic has tested and proven our ability of the company and at the team to move rapidly and deliberately and to plan communicate and innovate on behalf of for employees and customers.
Now I will discuss our Q1 results and then share some insights about the new customers. We have acquired in the fourth quarter and our ability to retain them over the long term.
After that I would share updates on our supply chain and fulfillment network. Finally, I will turn the call over tomorrow to discuss our fourth quarter results and guidance in more detail.
As anticipated our shop at home business School Brazilian amidst the current economic disruption.
First quarter results reflect a significant change that occurred in customer shopping behavior as the Pandemics Brett.
First quarter net sales increased 46% year over year to $1.62 billion. We ended the quarter that 15 million active customers, an increase of 3.7 million compared to the on the fourth quarter 2019, and the fastest acceleration you customer acquisition in the company's history.
Customer sales exceeded $1 billion for the first time in a single quarter totaling $1.1 billion or 67.9% of total net sales.
That's sales per active customer grew 6.6% to $357 when adjusting to exclude the extra week in 2018.
Q1, gross margin expanded by 50 basis points year over year to 23.4%.
In addition to the scale benefits from overall revenue broke our private label business contributed 60 basis points to the year over year expansion in gross margin.
Our health care Rx business continued its robust growth in Q1, despite tenda closures and or reduce clinic hours due to the pent up.
And lastly, incremental freight and logistics investments that we made to protect the customer experience due to colder 19 decrease our gross margins by 120 basis points in the quarter.
I'm also pleased to report that for the first time and Chuys history, we delivered positive adjusted EBITDA of $3.4 billion, improving margins by 160 basis points year over year.
This marks a significant milestone achievement for a company.
Our sales momentum combined with the marketing efficiencies more than offset incremental cold and related costs in the quarter needing to positive adjusted EBITDA.
We believe that the volume related cost pressures are temporary and we expect those to moderate as we look ahead.
Before I do believe this combination of skilled revenues and cost discipline will accelerate those along our path or sustainable profitability.
Now, let's shift our focus to customer acquisitions in the quarter insights into their purchasing behavior.
We collected data on five customer cohorts.
Well controlled booked consisted of customer cohorts from six weeks six months and one year prior to the coal at 19 outbreak.
And then looked at Q1 March and April customer cohorts after the outbreak <unk>.
For the purposes of clarity, we blended the three control group cohorts into a single Prequaled cohort.
And the March and April cohorts into a single post goldcorp unless specified the results that I will talk about reflect compares them off the blended cohorts.
Fourth we added a record 1.6 million next active customers in the fourth quarter, which was more than doubled our average quarterly pace or not active customer ads in 2019.
Second an equally as important the behavior shown so far by these new customers is promising.
Initial orders were up 11% larger in value than a prequaled at 19 customers.
In the first four weeks since their initial porches, a higher percentage off our new customers returned to make a second porches and the average value autos repeat orders with as much as 5% higher than the prequaled with customers.
Finally, we analyze their ownership sign up and cancellation rates and on a net basis they were within historical ranges.
These insights bode well as a sign of future customer engagement and although we cannot predict the future. Currently we're expecting these customers to become long term to customers.
We also observed encouraging signs for my existing customers in the quarter, we saw nearly doubled the number of customers coming back into active status warsi his previous quarters.
This means more customers, who have not made a purchase with us in the previous year return to an active status the lighting, that's an opportunity to reengage them.
Also offered to cope with 19 outbreak our existing customers started creating bigger basket.
These basket at a higher mix of consumables in that.
We believe these larger basket with a higher mix of consumables were evidence of pandemic related pantry stocking and we estimate this benefit that fourth quarter net sales by approximately $70 million.
We view this as a onetime benefit that we have not seen reverse in the second quarter.
We do not expect to see it reversed going forward.
All in all BCD, that's positive data points as we look ahead into the second quarter and the rest of the.
Now, let me share some observations for Q1 across our supply chain and fulfillment network. The surgeon orders increased shipping volume in March by or 50 per cent compared to February.
Although our supply chain remained resilient through the core the unplanned nature, often sponsored related to pull that 19 create a temporary scratch coins in our supply chain as well as customer service and fulfillment operations, we typically spend months preparing for our end, while Q4 holiday cycle, but in this situation there was no advanced warning or preferred.
Yes.
The demand truck, which was also felt by our supplier network caused elevated out of stock levels for certain product categories and led to some temporary conditions suboptimal inventory placement across our fulfillment network.
We were able to quickly react to this by updating our recommendation engines, so customers could easily self select different brands sizes for patterns, if the original choices available.
Private brand portfolio categories, like creep litter and hard goods offer customers attractive alternatives and experienced strong year over year growth in the quarter.
These actions helped reduce abandoned orders and maintain customer engagement and conversion levels with kept sales momentum strong throughout the quarter.
However, inventory imbalances in the fulfillment network led to higher rate of split customer orders and that has to ship more orders and multiple boxes and ship more orders over longer distances for a portion of our volume we increased the use of especially shipments as a way to ensure timely deliveries and protect customer experience. This deviation from our standard player.
<unk> increased fourth quarter freight and packaging costs by approximately $20 million and negatively impacted gross margin.
The other than volumes also led to a sizable increase in order backlog across the fulfillment network, which we taco with a multi prong strategy.
Our first priority was developing all team members. So we did everything we could do make fulfillment center work spaces as clean and safe as possible.
In Q1, we also hired 4600, new hourly associates, most of whom were dedicated to us fulfillment centers.
Since the ended the quarter you have achieved 100% off our original hiring target of 6000.
These new team members along with thousands of other dedicated utopians helped us walk through the backlog and Taco the increase in customer demand.
Now that fulfillment center stopping is properly aligned with our elevated order what do we are better positions to maintain equilibrium going forward.
Process here is similar to hiring up around the holiday season, we add positions as demand ramps up and then balance out our ongoing staffing needs by calibrating, our replacement high degrade against natural attrition, depending upon William requirements.
We also opened our nine fulfillment center in Salisbury, North Carolina on April six and immediately accelerated its volume ramp to further help reduce backlog.
I would like to think that you read team members, who came together for this opening under exceptionally difficult circumstances.
It does the demanding got to open a fulfillment center and that is even more challenging to do so in the middle of the pandemic.
Our next fulfillment center in Archibald, Pennsylvania remains on track to open later this year.
In closing we are proud of the way the team executed through this milestone fourth quarter of 2020, we experienced strong revenue growth record new customer acquisition and generated positive adjusted EBITDA for the first time.
2020 would be a pivotal year for chewy and we plan to remain true to our mission of being the most trusted and convenient online destination for pet Peds and partners every that.
Now more than ever we are focused on execution, who communication innovation and perseverance.
I'll now turn the call overcome Mario who will provide the details on our fourth quarter results and walk you through a current second quarter and full year financial outlook Mario.
Thank you submit our first quarter results provide further proof of our operating disciplined and customer focus drive long term shareholder value.
First quarter net sales reach $1.62 billion, increasing $513 million or 46.2% urea.
This is the fastest year over year growth in absolute terms in the company's history.
Excluding the estimated 70 million dollar benefit from pantry stocking in the first quarter net sales grew 40% year over year, which in itself represents a meaningful acceleration in our growth rate compared to fourth quarter of 2019.
Ownership customer sales for the first quarter totaled $1.1 billion, another company milestone or 67.9% of total net sales.
Honestly customer sales growth again outpaced total net sales growth, increasing 48% year over year or 180 basis points faster than total net sales growth.
In the first quarter, we added 1.6 million active customers, bringing our total active customers to 15 million.
On a year over year basis, we added 3.7 million active customers, an increase of 32.6% year over year.
As we've shared previously our active customer count at the end of a quarter is equal to the active customers at the end of the previous quarter plus any new customers added in the quarter minus any customers were nominated purchase in the last 364 days.
Net sales for active customer for Q1, 2020 increased 6.6% year over year to $357. When adjusting Q1 2019 results to exclude the benefit of the extra week in Q4 2018.
As a reminder, net sales per active customer equals trailing four quarter net sales divided by the number of active customers at the end of the quarter.
In this case and through the third quarter of 2020, we will adjust down the impact of the extra week in Q4 2018, when presenting year over year growth in net spec versus 2019.
Our first quarter netback shows a 1% decline quarter over quarter.
This is a function of the magnitude and timing of new customer additions in Q1 2020.
Nearly 80% of the new customer acquisitions in the quarter took place in March and April.
Well we include all of these new customers in the active customer account there relative impact on revenue over the past four quarters is small.
The true value of these new customers is the cumulative positive impact of live purchases on our revenue in future quarters, as a repeat purchasing activity ramps up and they direct more of their wallet share.
Sure we overtime.
You want gross margin increased 50 basis points year over year to 23.4% in spite of increased freight and packaging costs, which negatively impacted our gross margin by approximately 120 basis points in the quarter.
Q1 operating expenses, which include as you in a in advertising and marketing were $426.2 million or 26.3% of net sales scaling 70 basis points year over year compared to Q1 29 team.
SGN, a which includes all fulfillment costs customer service credit card processing fees, corporate gionee corporate payroll and share based compensation totaled $320.1 million into first quarter or 19.7% of net sales.
On a fully loaded basis. This represents a 130 basis points improvement versus the fourth quarter of 2019, and excluding share based compensation as Ginny as a percent of net sales improved 50 basis points to 17.1% in Q1 versus 17.6% in Q4 29 team.
The primary driver of the accelerated quarter over quarter scaling we saw in as Uni, what's the search in sales.
As part of our Cobot 19 mitigation efforts in the first quarter, we updated employee benefits and policies invested in temporary pay racism bonuses for hourly team members can materially raised or cleaning and sanitation protocols to keep our network operational in our employees safe.
Additionally, starting in mid March we hired 4600 hourly associates into our fulfillment network.
All of this combined led to approximately $10 million incremental expenses were 60 basis points to west Germany as a percent of net sales in Q1.
These investments are prudent size.
Yeah level in nature, and highly focused on protecting their customers and employees.
Q1 advertising and marketing was $106.1 million were 6.5% of net sales scaling 270 basis points year over year <unk>.
The increase inorganic or said another way customers, who come to our site without the eight of acquisition marketing spend allowed us to thoughtfully reduce our overall media buys in the quarter.
Additionally, our team was quick to capitalize on the lower media caused that we observed across digital and offline channels, thus, creating a tailwind that resulted in lower cost from all other customer acquisitions.
These twin benefits allowed us to optimize our investments in advertising and marketing in the quarter in acquiring a record number of new customers.
First quarter net loss was $47.9 million as net margin declined 30 basis points year over year to negative 3.0%.
Excluding share based compensation of $42.3 million or first quarter net loss was $5.5 million and then margin improved 170 basis points to negative 0.3%.
In the first quarter. We also marked a milestone as Q1 was our first adjusted EBITDA positive quarter in the company's history.
I want to adjusted EBITDA was $3.4 million and adjusted EBITDA margin improved 160 basis points year over year to 0.2%.
Improvements in both adjusted EBITDA and adjusted EBITDA margin reflected our ability to grow the topline improved gross margin in scale advertising and marketing despite the challenging operating environment, an incremental costs brought about by the covert 19 outbreak.
More than ever we believed that our disciplined data driven operating strategy, coupled with the secular shift to online on category will propel us faster along or trajectory of long term sustainable growth and margin expansion.
Turning now to free cash flow.
Q1 free cash flow was negative $21.8 million as $42.5 million in capital investments off said $20.7 million of positive cash from operations.
Q1 capital investments were primarily driven by cash outlays for our new fulfillment centers in North Carolina in Pennsylvania, and I'd projects and equipment.
Now to guidance.
We navigate Q2 and full year 2020, our team remains aligned on our mission and we continue to execute our growth strategy.
The inputs in our business remain in line with our expectations and are reflected in our Q2 guidance.
Some ongoing cost related to the residual impact of covert 19 are expected to carry over to varying degrees into Q2.
Our cleaning and sanitizing tempo remain elevated and we continue to see some pressure on packaging and freight costs.
As Ginny and Q2 will also reflect the full quarterly cost of the 6000 newly hired fulfillment center workers, whereas Q1, SGN. They only reflected a proportional costs during the hiring ramp up.
On balance we believe we have sufficient visibility on the revenue and cost sides of the business to a game provide.
Quarterly and full year guidance for net sales and full year guidance for adjusted EBITDA margin.
This guidance assumes no material changes or disruptions in the current operating environment or supply chain or our fulfillment network.
For the second quarter 2020, we're expecting net sales to be between $1.62 billion and $1.64 billion.
Representing year over year growth of between 40% of 42%.
Recall that we provide profit guidance at the annual level not quarterly.
For the full year 2020, we're expecting net sales to be between $6.55 billion and $6.65 billion, representing year over year growth of between 35% and 37%.
And full year 2020, adjusted EBITDA margin to be approximately breakeven plus or minus 30 basis points.
Well, we're not guiding to full year yesterday, I will share a few thoughts that may provide additional context in this area.
I mentioned earlier, we expect to incur ongoing kobin related expenses in the second quarter as we remain committed to safeguarding our team members health and wellbeing and protecting the customer experience.
On a fully loaded bases, we expect full year SGN, a as a percentage of net sales to be lower the fiscal 2019.
I will conclude by saying that we're pleased with our Q1 2020 results and look forward to Q2 and to the rest of the year.
With that I'll turn to go over to the operator for questions operator.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad, if you'd like to withdraw your question. Please press the pound Keith we do ask that you. Please limit yourself to one question and one follow up your first question comes from Doug Anmuth with JP Morgan. Please go ahead.
Thanks for taking the questions.
First just given the one Q strengths in your views that one Q is not a one off event and that ecommerce adoption has accelerated in the new customer behavior is promising I'm just talk a little bit more about your guidance in the back half and D. So that's implied I think it's about 31% at the high end in the back half and then just related to that.
You talked about $70 million of one time benefit in the quarter from pantry stocking mix towards the consumables.
But you don't expect it to reverse can you just help us understand those comments better and what gives you confidence that behavior may be permanently shifted here. Thanks.
Hi, Doug. Thanks. Thanks for the question. This is maybe I'll take the first question into Middle answer the second part.
But I think you're getting at is what is our guidance philosophy, how do we think about the guidance that we provide up in <unk>. So a couple of things. One is we are very data driven and we create guidance. We look at a variety of variety of metrics.
Macro micro factors and trends things like customer behavior, including auto ship and that's a factor for us the strength of our catalog.
Additive data.
And we take into account also our projected marketing spend and resulting customer acquisition. So the guidance that we provide is based on lots of data and are currently they've got as we provide is based on the.
<unk> best available information, we have so right now.
I think let me so let me I'd add to that little bit Hey, Doug This is summit.
As we as we look at our business to the balance of the year, we see a few variables at play on top of what Martin Marietta's that saw net sales you know we have a good understanding of the pre cobot customer behavior and expect limited variability in their behavior. We also have already conclusions about the post call that new customers that we've written in the earnings graft a into an.
Let them to behave similar to previous cohort their behavior could vary right relative to expectations, either up or down slightly and then there's a new customer acquisition piece, which could actually got a second tailwind from cobot, which is currently not baked into our assumptions.
And then on the cost side, you know, we could see incremental cost pressures in areas like media costs. It's an election year competition, a you know reengaging in the back half of the year. We may also have incremental expenses associated with the second wave that we believe we have a comprehensive plan and we're going to be better prepared to meet that potential need so netting these.
Factors out we feel good about the guidance separate providing today and as these evolve will continue to update.
You into the rest of the audience as the year plays out hopefully that provides a comprehensive point of view.
Your second questions about pantry stocking and the common that we're not seeing it reversed so what we mean by that is we're not actually seeing customers you know hold their purchase of these back as this step out from Q1 into Q2. So you know that's so we continue to track repeat order behavior we.
Continue to track subscribe rates to our ownership program and we continue to track metrics such as you know, we attach rates order attach rates et cetera, et cetera, and so far we're seeing behaviors that are promising and a mirror a previous cohort behavior. That's the context of the comment there.
Great. Thank you both for the color.
Your next question comes from Brian Fitzgerald with Wells Fargo. Please go ahead.
Thanks, a quick clarification on Sumit on what you just said so that the the post covert autoship customers. She said the sign up the cancellations or within historical ranges, but you're also seeing.
Basket sizes increase faster with the new cohorts.
You see waving the propensity to use 'em additional hard goods or attach rates or private label pharma with those with those newer.
Post covert.
Cohorts and then.
Second question is just around.
Option right. So we've seen in case indicates that the pandemic had initially send adoption rates up but then they revert back to normal maybe a shelters emptied out.
We did see a spike and fostering though so anything you can.
The color you can give us on you know net net is that more pets and household is that good for you are you seem to shelter start to open up and fill back up that that'd be great. Thanks, Yeah.
Hey, Brian Okay lot lots of questions there I'll take them one by one or the let's talk about let's talk about the shelter adoption and foster sort of rates that were seeing.
We there's not perfect data available in this space. However, the data that we're tracking shows us a you know essentially shows that in March and April fosters and adoption on year over year basis were up 60% and you're right coming into May and June they've sort of you know reverted back to do to sort of pre pandemic levels net net.
We saw on our side was an increase.
On pet profiled sign up or two and a half a million customers signed up for pad profiles with us in Q1, and the encouraging data point. There is one in every for customers, who signed up was a new puppy or a new kitten and so you know we're trying to correlate those back into shelter and option as much as possible and there's some correlation.
But I think there's a there's an overall trend that we're bidding with here and when you look at that type of customer or the type of baskets that they build our richer.
Baskets, because you require a full array and an assortment off essential food and supplies, but also a lot of hard goods and the combination. So that's I hope that provides a bit if a color a into the type of customer behavior in the and connecting it back to the shelter fostering rescues sort of trend.
Yeah, that's great. Thanks.
Your next question comes from Mark Mahaney with RBC. Please go ahead.
Okay. Thanks, I know you touched on two things, but you didn't quantify them. So I mean I try to try you out on that private label and pharmacy anything about the growth rates their contribution overall to revenue and is there any particular reason why this cobot crisis would've been a catalyst one of those maybe the pharmacy products do you.
Do you happen to see I'm, just talking as an idea that a you would see a greater interest in pharmacy products for for pets. During this environment. Thank you.
Hey, Mark good to hear from new.
So overall the pharmacy business had another strong quarter and we remain pleased with this young verticals progress a young being the operative word and therefore, you know outstanding from kind of providing specific contribution to the business. Today, we saw increased demand from customers, who no longer had direct access to their vets office during the locked down.
And we also saw and this was driven by either clinic closures or reduce clinic hours and at the same time. We experienced you know there was a there was a competing phenomena, where a you know we experienced delays in processing prescription approvals due to those those trends off office reduced our.
Hours or closures it did not however in our opinion impact conversion and on balance we believed that the pharmacy business saw net benefit from consumer changes during the lockdown supporting the in two days of the hypotheses that Youd love it.
On private brands or you know, we continue to create private brands a strategic.
You can kind of observed from the comment a you know we tested this was an opportunity for us to really test out substitute ability and the value that we provide with private brands and we lead with those in many categories Opportunistically and deliberately and we saw a private brand portfolio you know hold up strong.
In this regard so we continue to two to fuel growth with these two new verticals and they continue to provide us the complementarity and net benefit of overall basket value.
Okay. Thank you summit.
Your next question comes from Oliver Wintermantel that Evercore ISI. Please go ahead.
Yeah. Good afternoon, guys I had two questions. One is the inventories there were up about 77% not at that.
Probably has to do with opening up the new F.C., but.
From your commentary in the prepared remarks, there was also some some hiccups in.
With with your vendors or fulfillment, so maybe a few comments on inventory and how.
That is shaping up for the rest of the year.
And then Christiana one Watson on gross margins I know that fulfillment cost has had some input.
Impacts on the gross margin here and how you would think about that are going going forward into next next two quarters. Thank you.
Hi, Oliver this is Marty I'll take that question, So university inventory build you're right that it grew versus the started the year. The end of Q4 2019, and I think your intuition is right as well that part of the growth is because we launch a new facility, our Charlotte fulfillment Center.
On April six.
Now the other though the reason why inventory would grow it is simply the fact that our sales growth.
So as our sales grow we have more inventory due to maintain levels of or customer experience that we that we that we aim for I think that hopefully that answers your question on on.
On the inventory itself.
Terms of Ah gross margin going forward.
Let me point you back to our Q1 results and the fact that we we increased gross margin year over year and otherwise would have been higher than then.
And then we reported had not been for the impact of of Cobot that drove a and impact of about 120 basis points.
In the quarter, which obviously, we don't believe it's a recurring cost in terms of gross margin.
Well there were just to clarify gross margins freight and logistics hits gross margin for us up fulfillment expenses hit a below the gross margin line into contribution profit, yes, that's actually fulfillment expenses, meaning fixed fulfillment like the rent and the like that's all in this unit.
Got it thanks very much.
Your next question comes from Seth Basham with Wedbush. Please go ahead.
[noise], Thanks, Rod and grabbed such great results and my question is on customer acquisition costs, if you could give us some quantitative.
Insight into how they trended in the first quarter and your expectations for Q2, and the balance of the year that would be really helpful.
Sure Hey set up so as as you know we had anticipated when we met in April we saw efficiencies in marketing you know in Q1, both the inputs input costs across media marketing mix chains and lowered in fact, the changes in favorable condition in this way and we also saw boost.
On an organic traffic towards our side, a combination of which drove marketing efficiencies that we mentioned in the earnings today for Q2, we are gradually and Opportunistically ramping up marketing is starting now and as we've anticipated. We are observing an increase in channel input costs across an array of media.
Next channels digital and mass media.
Driven by business. He is ramping up spending on these channels or marketing channels. Our marketing teams continue to work smartly to balance investment levels to maximize acquisition against customer LTV and the resulting overall marketing yield as an output off a off that equation net net we expect.
We're tightening in marketing cost to be higher in Q2, then there were in Q1, driven by these higher input costs as well as greater participation from retailers in the space.
That's helpful and just to clarify from a year over year perspective are you expecting as much leverage and sales and marketing in the second quarter as you experience in the first I gather now.
We are expanding we will continue to drive efficiencies I will stay away from commenting on the on the specific amount of the efficiency at at this moment.
Fair enough. Thank you Angola.
Thank you.
Your next question comes from Laura can self with Morgan Stanley. Please go ahead.
Great and just one follow up on that I guess are you assuming [laughter] any increase in marketing or advertising costs in the back half this year and maybe the first half of 21 caring team. These new Kashmir. There do you sort of next back SAP, yeah, there their behavior as well you net remain sticky without any incremental spend.
And then my second question, just sort of a big picture question I guess, what are the one or two key learnings from the Tobin period and has that changed any of your long term strategic priority into our plans for the business.
In terms of marketing no you know, we as long as the inputs or in the customer behavior.
Do you need to align with the output behaviors of purchase rate and subscriber adds up you're observing we do not plan to spend incremental marketing and that's not something that we've baked in.
Number two.
In terms of learning from the coal would view it I think the two magically we've captured looking back if we were to summarize the playbook that the team executed I would summarize it adds communicating innovating and really persevering. We've needed. The you know agility off of merit or for office brand and these stamina alpha males.
On as we have come into this and as we come out of it we have continued to innovate on our customers as behalf and we will continue to do so we are focused appropriately in making sure that.
Priorities that hit growth profitability and customer experience.
Our top of mind for us.
And and we've been able to appropriately prioritize others below the line.
And last but not least we continue to communicate and older communicate with our teams to make sure that we're not we're totally aligned.
Hi, Thank you.
Your next question comes from Brent Thill with Jefferies. Please go ahead.
Hey, this is John calling Tony on for Brian last quarter, you mentioned plans to hire six to 10000, new employees. It looks like you're now 6000.
Are you planning to continue hiring more or have you reach your target for the year and if not what is your decision to hire at the low end. The result of seeing slightly less pickup in demand than you originally had expected.
And also can you give it to sense for what portion of these employees that you've hired our part time versus a full time. Thank you.
Sure.
You might have to clarify one part of your question, but there were several in there I'll start and then maybe you can go back to the second part of the question. The so we've we've met our target we are not continuing to hire more people as we've articulated in the script. You know we believed that we have reached a point where.
Ed variable labor, where our demand and supply equilibrium has has has as it has been achieved and we essentially will follow the playbook that we always do we will not natural attrition.
Take care off a of off kind of maintaining those equilibrium. So you know to handle the elevated demand that we continue to knock out of the park. We are continuing to utilize that labor and if demand levels off at any point than but let's not some attrition take care of it which is very similar to the way that we actually plan or holiday cycles. So there's nothing unique that is.
Going on with the specific time, it's just that the demand chalk happened before we could actually align the neighbors another labors aligned.
What was the second part of your question if you don't mind repeating.
I will you pretty much answered it but I did also just a have a question about whether you could give us a sense for what portion of these employees are part time versus full time.
Yeah sure. So this is you have to think of these as you know hourly team members are right who are who are.
Who are fulltime employees, and and you know there flex up and down a you know in maintaining the equilibrium off off demand.
And labor planning.
Great. Thank you.
Your next question comes from B pack nothing about him with Barclays. Please go ahead.
Hey, guys. Thanks for taking the questions. So two quick ones from US first so what can you talk a little bit more and more about the reactivation trench you'd have a large base of customers, who historically block just hard goods or toys and kind of jumped off after a one apologize anything you are doing to engage with them more and how much of the new customer.
As you know the 1.6 million in one Qs reactivation was his first time to the platform and then second question does the strong demand that you're seeing recently it gives you some flexibility to leverage you know maybe with when do those that are at this time, perhaps in terms of funding first ODESZA partners or any other forms of vendor rebates.
At this time thinking.
Sure so getting through the second question you know all our relationship with suppliers, we view that as strategic and we also view you know our.
Our participation levels, you know as an ongoing strategy.
Not not driven by opportunistic or changes in event. So as we've continued to scale you've seen that our skill and market share has produced leverage to be able to drive efficiencies across product margin as well as overall supply chain. So that I think would the acceleration in the trends that we're seeing here.
We continue to to to be bullish that we can continue to drive that scale and therefore, you know fitness into bottom line.
On the first part of the question reactivation friends. So the reactivated base of customers is a small portion relative to a you know D. Overall customer base that we're talking about which is also a you know natural for us because our retention rates are high are multiples higher than traditional ecommerce cohorts and.
Also recall that our attrition is de minimis here to into your Threeq. So these kind of trends are encouraging where when we bring customers onto our platform VR, we have the ability to retain them for long periods of time and day, a you know should they ship their share of wallet or two chewy the longer that they stay with us so their net sales for.
Active customer our share of wallet grows with us and it's the same behavior that we're observing with our current customer base. So we're not we're not taking any I'm not sure old measures standing on the side to drive accessory activation or we're not seeing any kind of chain change in pattern there.
If I can add one more thing to do you feel like because I think the point that someone mentioned earlier in the in or into earlier remarks is that not only do we see new customers joined the platform.
But to the question of active of of customers reactivating, we have customers coming back to the platform overtime, but in the first what are we so is that that number that that rate doubled.
So we had a lot more news over the existing customers, who hadn't purchase from us in the last year come back to the platform. So that's a very good a very positive sign for us.
Got it okay Super helpful. Thanks, guys.
As a reminder, if you'd like to ask a question at this time. Please press Star then the number one on your telephone keypad and your next question comes and Eric Sheridan if you'd be F. Please go ahead.
Thanks for taking my question Mary I want to come back to something you said, you're part of the prepared remarks, you said you know this could accelerate if I'm paraphrasing break celebrating the path.
Crucible just profitability over the next couple of years, you anyway to give a greater sense, just how you're thinking about the exit velocity on profit margins coming out of 20, 2021, and thinking about what that means for pulling forward levels of profitability in the next couple of years, what some of the levers you're thinking about about.
She leveraging the business versus investing back into business should maybe I'm sure. Two if I can as you see increased levels of profitability in the business as you built it into U.S. Sumit does that make you rethink maybe looking beyond the U.S. and speaking international each after she is a company up over the medium to long term. Thanks.
Much.
Oh, Hey, Eric its Mario I'll try to answer the first part of I'm going to see if I, if I remember the pieces and I know packet, but I think you're getting at is what is or how do we look at our path to profitability and and the fact is that in in Q1. You saw results we were able to achieve for the first time positive EBITDA.
3.4 million improving year over year, we expanded gross margins, we scale the piano lines like marketing is unique.
In the guidance that we provided just a few minutes ago.
Was approximately breakeven for the year, plus plus or minus 30 basis points. So so I think those are proof points that are executing against the strategy that we laid out at we we've communicated.
It works the specifics of the exit rate on this year versus next year in the timing of when we expect to achieve some over a long term targets.
That I think what I can say is that we are closer now having seen this a this shift in demand it has increased volume.
Sales were closer now than we were you know just 90 days ago, but.
But specific timing I'll refrain from a from a dressing that.
Hey, Rick this is a summit.
I'll add some color to that which most on sort of the international question. We're not we're not coming off of our strategy, which we've been very clear about from the beginning and continued to execute on good rigor and discipline, so acquiring new customers and growing share of wallet for existing customer base combined with focusing on new verticals private brands healthcare remains our priority on top of this we're not taking off what up.
I guess as it pertains to innovation or launching new or types of businesses.
It's gift cards in Q1 will continue to see got business ideas that can augment our sales and profits, while also delivering value to our customers and and and as we do that we'll we'll of course keep keep keep the audience updated so are you know our roadmap on international our thinking on international also hasn't changed we believed that there are three trends going on right now that.
Meaningfully accelerate our position to play in this space. One is we're observing you know pet spending per household going up and we anticipate a 5% cagar on that or the next three to four years to we've also observed U.S. pet household ownership is going up at a rate of 1% to 2% Cagar and then three what we've seen with this.
Pandemic is that the online penetration.
Projections have increased from 25% penetrated through 2024 to now north of 35% penetrated and we were well positioned to capitalize on this because we've been planning for it we are preparing for it we have been we have 17000 people focused on it so from a people process infrastructure and tech point of view.
We're aligned and focused squarely on the United States with this massive opportunity in front that we'll continue to execute on and our international thinking remains the same greater than one year out less than five years out.
Great. Thanks for the cold.
Sure. There are currently no further questions at this time I'll turn the call back to management for closing remarks.
Thank you all have a nice evening.
This concludes today's conference call actively participating you may now disconnect.
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