Q2 2020 Chewy Inc Earnings Call
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Now I'd like to turn the conference over to Bob Lafleur, Vice President Investor Relations in capital market. Please go ahead. Thank you for joining us on the call today to discuss our second quarter fiscal 2020 results.
Joining me today are Chuys, CEO summit, saying and CFO Mario Martin.
Our 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 Investor Dot Chewy Dot com.
Linked to the webcast of today's conference call is also available on the site.
Our call today, we will we making forward looking statements, including statements concerning <unk> 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.
Excellent our supply chain workforce filming centers, all other facilities customer service operations and future plants.
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 to future performance.
Also note that the forward looking statements on this call are based on information available to us as of today's date.
We disclaim any obligation to update any forward looking statements, except as required by law.
For further information please refer to the risk factors and other information in Chuys 10-Q, and 8-K filed earlier today and in our other filings with the FCC.
Also during this call we will discuss certain non-GAAP financial measure.
Reconciliations of these non-GAAP I'd almost 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.
Non-GAAP measures are not intended as a substitute for GAAP results.
Finally, this call in its entirety, it's 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 to turn the call over to submit.
Thanks, Bob and thanks, a lot of people joining us on the coal.
Strong demand we observed in the first quarter carried over into Q2 and once again, thanks to the high quality execution from the Treaty, we achieved record net sales growth and customer additions.
In recent months it has become clear that the retail industry in general and E. Commerce in particular is going through a period of transformative change growth curve stuff. We're supposed to play out over years I've been compressed into quotas and even much.
Over the past few years, we have invested in technology, you businesses, but they've been capacity and building an extraordinary team.
This has prepared us too quickly adapt to the acceleration off our own growth curve and to provide top not service to the growing millions of pet wanting households in the U.S., who depend on Chile.
We have built chewy by putting the customer at the center of everything that we do in a world of uncertainty qualities like trust convenience and customer service really matter, especially when it comes to caring for family or loved ones that are there are people pets or boat.
We have taken these millions of customer relationships and built a large base of repeat business that enables our rapid scaling and fuels our profitability on an accelerated timetable as empowering goes all if that is just getting started.
The next few minutes I will discuss our Q2 results and then share some updates on the purchasing behavior of our newest customer cohorts as well as how we entered Brett their lifetime value potential.
I will also update you on our fulfillment center network and distribution strategy planning for the upcoming holiday season, and then wrap up my remarks, but some closing thoughts about chuys marketshare opportunity and how we fit then and the broader pet ecommerce space. Finally, I will turn the call over tomorrow to discuss our second quarter results and guidance in more detail.
Chuys advantageous position and the race towards E Commerce, and our culture of innovation and customer service resulted in another quarter of outperformance Q2, net sales were $1.7 billion, increasing 47% yeah what are your.
I want to ship customer sales were $1.16 billion or 68.3% off net sales.
We ended the second quarter with 16.6 million active customers, an increase of 4.6 million compared to second quarter 2019, raking last quarter's customer acquisition record.
Net sales for active customer or nest pack was $356, representing 3.2% into what growth after adjusting to exclude the extra week in 2018.
We delivered strong gross margins, but Q2 actualizing at 25.5%, a 190 basis point increase year over year.
By early Q2, we had third the backlogs and corrected the inventory imbalances that weighed on Q1 gross margins.
Our newest business work those private label and health care combined contributed 140 basis points to the year over year expansion in gross margin.
In the Rx business, we serve our broadest customer base on record serving millions of American households at a time when they needed that's the most.
Certainly our newest Rx sites in Kentucky, and Phoenix became fully licensed in Q2 to fulfill customer orders nationwide, allowing us to further improve customer experience and optimized logistics costs.
Another area of focus has been our hardgoods business, which continued its strong growth in Q2 positively contributing to the overall gross margin trajectory.
But in the hard goods categories, we expanded our mix of private label products and private label Hardgoods penetration reached 15% off net sales providing care gross margin benefits.
We remain excited about the progress we are making across multiple initiatives ongoing but then the company.
We executed tightly against our sales momentum, while expanding gross margin and controlling costs to deliver our second consecutive quarter of positive adjusted EBITDA.
Q2, adjusted EBITDA was $15.5 million at a margin of 0.9%, reflecting 340 basis points off year over year margin improvement.
Now, let me briefly touch on customer behavior for our new and existing customers over the course of the.
We continue to monitor the behavior of course, Bogot customer cohorts. The acquired in Q1 and Q2 for any notable variances against our more mature treatable with customer cohorts and are encouraged to observe a high degree of consistency in customer behavior between the two.
The Q1 cohorts remain positively engaged and the initial engagement levels off the Q2 cohorts matched their Q1 peers.
Overall customer acquisition rates remained above pre pandemic levels and other metrics such as basket size reorder rates and ought to ship sign up remained healthy and stable.
Our encouraged by these trends.
The new active customers, we added in Q1 and Q2 of this year. So past the total active customers we added across the entirety of 2019.
These new cohorts are not only large number but given their initial engagement levels, they're also potentially significant and their unrealized contribution to our future revenue and profitability.
As with our mature cohorts, we expect their nest pack to increase significantly over time, reaching approximately $500 by year, two and over $700 by your five.
An exciting new development. However, it's not unlike our earlier cohorts, who were primarily purchases of food and essentially we now have the ability to expose our newer cohorts due in large variety of purchase options earlier in their customer lifecycle.
Example, Rx prescriptions, a wide variety of hardgoods option fueled by a private label products or gift cards for friends and family members.
These expanded offerings allow us to serve the customer more fully from their initial purchase an expedited the capture of greater wallet share.
This in turn allows us to scale their lifetime values or LTV beyond their historical ranges.
This focus on new businesses and product innovation, it's critical for a long term success and each has been under strategic roadmap that we've shared with our shareholders and investors since our IPO.
It is also what they'll continue to amplify chuys growth and profitability flywheel as we look to the future.
Another important contributor to our ability to serve millions of customers is our dedicated fulfillment network, which continues to expand to meet the needs of our growing business. Our next fulfillment center or CE launch will be Archibald, Pennsylvania facility, which begin shipping orders by mid October.
Archibald will be our 10th FC overall, and our force automated facility.
In addition to the Archibald and the North Carolina FC which were planned fulfillment center launches for 2020, just last week, we expanded our network with the opening up a new limited catalog fulfillment center in Kansas City.
Incremental fulfillment capacity added by Kansas City provides us the flexibility to effectively load balance across our other FCS and gives us available buffer capacity as we head into the busy second half of 2020.
This new FC is a capital light high velocity operation focused on foster fulfillment during peak demand periods.
This facility was not part of our original FC Netbook plan for 2020 and demonstrates our ability to improvise adapt quickly changing conditions in order to maintain business continuity and to protect customer experience.
Looking a little farther out we also announced that we will be adding a second automated FC through our network in mid 2021.
This one will also be located in Kansas City, Mario will share some more details on this project shortly.
The second center will give us option value as we scale operations in the Kansas City area from 2020 into 2021.
By the end of 2020 odd fulfillment Center network will consist of 11 centers, but over 7 million square feet plus three pharmacy focused fulfillment centers. We believe this makes us one of the largest dedicated E commerce fulfillment networks in the U.S. and certainly unparalleled in the dedicated pet space expanding.
Some capabilities. It's just one off the steps we are taking in preparation for the upcoming holiday shopping season.
The rapid changes we've seen in retail and E commerce are likely to rewrite the rules up this year as holiday and cyber seasons.
Preparations are already underway. So that we are ready to ensure that our systems inventory and staffing levels are in place and able to adapt to any contingencies.
Also but the holidays in mind, we continue to expand our assortment of innovative high quality products that surprise and delight our customers in Q1, we launched gift cards. In Q2, we took pet personalization do a whole new level by launching the service that allows pet parents to personalize dozens of people products like.
A few mugs Waterbottles, then picture frames to celebrate their pets or create personalized gifts.
Using a first off its kind three d. powered user interface pet parents can easily upload images and add customizable text and then interact in real time with a threed rendition off their item before ordering.
We are excited to expand this experience to pet products like callers I'd tags and beds in our growing personalization catalog.
Before I end I would like to share some compelling data points about the rapidly growing online segment of the U.S. pet products market.
Indefinitely data provider package facts predicts that online product sales in the U.S. will increase by $3.9 billion. This year with online sales scanning five points of market share year over year to reach 27% of all pet product sales.
Against that backdrop, the midpoint off over 2020 guidance has us growing our revenue by approximately $2 billion year, where are you.
In doing so we would capture over half of the total forecasted growth online pet products sales this year.
The tree team continues to execute against our strategic plan and we have never been more steadfast in our mission of being the most trusted and convenient to destination for pet parents and partners everywhere.
We are proud that despite all of the challenges our team members have faced on the job and their personal lives. They remain focused on taking care of our customers and the pets, who depend on them I.
I'll now turn the call over to Mario who will provide the details of our second quarter results and financial outlook Mario.
Thank you Simon.
Second quarter, net sales reached $1.7 billion, increasing $546.3 million or 47.4% year over year.
This marks the second time, we have added more than half a billion dollars from net sales year over year in a single quarter.
Altogether, we added over $1 billion a topline in the first up 2020, as we attracted more customers where platform expanded the catalog and help our customers build bigger baskets.
Oh sure customer sales for the second quarter totaled $1.16 billion or 68.3% of total net sales and again topped $1 billion in a single quarter AUTOSAR customer sales increased 45.3% year over year, continuing the programs uninterrupted growth since launch.
In the second quarter, we added 1.6 million active customers, bringing our total active customers was 16.6 million.
On a year over year basis, we had a 4.6 million active customers an increase of 37.9%.
<unk> customer base is a key long term driver for top and bottom line expansion and we're pleased with the result, so far this year, having added more active customers in the first six months of 2020 than we did in all of 29 team.
Net sales for active customer or netback as of Q2 2020 reached $356 an increase of 3.2% year over year when adjusting the second quarter of 2019. This back to exclude the benefit of the extra week in the fourth quarter of 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.
And this case and through the third quarter of 2020, we adjust out the impact of the extra week in the fourth quarter of 2018, when presenting year over year growth versus 29 team.
Lets back was virtually flat quarter over quarter as a result of a large influx of new customers in Q2.
Recall that all new customers are included in the active customer count, but their impact on net sales is limited to the most recent quarter.
We have shared on prior calls customer spend more with us the longer they stayed with us.
From the initial order they discover the value selection convenience and best in class customer experience, we offer and they quickly consolidate their purchases with us.
Sumit mentioned earlier, our most recent cohorts are displaying the same purchase and engagement consistency as or more mature cohorts and we're encouraged by these trends.
Gross margin in the second quarter reached 25.5%, increasing 190 basis points year over year, surpassing the low end of our long term target range for the first time in a single quarter.
Early in the quarter, we addressed to covert 19 related backlog issues. There were a drag on first quarter gross margin.
I think they impact from higher freight and packaging cost that we expect that would be a drag on second quarter margins.
Gross margin also benefited from a favorable sales mix into hard goods and strong contributions from our private label and health care offerings, which combined drove almost three quarters for the year over year gross margin improvement.
Due to operating expenses, which include as Ginny and advertising and marketing were $465.6 million or 27.4% of net sales scaling 340 basis points year over year.
As you know, which includes all fulfilling customer service credit card processing fees corporate gionee corporate payroll and share based compensation totaled $343.2 million into second quarter or 20.2% of net sales.
This represents a 100 basis point improvement year over year and demonstrates our ability to scale. This line well, we continue to expand our fulfillment center network invest in our team members and addressed incremental costs driven by covert 19, which in the second quarter added $11 million were 60 basis points to S.J.
Q2 advertising and marketing was $122.4 million were 7.2% of net sales scaling 240 basis points year over year.
While organic customer acquisition remained strong throughout the quarter, we did see input costs rise quarter over quarter as media rates began to recover from their Q1 lows.
By accurately targeting our marketing efforts, we were able to add more than twice as many net active customers on a year over year basis in Q2, this year with just 11% more marketing spend.
Over the long term the CAC efficiency, we have achieved with our 2020 cohorts. So far combined with a strong expected purchasing behavior should produce LTV to CAC ratios for them as a group that are well above the predecessor cohorts.
Second quarter net loss was $32.8 million net margin improved 530 basis points year over year to negative 1.9%.
Second quarter net income excluding share based compensation of $37.8 million was positive $5 million.
Net margin excluding share based compensation was positive for the first time ever improving 370 basis points from 0.3%.
Second quarter, adjusted EBITDA was $15.5 million and adjusted EBITDA margin improved 340 basis points year over year to 0.9% exceeding breakeven for the second time this year.
Turning now to free cash flow.
Q2 free cash flow was negative $56 million, reflecting $28.9 million, a negative cash flow from operating activities and $27.1 million of capital expenditures.
The negative operating cash in Q2 was primarily a function of increasing our inventory levels to match current and anticipated demand levels and to protect the customer experience.
Well investments continue to refocus on capacity build including cash outlays for our new fulfillment center in our Triple Pennsylvania that is scheduled to open next month.
Before I turn to guidance I want to remind you of the near term investments, we're making that we believe will enable us to scale the business moves forward along the path to profitable growth.
Our goal is to provide you with further clarity on the rest of Twentytwenty and hope you think about the shape of the piano and free cash flow over the next six to 12 months.
We recently announced plans to launch or 12 fulfillment center. This one of the Kansas City area in the second half of 2021.
This facility will have the same automation layout as our Archibald Pennsylvania facility that is set to open in mid October.
A portion of the initial investments associated with this facility will be recorded this year.
First a reminder that at all for filming costs are included in this DNA. So launching a new facility requires capital investments inventory build in a short term increase in as many as a percent of net sales as we hired and trained personnel ahead of wrapping the site to full capacity.
Cost associated with the recent and upcoming launches of the Kansas City Unarguable facilities will be reflected in our Q3 in Q4 financials and are incorporated into current guidance.
Second I want to reiterate the benefits, we expect to gain from Sq automation.
To 60% improvement and safety and economics related metrics, 25% increase in throughput capacity per square foot, 50% increase in labor productivity and 30% reduction in fixed and variable fulfillment cost per unit.
These investments will also allow two week to maintain our competitive edge as was our coveted position as a top experience provider.
As a specialty critical since covert 19 as rapidly influencing the way, we live shop and serve our customers.
Now to guidance.
As we enter the back half of 2020, we have good visibility on a sizable share of our future sales. Thanks to the recurring nature of our ODESZA program.
At the same time, we acknowledge that opportunities and risks exist side by side in today's unique and operating environment and we are prepared to capitalize on opportunities and mitigate risks asset when they arise.
So with that for the third quarter, we are expecting net sales will be between 1.70 and $1.72 billion representing year over year growth of between 38% and 40%.
For the full year 2020, we're expecting net sales to be between $6.775 billion and $6.8 billion to $5 billion, representing year over year growth of between 40% and 41%.
As for guidance suggests we expect to deliver nearly $2 billion from net sales growth in 2020 divided roughly 50 50 between the first and second half a year.
Sumit indicated earlier, we expect to capture over half of the growth in online pet products sales that the industry experts predict for Twentytwenty.
Full year 2020, adjusted EBITDA margin is expected to be approximately breakeven plus or minus 30 basis points.
We are holding our adjusted EBITDA guidance constant with the guidance, we gave last quarter.
We have good visibility on the demand side of the business as we entered the second half of the year. There are some areas of the current operating environment, where we don't have full clarity on potential cost headwinds.
For example media costs in Q3 in Q4 are likely to see some upward pressure from factors like the economy continuing to open the upcoming election and increased competition as we approach the holidays.
Similarly during peak periods, we can make additional investments and employee benefits or freight and logistics to respond to elevator volume's protect customer experience or both.
Our present guidance, reflecting these potential headwinds many of which are attributable to market conditions related to covert 19, and its impact on the broader economy and ecommerce more specifically.
We view this as nonrecurring in nature and don't see them affecting the underlying profitability of the business that we demonstrated in the first half of 2020 and expect to carry forward into 2021.
I will conclude by saying that our Q2 results demonstrate our continuing ability to attract and retain customers gain market share achieve scale and operate profitably.
We remain optimistic about our future and look forward to the second half 2020 with that I'll turn the call over to the operator.
Operator.
I will now begin our question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using speakerphone, please pick up your handset before pressing the key.
To withdraw your question. Please press Star then bill.
Our first question today comes from Mark Mahaney with RBC capital markets.
Thanks, I want ask about the nest pack outlook and could you just detail how that.
Yes pack goes from whatever 350 356 now to the 500 to 700 I know, you're just I know you're talking about that with particular cohorts as the overall customer base ages.
Inevitably drive up there, but just talk about how that how that happens is it greater frequency is it spend across different categories I'm sure. It's all the above but what if you typically seen in terms of that drive up of that and that's back. Thank you very much.
Hi, Mark this is mark so I'll take the question.
You know what would happen is like in the first quarter, we had a record influx of new customers the diluted pack and netback and the second quarter. So it was basically flat quarter over quarter, but up 3.2% year over year and I think you have the dynamics right that as we add more new customers.
No that affect snaps back in the short term, but overtime those customers mature and are they ship their spending to us.
So then your question of how does that evolve overtime and this is a mixture is a as you said all of the above not only do they find the selection convenience price customer service to be so appealing to they moved there.
They are spending to us, but we also continued to expand the catalog in the categories.
We serve them and in that increases there, they're spending with us over time and you're right to think that a as we have shared but in the past.
First year, that's to be a 150 $200.
By year, three that gross a 100 $200 by year.
Four or five.
You are in the Fivesix hundred dollar range.
So the longer they stay with us the more they spend with us, but it's a it's a combination of all the things you mentioned.
Mark also a this is summit I think helpful to remember that the number that you're quoting right. The number than us back number that we're quoting is a weighted average number and when we look at the number of customers that'd be required. So the net additions that have happened in the last three years form a bulk of the customers on the platform. So just by the mathematics.
Fed yeah, the cumulative it gets dragged down by the majority of the cohorts that we bring on but when you look at our older cohorts that have been active adults over 456 years. Those are the cohorts that are spending north of five six $700 and so that's I think that's an important consideration which is why you know the in the past we've.
Sad, it's really important for us to bring customers online and then what we gained confidence as we build relationships with these customers and expand the more they spent the more this the longer they stay with us the more money they shipped from their share of wallet from their basket over to choose and so you take that died.
Can you take the dynamic off let's say the food and supplies market in the North American space and you take a 100 billion dollar pet space you take 65% of that is just put in supplies and you take 90 million households that math is roughly about 700 dollar per share of wallet per household just attributed to food and supplies.
So when you start putting these two together and you see the results and the way that we go to market engage these customers and the offerings that are offering that Mario suggested that's how the math works up.
Okay. Thank you summit.
Sure.
Our next question comes from Brian Fitzgerald with Wells Fargo.
Thanks, guys a couple of questions. The first one is you seem to continue to acquire customers very efficiently in the quarter anything you could tell us about the media pricing environment during the quarter extreme quarter, and then channels give me the best leverage or color on the media mix there.
And then at what Paul effects.
Hey, Brian Smith here.
So it or not much to break that down but what we are continuing to see is going to add a as anticipated chantal input costs across an array of media began to increase from the low is that we saw in Q1 and so our marketing team has had to smartly pivot to make the level of investment and one thing that benefits and engine like ours is that because we are a fishing.
And going to market on the performing side, we're able to also attributes spend on short term bases and change that spend if we don't see the yields coming back in so for US. It's all about you know guiding ourselves to the LTV to CAC metric and then on top of that we're continuing to find the efficient frontier. So you know for example, as you move out.
Mario alluded to media costs due to election year and typically what happens is that you should expect TV cost to start going up but also you know visibility goes up overview viewership goes up during this time and there's a there's a headwind on a tailwind that actually brings to the equation I think what's a little bit murky. This year as you know how did okay.
Dynamic if the a if the viewership is scaled back how that actually impacts media cost. So we're watching all of this but at least underperforming side, where we spend a bulk of our money where more targeted and we have the ability to dial back or dial up as the yield comes in.
Got it and the other one I just had was on that the new automation and wondering if you can kind of compare contrast, the capex on the opex footprint of those facilities at the new automation ones versus the rest of the network is there an opportunity to upgrade or augment some of your existing facilities with some of this autumn.
So when you're talking about thanks, Yeah, I mean, absolutely. We've we've built in the last few years, we've built our existing network with a point of view off if the data comes into our expectation like where the data points that we're providing we have an opportunity to go back and retrofit or upgrade our existing facilities and automation for us.
You know is a strategic choice and we believe that now more so than ever we have confidence that we're making the right choice and investing in automation to be able to get out the benefits across safety a variable cost as well as a full customer full full cost per unit for the network.
Thanks I appreciate it.
Our next question comes from Doug unless with JP Morgan.
Thanks for taking my question.
To me it was hoping you're just talk a little bit more about the services marketplace.
Essentially just.
If the pandemic is perhaps accelerate your thinking there at all and just how how you'd think about at the time, what a potential product could look like and then also monetization around that product. Thanks.
Good to hear from you when we think about services first of all end the concept of a marketplace. We think about it broadly. So we're not really pegging ourselves to you know a product oriented marketplace or have a a particular retail environment also service oriented marketplace. We believe you know us helping customers.
In the health and wellness space, where you know a lot of customers are migrating towards finding more and more information, especially due to vet clinics close is a service that'd be could provide a we believe you know offering up our assortment to you know a two to two small business providers at a time when they needed the most could be a service that'd be.
Could provide a it a pet insurance could be a service that'd be could provide so services for us as a broad term, Doug and there's not much to share you know regarding our progress other than the fact that we continue to evaluate ideas and and and and put our talk behind it and when do you have something more to shed I'll come back and Sharon.
Thank you.
Okay. Thank you.
Our next question comes from Laurie Castle with Morgan Stanley.
Great. Thanks, so much.
Ask about you know strategy that you're thinking about to retain these new buyers that you've acquired in the back half a year and into 2021 and that sort of on the same vein. How are you thinking about marketing spending in the back half the year given some of the efficiency that you've seen I'm in the first half.
Hey, learn some at a I'll take that on the so first of all.
We are encouraged by the fact that the new customer cohort is displaying behavior, which is consistent to our older cohorts, which then tells US that were don't have to do something unnatural to engage them. What we are also encouraged by the is the fact that we have different choices for them to engage with for example, if you look back a couple of years.
Years, you know you had the choice of either buying food or buying your supplies from US today, you have as a customer you have a much broader array of choices and so when you really think about how we deploy marketing now for engaged customers. It's about you know understanding their lifecycle and at what point do we exposed.
Them to these offerings and how do we smartly convert them from one word to go or complementary.
So offerings to their portfolio to accelerate.
Our basket size relative to order board. So that's how we're thinking about it.
Number your second part of the question is efficiency a in the back half of the year or how we look at marketing outlook as I alluded, we expect channel input cost across an array of media to began to begin to increase and our team.
One we expect organic traffic and customer acquisition trends to remain elevated relative to Prequaled. At levels. Then you know is the notion of how paid marketing should be should be executed and there were going to continue to spend money, but the operating philosophy off either driving the business to cash neutrality or.
Until we hit the efficient frontier and keeping LTV to CAC ratio as is our guiding point overall, we expect net cost net customer ads to be higher than pre cobot levels and overall, we expect to deliver marketing efficiency from a year over year point of view.
Great. Thanks, so much.
Our next question comes from Dillon Carton with William Blair.
Yes, hi, Thank you very much just curious if you can touch on the behavior, you're seeing with pharmacy customers, if there's anything different as far as attachment rate.
And then also as you look to the back half kind of keeping the lease the earnings guidance relatively in line on higher sales. It Thats just.
Maintaining some sort of conservatism just given the visibility or if you're seeing kind of incrementally higher costs or or reason to be cautious. Thank you.
Stay tuned summit I'll take the first one Mario will take the second one on pharmacy not much different to report a in a we're encouraged by the way of pharmacy continues to resonate with our customers and we continue to be pleased with the results.
As we've noted pharmacy made positive contributions to the companies to Q2 revenue and margin expansion goals and we continue to benefit from the efficiencies provided by the expanded network will for ARX fulfillment centers that allows us to deliver on even sharper experience and faster delivery times. So we continue to expand the proposition which will.
I will make a chewy a stronger proposition for customers either wanting to adopt pharmacy for the first time or existing customers, who want to try out our pharmacy platforms and we're happy about that.
And then the this is Mario for the second part of your question.
I'll start off by saying that we feel good about being able to provide guidance.
And like always we weigh the risks and opportunities in our guidance reflects the balanced view of optimism versus whats, let's clear in the environment that we're operating in.
So a you know you asked specifically about the bottom line, but let me just give you the topline and bottom line. So you can see how we we arrive at it but for the topline.
Auto ship and the predictable customer behavior that we've seen over time is what gives us visibility to be able to raise the guidance by $200 million and guide to almost 2 billion dollar increase year over year.
For the bottom line, though we held our EBITDA as you mentioned a flat to the two there last call and thus for two main reasons one is.
There are some potential cost headwinds.
Submitted mentioned variability of media costs higher logistic expenses and potentially short term costs related to covert 19.
And it's how much of these headwinds materialize in the second half that will drive us to one and or the other end of the range and of course, we're going to continue to manage to actively manage the headwinds using all the data available to us.
But the second portion is that we may choose to make some short term investments in customer experience marketing and other areas that may impact profitability in the short term, but are exactly the kind of strategic decisions that we make on a regular basis that drive our growth over time. So our guidance provides us flexibility to do to make those types of investments in December.
And ER and the backup.
Makes sense I appreciate it.
Our next question comes from Seth Basham with Wedbush Securities.
Hi, good afternoon. Thank for taking my question Ive a question about the behavior of the pre versus post Kobe customer cohorts, you're talking about the other expose these posts cohort oppose tobin cohorts to a larger variety of purchase option yet it seems like they're not spending more.
There are lifecycle point, then pre Toby customer cohorts is that correct or if not please correct me if so please provide some color.
No such a short on sort of that's not correct. A in fact I think Mario alluded to this in his script as well that the LTV to CAC ratios off a you know these newer cohorts are super led to have compared to the older cohorts and it's not just because of the kaka efficiency. It's also because of the strength in the LTV that we're seeing.
Okay, that's excellent to understand and then secondly, as it relates to fulfillment costs you saw the leverage this quarter that was a little bit more than last quarter I talk about potential headwinds going forward, you numerate or elaborate on.
The headwinds that you might expect going forward and whether or not we should see more or less de leverage in the back half relative the first yet.
Oh fulfillment costs, we touched on that as part of SGN, a and then what we what I mentioned in my my opening remarks is that.
We would see a deleveraging related to opening our new fulfillment center. The happens every time, we opened a new FC.
Because at the beginning we have to recruit and train and ramp.
From a productivity standpoint, those new team members, but overtime the productivity increases volume in that facility increases and that effect ameliorate. So.
It is a it's a temporary effect of opening up new fulfillment centers and said the point about headwinds on the on the labor side or the investments is essentially you know us trying to anticipate how playing through the back half of the year, while continuing to live in a pandemic is going to.
Panned out yeah, there's lack of clarity on the stimulus side and yeah, they're changing macroeconomic environments. At this point then we just stand ready to invest in short term wage and benefits.
If we need to align our labor curves with the demand forecasts that we have to execute to protect customer experience.
Understood. Thank you.
Our next question comes from Oliver Wintermantel with Evercore ISI.
Yes, Hi, good afternoon. My question is regarding the sales cadence throughout the quarter.
How you entered the quarter and how it looks like but velocity you and exited the quarter and then if you could give us maybe like good oh or.
How it's trending in the third quarter, so far and then a follow up question would be.
Advertising revenue opportunities on your own side. Thank you.
Hi, Ali it's Marty I'll take the first part and submit can answer I will answer the second part but.
To your first question <unk> net sales and customer acquisition in August were consistent with our Q2 exit rate.
So the best way to describe the current base of customer acquisition is that we are running above pre coping levels, but below that peak rates. We saw in March and April and the guidance, we provided a reflection.
Hey, all its summit not much not much to add to the advertising revenue opportunities on our side when we have something to share will come back and Sharon.
Got it thanks very much.
Our next question comes from the PUC Nike wanted.
Clay.
Hi, guys its trevor on for deep pockets to ones from us.
Just dovetailing on one of the earlier questions now that you have six months of data on post cobot cohorts can you give us any color on like average basket sizes frequency in churn there I know you get some comments there on spending levels, which was very helpful. And then second one dovetailing on that last quarter you flagged about.
Ian and pantry stocking.
Contributing to revenue any update on that metric. This quarter have you seen that kind of stabilize or have you seen that inventory that are that's in pantry drawdown. Thanks.
Sure I'll I'll take both of these first of all we're not seeing pantry de stocking we continue to see high levels of engagement from our customers and as we alluded to in the Q1 call. We don't expect the.
Pantry destock impact to come in or at least come into perspective, so quickly so not much not much more to say there and on the new cohorts trends and basket size reorder. So without specifically common thing you know we continue to see basket size is our bigger or larger and are there other metrics.
Such as frequency meantime to order or purchase rate auto ship subscriber rates et cetera are consistent with our mature cohorts.
Great. Thanks.
And if you have any further questions. Please press star then one to join our question Q.
Our next question will come from Brent killed with Jefferies.
This is John calling Tony on for Brian. Thanks for taking my question.
When we back into implied Q4 sales using Q3 in full year guidance, we get somewhere around low thirtys grow.
Which implies a moderation from Q3 guidance.
Should we take this as conservatism or is there something youre seeing in customer trends or from competition that leads you to believe topline growth will start to slow towards the end the year. Thanks.
Hi, John its Mario I'll take that one.
Our updated guidance or delivers nearly 2 billion of sales growth this year and just over half of that coming in the first half and there the remainder in the second half and that $2 billion equal to 40% growth year over year, which is the same growth rate that we had in 2019, but I'll a larger base.
So the growth in absolute terms is quite meaningful in the second half and it right inline with what we saw in the first half.
I think the other thing you should take away is that.
Our projected growth a 2 billion. This year is equivalent to more than half of the total growth and they're all in a in the market for online so pretty significant.
Okay. Thanks.
Our next question is a follow up from Dillon Cardinal with William Blair.
Yes, thanks for coming back in here just curious on the hard goods. The total growth in that category, 52% what drove that acceleration am I right in that the private label Hardgoods is actually in the other line item and if so kind of if you're seen private label hard.
Go ahead of that and is that having sort of the benefit for the hard goods category more broadly that.
Hey deal and so yes private label Hardgoods isn't the other category and Oh, we attribute the hardgoods growth.
Growing hard goods as being an important part of our growth strategy.
And we've alluded to this into passed a ever since our IPO and it's been an important part of the growth strategy. Both on the branded side as well as the central driver of our private label hard good business as well. So what you saw in Q2 is the result of ongoing efforts.
In investing behind the business, both in going to market smart merchandising assortment and high quality products, both across product lines, but also expansion of price points and addition to some external factors that we benefited from such as increase in pet adoption and engaged pet parents.
Sorry, if there was a second question I'm Gonna have you I repeat that please.
Yeah I was just curious.
I guess I am right that the private label Hardgoods is embedded in the other category. So I guess I was just curious if the you called out.
By the label Hardgoods, I think in the gross margin comments.
Yes. It would stand to reason then that you're seeing private label Hardgoods, maybe grow ahead of your third party hard goods and if there's some benefit there I guess not in the broader hard goods category growth.
I mean first of all recall that our private brand strategy is to develop high quality, a you know customer affinity products and bring them to life. We don't necessarily you know, where we don't create products that compete one to one head on and that's really not our strategy.
In the on the hard goods side, you know where product lines are commoditize or people or customers may appreciate diversity of choices, yes, we're super encouraged by the way that customers are interacting with our products. The star rating that we're receiving for these high quality products as well as the acceleration and a meaningful penetration.
They're driving into overall hardgoods, reaching 15%.
At Q2 exit.
And get a percentage.
Yeah, Yeah, 15%, 15% penetration for hard goods private label.
Great.
Oh, yes, sorry, yeah, I mean, I Miss heard you, but I thought I heard you say, 52% growth in hard goods, but actually it grew 72% year over year in the quarter.
Okay, I just hasn't that number's, perhaps thank you.
This will conclude our question and answer fossil and I would like to turn the call back over to management for any closing remarks.
Next I'll have a great evening.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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