Q4 2020 Chewy Inc Earnings Call
Pardon me, ladies and gentlemen, chewy call will begin shortly so please continue to hold again the call will start shortly so please continue to hold.
[music].
Good afternoon, and welcome to the Chewy fourth quarter and full year 2020 results call all participants will be in listen only mode.
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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone can withdraw your question. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Robert Lafleur President of Investor Relations. Please go ahead. Thank you for joining us on the call today to discuss our fourth quarter and full year results for fiscal 2020.
Joining me today are chewy, CEO, Sumit Singh and CFO Mario Marte day.
Our earnings release and letter to shareholders, which were filed with the SEC on form 8-K earlier today have been posted to the Investor Relations section of our website investor Dot Chewy Dot com a link to the webcast of today's conference call is also available on our site.
On our call today, we will be making forward looking statements, including statements concerning chewy future prospects financial results business strategies and industry trends and our ability to successfully respond to business risks, including those related to the spread of COVID-19.
Including any adverse impacts on our supply chain work force fulfillment centers 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 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 and 8-K filed earlier today and in our other filings with the SEC.
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 measurements are provided on our Investor Relations website and in our earnings release and letter to shareholders, which were filed with the SEC on form 8-K earlier today and in our 10-K.
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 also be included on our IR website shortly.
Now like to turn the call over to submit.
Thanks, Bob and thanks for all of you for joining us on the call.
As we gathered for this call a year ago, we were just beginning to realize the scope optical dependent.
Looking back I'm incredibly proud of the way to Adobe and <unk> came together to execute through this incredibly challenging.
As a leadership team, we communicated frequently and honestly about how we would navigate the pandemic with our team member safety in the forefront we.
We made sure our teams are safe and healthy Workspaces and implemented new team member friendly policies and benefits.
In response, our teams have redoubled their dedication to our customers and made sure that their pets received the wiper products and care that they need it.
In the face of surging volume, we kept our supply chains operating and our procurement centers or FCS opened our corporate staff and customer service teams quickly adapted to working from home and our tech and product teams solve challenge after challenge to seamlessly fostered that transition.
Despite the disruptions caused by Covid and in some cases because of them, we accelerated the rollout of several strategic initiatives, including the launch of Egypt cards, and personalize products. The introduction of service innovation like our telehealth offering connect with a bet and compounding services and the opening of our first automated and of course high velocity.
Equipment centers.
These accelerated rollouts speak to the adaptability and the innovative spirit of our entire chewy team.
And even with the Covid backdrop, our teams remained relentlessly focused on the strong execution required to deliver a superior customer experience to over 19 million pet parents, who are trusted to deliver on that promise. It is for all these reasons that 2020 will go down as a landmark year and chewy and history.
Over the next few minutes I will briefly discuss our Q4 and FY 2020 results.
We'll then use the balance of my remarks to outline our long term vision for chewy and why we believe this vision leaves us well positioned for long term sales and profitability growth after that I will turn the call over to Mario to discuss our fourth quarter and full year 2020 results in greater detail as well as our fourth quarter and full year 2021.
Q4, net sales increased 58% year over year to $2.04 billion, bringing 2020 full year net sales 271 $5 billion or what is seven 4% annual growth exceeding $2 billion of quarterly net sale is another milestone for us.
It took us seven and a half years to reach our first billion dollar quarter and only two years to reach the $2 billion quarterly sales monthly active customer growth and continued strength in purchasing behavior were key drivers of Q4 and full year 2020 momentum.
During Q4, our new customer acquisition pace accelerated relative to Q3 customer reactivation increased by 40% and customer retention improved by 240 basis points.
As a result, we added one 4 million net active customers in the fourth quarter and ended the year with $19 2 million active customers.
As we have shared with you in the past efficiently, adding new customers to our platform and then growing their share of wallet is a key part of our growth strategy.
For the full year, we added $5 7 million net active customers, reflecting a 42, 7% annual growth.
The customer cohorts, we acquired in 2020 were highly engaged and displayed similar and in some cases stronger purchase and repurchase behavior compared to legacy growth.
These positive behaviors were driven by a wider product assortment and by a growing set of customer offering such as gift card personalized product compounding services and connect with them.
Assessing our progress by business vertical we're pleased to note that our core consumables business remains strong and we continue to gain traction and hard good health care and proprietary brands.
Looking at the Q4 trends within our key verticals third party hard goods sales grew 40% faster than the business overall and proprietary brand and hard goods sales more than doubled year over year.
Furthermore, and hard goods, our proprietary brand penetration increased 570 basis points year over year to reach 21% continuing the share gains we have reported throughout the year.
These results provide us confidence that we're on the right track and that there is a lot of opportunity in front of us to continue winning customers' hearts and minds in these areas.
Now, let's review our margin performance.
We're encouraged to see our effort to increase customer lifetime value or LTV drive higher margin.
Fourth quarter gross margin expanded 300 basis points year over year to 27, 1%.
Full year 2020 gross margin was 25, 5% up 190 basis points versus 2019, and a record high on a full year basis.
Approximately half of our Q4 gross margin improvement came from structural and sustainable drivers like higher penetration rate into higher margin vertical like hard good proprietary brand and healthcare.
Notably on a year over year basis, we executed a 510 basis point mix shift out of lower margin consumables and into higher margin vertical like health care and.
Higher gross margin and rigorous focus on bottom line execution translated into another quarter of positive EBITDA for.
Fourth quarter, adjusted EBITDA was $60 $8 million translating to adjusted EBITDA margin of 3%, a 340 basis point improvement year over year.
For the full year, adjusted EBITDA was $85 $2 million and adjusted EBITDA margin improved 290 basis point to one 2%.
Both Q4 and full year 2020, adjusted EBITDA includes a $15 9 million dollar benefits from releasing a prior tax reserve and even if we back out. This one time tailwind we generated $150 million more in adjusted EBITDA in 2020 than we did in 2019, demonstrating our ability to successfully.
<unk>, the business and drive incremental profitability.
Our performance in dynamics off this past year have provided us with an advanced look at chewy as future.
We believe that our future is bright given the size of the opportunity in front of us and our relentless focus.
Moving forward, we plan on executing against this opportunity in order to realize even greater scale and improve profitability.
I've been focused the balance of my remarks today outlining the scale of the large and growing opportunity in front of US and then sharing with you the ways, we intend to meet the challenge of realizing it.
Let's start with three important credit and why we believe chewy is well prepared to capitalize on that.
First is the increase in the number of pet owning households.
Net adoption surged in 2020 as millions of people sought out comfort companionship and the joy of pet parents.
According to industry analysts the number of pet owning households increased by five 7% in 2020, a significant acceleration from the pre pandemic five year CAGR.
<unk>, 6%.
Looking at our own data it is clear to us that these new pet parents or joining us early in their journey. For example in 2020, we observed a 35% year over year increase in the creation of pet profiles for puppies and kittens and a 40% increase in the creation of profiles for newly adopted pets.
We get excited about these insight because that newly adopted chewy puppy is going to grow up eat more food and shred more toys, leading to a long lasting relationship with us resulting in a stream of recurring revenue for years to come.
Understanding our customers and anticipating their wants and need help us create sustainable advantages to win in the pet space.
The second trend is the size of the U S pet market opportunity and our ability to expand the competitive playing field.
Today, we compete in roughly 70% of the 100 billion U S pet market and we do so primarily in the areas of food supplies and prescription drugs and diet that leaves us with an additional 30 billion dollar opportunity in health care and services to grow into and we are confident in our vision and our ability to do so.
Equally exciting to note is that we are continuing to increase our penetration into a growing U S. Pet market that is expected to reach $120 billion by 2024.
At $7 billion in net sales chewy is clearly only Scott and finally, the current tenant is growing e-commerce penetration within the U S pet market.
Penetration rates in the retail food and supplies category are estimated to have grown from 7% in 2015% to 30% in 2020 and are expected to reach 53% by 2025, which is in line with our current online penetration rates of categories like books and electronics.
Further as we are observing health care and services have already begun to shift online and we believe this trend will continue and accelerate.
Equally importantly, we believe the shift in favor of E Commerce channel are durable and largely permanent.
This is where we believe chewy has one and we'll continue to win for years to come.
For the preparation and focus have positioned us as the Internet preeminent neighborhood pet store and a leading pure play E Commerce company in the pet space.
We look forward to a future marked by ongoing innovation, winning customer hearts and minds and growing market share.
Overall, we see 2020 and the impact of Covid as much more than a one time growth accelerator.
The past year as a catalyst that sped up a secular shift towards e-commerce that was already underway.
There are multiple growth vectors ahead of us, which make the market opportunity so compelling and moving forward. We plan to continue following the growth and margin expansion roadmap that we have used since our IPO.
That roadmap consists of the following acquire new customers increase share of wallet for existing customers expand assortment growth proprietary brands and health care offering non services and when the time is right expand the business outside of the U S.
As we continue to successfully execute in each of these areas. We will also continue to invest wisely to grow our base of recurring revenues scale, our operating expenses and drive profitable growth over the long term.
Let's look at how our efforts are translating into tangible results.
Increased wallet share is a truly powerful growth catalyst, we kept our 12% more initial wallet share from our 2020, new customer cohort than we did from their 2019 predecessors, and we accomplished this while absorbing our largest new customer cohorts.
An additional data point, which lends us confident that our efforts are delivering results is the fact that year, one contribution profit per customer, which we calculate as gross profit less variable cost has increased at an average annual range of 16% over the past two years reiterating what I mentioned earlier in my comments these gains occur.
Gross share of wallet and profitability are being realized as a direct result of our efforts and reflect the impact of catalog expansion improved discovery ability and the incremental contribution from high margin verticals like health care hard goods and proprietary brands.
In the past three years, we have nearly doubled our total SKU count, including executing a seven fold increase in higher margin proprietary brand skus.
Within health care, we are unlocking value for ourselves our customers and our partners in this large and growing $35 billion market opportunity.
You will likely recall that we recently launched two services in the health care space connect with the vet and compounding in 2020 day services, where life just for a few months, but in 2021, we will get a full 12 months of financial benefit for these services for wide as well as vital knowledge that we continue to accumulate as we operate and refine these businesses.
In the year ahead, and beyond we will remain focused on expanding our customer base to.
Sustained improvement in customer LTV continue to support our strategy of disciplined investing in advertising and marketing.
As we quickly and efficiently convert new customers into engaged active customers, our growing customer base in turn generate the profit.
That we then reinvest into acquiring even more customer, thereby completing the flywheel effect that drives both topline and bottomline growth.
Recently, we expect to continue leveraging SG&A along the way we may choose to make incremental investments to strengthen our employee value proposition. However, our playbook shows us offsetting these investments over time with efficiencies from the technology and productivity enhancement that we began implementing in 2020.
We are confident that these investments will drive long term growth and profitability.
More specifically in 2021, we will invest approximately $60 million in higher wages and benefits the bulk of which will be directed to our fulfillment and customer service team. This.
This investment is necessary to help us attract and retain team members drive higher employee engagement and increase productivity over time.
At the same time, we expect to see productivity gains accelerate in 2021 from the technology and automation investments. We have made in our fulfillment Center net book you May recall that in October 2020, we opened our first fully automated FC a month earlier than that we began realizing a different style of efficiency. When we opened our first limited.
Catalog high velocity Dfc.
Given their launch timing. These FCS provided only modest ramp benefit to us in fiscal 2020.
In 2021.
To realize accelerated productivity gains from their full year operations. We also expect to open our second automated fulfillment center in Q2 2021 in Kansas City and another limited catalog facility in Q3 2021. Additionally in 2022, we will begin automation retrofit at select fulfillment centers.
We will keep you apprised of the specific timing of these events on our upcoming calls we believe these investments in our people and automation are not only prudent but they also have the potential to drive step function changes in our variable cost structure and contribute meaningfully to effective SG&A leverage.
Finally, I would like to share that having achieved our first full year of positive adjusted EBITDA in 2020, and our first quarter of positive net income in Q4, we have taken a meaningful step forward on our path to profitability and in demonstrating our ability to get big fast and get pitfall.
Going forward, our margins may fluctuate quarter to quarter, but we believe our profit trajectory is clear and positive I will end my comments by reiterating that 2020 was an incredibly challenging and unpredictable year for all of us do.
During this time chewy performed exceptionally well and made significant strategic and operational progress we navigated the safety concerns of the pandemic and kept delivering for our pet parents and business partners. We proactively grew our market share by offering a low level of service for the millions of new customers, who adopted pets during the pandemic.
Further we capitalized on the accelerated and sustainable shift of consumer E Commerce channel.
As a result, we grew our customer base by 43% and ended the year with $19 2 million active customers.
Perhaps most importantly, we dramatically increased our market size by launching new services in the pet health and wellness space.
These expanded offerings help us reach additional customers and improve our ability to increase wallet share with our existing customers.
We are entering 2021 with significant momentum and we're confident in our ability to deliver with that I will turn the call over tomorrow Tomorrow.
Thank you Sumit when.
We knew that 2020 holiday season would be unprecedented and we prepare for a range of outcomes.
The season got off to an early and strong start and market conditions remain favorable throughout the balance of the quarter for.
Fourth quarter net sales were $2.04 billion, reflecting 58% year over year growth.
This brought full year 2020, net sales to $7.15 billion, a $2 3 billion or 47, 4% increase year over year.
Along with accelerated customer growth. We also saw sustained high levels of customer engagement as traffic and conversion metrics improved from December into January reversing their typical seasonal pattern.
Icing and promotions are usually a reflection of the broader market environment and both remain balanced and stable throughout the quarter.
This allowed us to maintain pricing integrity and lower the volume of promotional discounts offered.
Looking at customer cohort behavior. The positive trends, we saw earlier in 2020 continued through the fourth quarter engagement levels remain high and basket size and reorder trends remain favorable which led to a 12% increase in Q4 average spend per new customer versus the Q for 2019 cohort.
Closing out the fourth quarter topline discussion auto ship net sales represented 68, 2% of total net sales and net sales per active customer for netback increased to $372. This represented sequential growth of $9 or two five per cent and year over year growth of $12 or three 3% net.
<unk> growth accelerated this quarter as the mechanics of the net back calculation begin to reflect the positive revenue impact of the millions of customers who joined the platform in 2020.
As is our usual reminder, net sales per active customer reflects trailing four quarter net sales divided by the number of active customers at the end of the quarter.
It's also worth noting that we no longer need to adjust our year over year net by comparisons for the extra week in 2018, a skew for 2018 has now age out of the comp period.
Moving down the financials fourth quarter gross margin was 27, 1% a year over year increase of 300 basis points and a high watermark for the company to date for.
For the full year gross margin came in at 25, 5% up 190 basis points versus 2019, continuing to our drive towards incremental annual gross margin improvement.
Sumit mentioned.
Approximately half of the 300 basis point improvement in gross margin came from sustainable structural drivers like the improved mix into higher margin verticals like hard goods proprietary brands in health care as well as increased scale benefits. The remainder came from pricing stability and then more restrained promotional environments.
Turning now to operating expenses fourth quarter operating expenses, which include SG&A and advertising and marketing were $532 $6 million or 26, 1% of net sales scaling 250 basis points year over year.
For the full year operating expenses of $1 $91 billion for 26, 7% of net sales scaling 210 basis points versus full year 2019.
SG&A, which includes all fulfillment customer service credit card processing fees, corporate G&A corporate payroll and share based compensation or 18, 7% of net sales a 230 basis points year over year improvements.
SG&A expenses in the quarter include a $15 $9 million benefit from the release of a non income tax reserve and approximately $13 million for Covid related expenses.
Excluding these two items SG&A as a percentage of net sales was 18, 9%, a 210 basis point improvement year over year.
For the full year SG&A was $140 billion or 19, 6% of net sales and scaled 40 basis points year over year.
Excluding the $15 $9 million non income tax benefit in the fourth quarter and approximately $42 million for COVID-19 related expenses incurred throughout the year SG&A scaled 80 basis points year over year.
Fourth quarter advertising and marketing was $150 1 million or seven 3% of net sales scaling 20 basis points year over year.
As we discussed last quarter, the elevated organic acquisition rates, we saw in the first half of 2020 began normalizing in the third quarter and that trend carried through to the fourth quarter.
As expected we also saw channel input cost recover from the lower rates, we saw in the first half of the year.
We adapted to these changes adjusted our acquisition marketing efforts and drove accelerated customer acquisition in the fourth quarter, while still improving our year over year efficiency.
On a full year basis advertising and marketing represented seven 2% of net sales scaling of 160 basis points versus 2019.
We estimate that roughly half of the marketing efficiency. In 2020 was a result of the pandemic driven boost to traffic and conversion.
In Q4, we deliver our first quarter of positive net income net income was $21 million and net margin was one per cent.
550 basis points improvement year over year.
Excluding share based compensation expense of $24 million fourth quarter net income was $45 million with net margin excluding share based compensation, improving 330 basis points from two 2%.
On a full year basis, our 2020 net loss improved $92.5 million from $252 $4 million from the prior year and our net margin improved 390 basis points to negative one three per cent for.
Full year net income excluding share based compensation was $36 $7 million compared to a loss of $116 1 million last year, and then margin excluding share based compensation improved 290 basis points to 0.5 per cent.
Fourth quarter, adjusted EBITDA was $68 million and adjusted EBITDA margin improved 340 basis points for 3%.
For the full year, adjusted EBITDA was $85 $2 million and adjusted EBITDA margin improved 290 basis points year over year to one 2%.
Turning now to free cash flow fourth quarter free cash flow was $47 million, reflecting $77 $5 million from positive cash flow from operating activities and $35 million of capital expenditures.
Positive operating cash in Q4 was primarily a function of Q4 profitability and our favorable working capital strategy.
Capital investments continue to be focus on capacity build including cash outlays for our new automated Fcs in Archbold, Pennsylvania, and Kansas City, and our next limited catalog high velocity fulfillment center.
We finished the year with $563 million from cash and cash equivalents from the balance sheet and free cash flow was essentially breakeven for the year.
Let me highlight two points regarding our free cash flow.
First in 2020, we invested in higher inventory levels to protect our supply chain and to ensure that we can meet our customers' needs, especially during peak holiday season.
Second note that we have continued to execute on our strategy to reinvest excess cash flow to grow the business and improve the bottom line.
This is evidenced by the fact that in the last two years, we consume no cash while at the same time, we more than doubled our topline lunch for fulfillment centers and improved our adjusted EBITDA margin by 770 basis points, our strategy remains intact, and we remain committed to execution and results in 2021.
That concludes my fourth quarter in 2020 recap so now, let's discuss our first quarter and full year 2021 out of book and.
In 2020, we benefited for many tailwind some of which we expect to continue into 2021, and some of which may not.
On balance while we believe that consumer behavior post pandemic is still somewhat challenging to predict we also believe that our strong value proposition, which includes expanding customer choices provides us real intangible advantages as we execute on our mission.
To start the positive demand trends, we saw in Q4 have carried over into the new year.
Customer spending on our platform remains strong and business vertical mix remains structurally sound.
Additionally, the pricing and promotional environment is thus far remained stable and in line with our expectations.
On the other hand, there are certain headwinds that we continue to navigate through the first quarter. We expect some of these to be temporary in nature, while others are likely to remain active hotspots for us to manage throughout the year.
For example, we are observing an industry wide disruption in the availability and supply of wet canned food, which is driving elevated out of stock levels and suboptimal inventory positioning across our network. Thus far this has not had a material impact on our business, but it is an area, where we intend to remain vigilant.
And advertising and marketing, we intend to remain disciplined in our marketing spend while balancing external variables across advertising platforms and the normalization of market conditions in a post pandemic world.
At the same time, we don't intend to leave any opportunities on the table and reserve the option of making investments that produce long term customer acquisition benefits, even if they affect short term profitability.
We expect to continue scaling SG&A in 2021.
The labor market continues to remain pressure driven by strong e-commerce demand and in certain geographies persistent competition against extended unemployment benefits.
We believe that our investments in automation and productivity gains will continue to help us manage these headwinds.
Further while we will make bold investments like the $60 million from spending on higher wages and benefits that we outlined earlier, we continue to believe that improvements in turnover productivity and engagement when combined with the efficiencies we expect to realize from the other investments that we've made and take capabilities and machine learning will yield even law.
Larger long term benefits.
With a book perspective in mind, our 2021 guidance balances the opportunities, we see with potential headwinds that may arise.
We are establishing guidance as follows.
First quarter net sales of between 2.11, and $2.13 billion, representing year over year growth of 36% to 37% when adjusting for the $70 million of estimated pantry stocking benefit we identified in Q1 2020.
Full year 2021, net sales of between $8 85, and $8 95 billion representing year over year growth of 25% to 26% when adjusting for the Q1 2020 pantry stocking benefit.
And finally full year 2021, adjusted EBITDA margin expansion of 50 to 100 basis points.
As you update your models for 2021 here are a few other things to keep in mind.
You should expect to see our net active customer accounts in 2021, returning to something closer to their pre COVID-19 levels, reflecting the normal retention patterns, we see from any given cohort from their first year into the second year and this will be especially pronounced this year given the size of the 2020 cohort.
At the same time, we expect an aspect to increase in 2021 versus 2020 as pre 2020 customer cohorts continue to mature and we capture a greater share of wallet from the 2020 cohort.
And one final note with a petsmart separation complete we will bring a limit the number of administrative functions like tax and insurance in house that were previously run under a shared services agreement with Petsmart, even with this change the operational and financial impact of the separation is de Minimis.
2020% at us with many challenges, but it also brought about many beneficial changes in our marketplace. We were well positioned to meet these challenges and we're flexible enough operationally to take advantage of the opportunities as a result, our 2020 performance was strong across the board we added a record number of new active customers produced.
Strong revenue growth and generated four quarters of positive adjusted EBITDA, all of which demonstrates the clear progress, we're making on our path to profitability.
Looking ahead to 2021, we will continue to benefit from the evolving marketplace and our strategic execution should enable us to generate 25% revenue growth or more and further expand our adjusted EBITDA margin with that I will turn the call over to the operator operator.
We will now begin the question answer session to ask a question you May press star one on your Capex downtown which are using a speakerphone. Please pick up your handset before pressing the keys.
Your question. Please press Star then two.
We also ask that you please limit yourself to one question and one follow up.
Our first question today will come from Nat Schindler with Bank of America.
Yes, Hi, guys. Thank you for taking my question just really wanted to go a little bit more into the deceleration you're baking into guidance I understand it was a pretty radical.
Radical year, this year, and how things change, but I'll.
So all of those customers who've got pets, and all of that new customer growth that occurred all throughout this year is going to be additive to growth for the bulk of next year at least well on average half of the year, so shouldn't the deceleration curves bar.
Barring the three percentage point hit roughly that the pantry stocking did in <unk> of last year.
Barring that shouldn't be a much smoother slower deceleration.
Our subscription model like yours.
Hey, Matt This is Matt I'll take that one so yeah.
Our guidance has us, adding $1 $8 billion in top line sales. This year on top of a record year in 2020, and I think it's important to first of all say that we remain confident in our ability to execute through the current environment, which in our opinion remains challenging.
So giving guidance to US you know contains reflecting on all if there had been some tailwind and appropriately balancing risk and opportunity to be able to provide a point of view. This early in the year, when we understand consumer behavior and the environment to be evolving and challenging at the same time. So you know.
Overall, we feel good about these numbers and our ability to execute towards them and I think another thing needs to be set in the way that we should interpret this see we believe that with this guidance of $1 8 billion incremental growth, we're going to capture more than 50% of growth that will happen in the online channels in 2021, which.
As you know is a is a powerful statement in itself.
So we will continue to sort of evaluate this and continue to keep you updated on how we are if we update our models internally at the at the right time.
Just a quick follow up on that how much of the incremental growth in the online channel in 2020 do you think you've captured.
If you do the math the way, we believe that online grew roughly $66 $2 billion year over year and this year, our buy online pick up in store, which was a popular kind of mechanism is rolled up under online and if you back that out pure E Commerce pure play E Commerce.
We were roughly $4 billion and chewy grew 2.3 off that for so capturing 57% of pure play ecommerce growth.
Great. Thank you very much.
Our next question will come from Brian Fitzgerald with Wells Fargo.
Thanks, guys Congrats great quarter M. D. Do you average annual increase in year, one of the contribution profit at 16% over the past few years could you tell us.
What that was in 2020 and 19, maybe more specifically and then any thoughts on how that might continue to trend over the next few years and then I got one quick follow up.
Hey, Brian Smith I'll take it so we haven't we haven't broken down numbers as you know we don't provide contribution profit level detail you know what we are observing and why we wanted to come out and share. This is because you know it was it was indicative of the.
Result that we're observing as a result of the direct result of the efforts that we're putting in to drive consumer LTV and profitability in the portfolio and so when you when you sort of roll. These back they they answer the second part of your question on a longer term basis these gains across share of wallet and profitability as we evaluate.
I'm internally are being realized.
Realized.
And reflect the impact of catalog expansion improved discover ability and the incremental contributions from higher margin verticals, such as health care hard goods and proprietary brands.
You know as we mentioned in our share in our remarks I believe I believe we mentioned this we've nearly doubled our total SKU count in the last three years, including executing a seven fold increase in higher margin proprietary branded skus. So when you look at sort of margin growth from here on out. We believe there were were still sort of an earn.
<unk> innings of what remains are really focused roadmap on how we plan to execute our playbook and grow margins from here on out.
Less than a third or approximately a third of our total customer base is today buying a proprietary branded product.
Which leaves an opportunity for two thirds of roughly 20 million customers to be exposed to a higher margin proprietary brands. When you look at health care being a newer vertical that number is far far lesser than the one card that I mentioned, providing us even more headroom to grow.
So as we sort of continue to play out our our our playbook on putting more focus on innovation around products and services and the complementarity between them. You know you should expect us to drive incremental gradual profit from hereon out that's how we think about that.
Great.
Just kind of a related one for me is just the increase in wallet share you have seen during the pandemic. Just wondering if you could talk us through maybe how.
How many new pet adoptions of new pet purchases might be impacting that for example, if you have a higher mix of new pet parents, how that is influencing the wallet share with purchases of kennels embedding maybe said another way within the lifecycle of a of a pet right because.
Maybe in a non analogy, but you know.
The newborn gets no holds barred they get everything new and fresh and then you know by the time, they get old and you have <unk>.
For two or three or four you start to recycle close and just just wondering if youre seeing any impact from how you think that meters through the wallet share.
I think that's a great question. So for US if you recall a data point that we shared this round in the script. We said we've seen a 35 per cent increase in creation of pet profiles for puppies and kittens.
And a 40% increase in pet profiles for adoptions, well I mean that chewy puppy. So sure you might not you know recycled that create as early as next year first of all.
Zero out of credit so youll likely have to depending upon you know the kind of puppy that you brought home, but let's let's assume hypothetically that you did and well. Even then I think what what makes the category attractive to US is the fact that you know pet sales are mostly recurring and consumables and health care.
And that probably is going to grow up and eat more food in shred more toys and require greater health care needs and.
And we're here to service all of them. So it you know.
Any kind of impact that we're seeing right now we do believe ultimately you know there are sustainable momentum behind these kind of profiles or this kind of data that we're capturing it you know net net we have we kind of looked at our database last week, we have over 170 million data points across these.
These pet profiles that are created that feed in into a recommendation on personalization services and engines and provide us a greater ability to engage customers from here on out. So the game is very much on and we're very much focused on continuing to engage customers and gain share of wallet there.
Awesome. Thanks I appreciate it.
Yeah.
Our next question will come from Steph Wissink with Jefferies.
Thanks, Good afternoon, everyone. Congrats on a great year.
So may I have a question for you just on the multi year. If you look back at the IPO model. It looks like you're running more than two years ahead of your EBIT targets at that time. Some true if you can contextualize for us.
How much of that is leverage related to the underlying gains of the food and supplies business and how much of that is kind of pulled for rate of some of the strategic initiatives that you listed in your scrap like health and compounding and other things.
Should we think about the leverage in the model.
A great question, So I would say that we are.
First of all we're executing exactly the roadmap we said we would.
The scale benefits provide us an ability to drive more fixed cost leverage and our investments and higher variable costs scale in our fulfillment Center network given the density of volume that we drive through that network are the shift in gross margin that you observe on top of the SG&A lever.
Primarily driven.
I would say if I were to characterize the day impact weight of contribution of net new verticals I would say, 60% is driven by our work towards.
Increasing assortment and choices across proprietary brands health health care in hard goods and roughly 40% I'm just doing some news math here is it's driven by incremental scale.
Across the totality of the business and the auto ship leverage that we get to give an incremental sales that we pushed through the ownership channel.
Mario anything to add.
I mean, I would I would add to the point on auto ship, but if you look at the sales for auto ship and last year alone about $4 $9 billion as reported.
That's greater than the entire sales total net sales.
In the previous year. So you can see how that portion also is driving leverage and we said how that impacts not only our ability to do better planner insider for walls of our warehouses, but across both our income and vendors or Oems and then our logistics partner. So it is a it is a point of leverage.
Leverage in gross margin as well.
The way, we think about it learned what's important what's helpful. Is you know food is a staple so that makes up the necessity of why you would likely visit chewy well, we're changing that also but if you. If you just stick with the legacy logic. That's what attracted you plus the proposition of high touch high bar of customer service.
And then you know our ability to build a basket around that has significantly improved well now we've actually with the choices that we've.
Band, it and and improve discovery ability, you're not only discovering food youre actually interacting with us why our content channels and figuring out that connect with the vet is a service thats available to you that you might have hard why a word of mouth and health care is a is an area that we service are you effectively and you know we've got a Disney collection that is.
Exclusive to us and nobody else has something we're creating these sort of these differentiations in these these advantages that we believe complement each other and ultimately go back and provide benefit to the entire basket and that that scale provides leverage to our fixed cost infrastructure.
That's great. Thank you very much sure.
Our next question comes from Doug Anmuth with J P. Morgan.
Hey, Thanks. This is Katie on for Doug.
Hoping you can provide an update on your connect with is that initiative what are the early learnings are.
And how does that shape your expectations around monetization. This year and then on pharmacy last quarter, you laid out a target for 500 million of G. M D and fiscal 'twenty curious, where you came in relative to your expectation and then also how you're thinking about the growth potential of farm out this year.
Hi, Casey this is summit.
So connect with the VAT is we're pleased with the progress of connected to that as you just for the benefit of the audience.
Yes Telehealth service.
Primarily tally triage that we launched in.
In Q3 that allows us to connect.
Customers with licensed veterinarians to be able to service their needs on most commonly asked questions or a health and wellness related concerns.
Pleased with the progress of connected to that at this point we've completed.
We're very much in learning mode. We've completed over 30000 sessions with customers and we're learning a ton and our net promoter score remains high above 85.
70 per cent of the customers who've been interacted with the service have provided to the 10 on 10 rating, which we're pleased about very recently, we've expanded connect with the vet from purely a chat functionality to video capability, which we're now leaning into a progressively and we've also expanded hours of operation or sorry in about in about two weeks.
Going to expand hours of operation.
From eight P. M to 11 P M to add greater availability of the service to west coast customers today.
Today, the service continues to remain available to auto ship customers for free.
We do.
You know I believe and monetization of the service and availability of it to our entire customer base.
I will come and share that with you closer in to the time, when we're ready to do that.
And then on health care or your second question was about pharmacy, yes. Overall, we did achieve the number that we had shared with you about the $500 million net sales for pharmacy overall, we didn't hit that and your third question was.
Other potential or future.
Growth in pharmacy.
Just a vertical that we continue to remain excited in right pharmacy is when.
When you look at prescription as a vertical.
We believe it's roughly 7% to $10 billion market size growing at 10% CAGR, which would be even in a pandemic you're growing at <unk> the rate of food and supplies.
We are early stages or early innings in that in that playbook and we remain excited about the upside potential here.
And Katy this is mark just to add one more data point to that you're right that we said for about half a billion dollars gross revenue, but of course, not all of that flow through our through our financials.
About 360 day.
Great. Thank you.
Our next question will come from Oliver Winter mantle with Evercore ISI.
Yeah. Thank you guys.
Margin you just mentioned the ownership and as a percentage of sales it looks like that continued to decline for the third quarter in a row is that is that.
Just because people didn't have yet the chance to sign up for auto ship or is that the expansion of our you know.
More verticals and more hard goods.
Could give us a little bit more details on that please yeah.
Yeah, Hey, Ali Yeah, So you're right there was a.
A small change, but that's all within the variance that we would expect any given quarter. If you look at for the full year. It was 100 basis point difference between last year and this year, but remember this year. We also added a record number of active customers and as you said as you pointed out that is part more more about timing.
And when we expect those customers to sign up to auto ship to discover the benefits there.
But but that is certainly within range of what we'd expect.
Got it and then a quick follow up just on the gross margin line, you mentioned half of it was structural and sustainable.
West was less promotions, if I look into 2021, if that structural keeps keeps on playing out and we get back to more promotions should we.
Is it that easy that we should expect you know another half of that gross margin expansion expected in 2021 or what are the other moving parts in there.
So I'll start and maybe sumit, if he wants to add something to it but.
We have said that are the day improvement that we saw in the fourth quarter half of it was structural none of that is any different in 2021, when we think about the the vectors that we're fighting against right now.
Moving to grow our hard goods catalog, a health care proprietary brands expanding share of wallet.
And and increasing while we sell to our to our customers all those things are in place.
You may find is quarter to quarter, there may be some fluctuations in gross margin and that's simply because we do see some activity in certain times of the year in terms of.
Promotions and maybe some more advertising in the in the marketplace.
But the reality is structurally those things so we don't expect to change.
Well the only thing I would add is you know at this time, we're not baking in any topline or bottom line impact related to any material disruptions in supply chain or logistics networks.
So far for assuming recovery and we're assuming a quality of recovery that does not impede the momentum of the business.
Everything that we're hearing right now seem that see that that is an assumption that we're we're comfortable with it.
You know in some instances we have the proper amount of inventory and you know the inventory might be uneven to distribute it through our fulfillment network and while that does not result in any out of stock situation. It does lead to higher levels of cross shipment are split orders that resulted in suboptimal shipping costs that rolls up to gross margin. So I think there is some pluses and minuses, but.
On the balance we do expect customers to continue to engage in discover.
The higher margin verticals that we continue to focus on and therefore.
Provide gradual structural changes to gross margin.
Got it thanks, very much and good luck.
Thanks for Thanks Ali.
Our next question comes from Seth Basham with Wedbush Securities.
Thanks, a lot and good afternoon. My question is around your fulfillment expense outlook for 2020 with selling additional costs that you've called out. It seems like you did deleverage of curtailment expenses should we think about the outlook for 2021, and the moving pieces with additional investments from wage et cetera.
But you have to leverage for the line expenses or not.
Yeah.
Yes so.
Seth This is Mario I'll answer that.
We did in the on the prepared remarks in the earlier discussion points. We said that we were investing to $60 million in wages and benefits most of that is going to be in fulfillment and customer service. We also mentioned that we're launching two new fulfillment centers this year.
And so you would expect they're the same type of investments we made in the past, especially last year.
Because one of them is going to be a high velocity limited catalog fulfillment center just like the one we launched in Kansas City last year and the other one that's going to be a fully automated where an automated facility.
Much like the one that we launched.
In October.
And Archbold, Pennsylvania.
If your question is that we expect those from business to be reflected in our SG&A. This year.
The answers are the answer is yes.
Gotcha, well when we think about the composition on the air margin expansion for 2000 from 'twenty. One are you expecting both gross margin and SG&A leverage.
I think Scott for you just provided guidance and the.
The checks and balances so far flow through the guidance that we provided for the full year and as the quarter progresses. I think we'll keep you updated on share more information on a granular basis.
Fair enough. Thank you very much.
Okay.
Our next question comes from Peter Keith with Piper Sandler.
Hey, good afternoon, its value free near one for Peter Thanks for taking my question I'm wondering if you could discuss what you're seeing and how youre thinking about price inflation of pet food in 2021, and should we think about retail pricing across the entire portfolio of products.
<unk>.
Your question is a little broad Bobby so I'll try to answer this as best as I understand it and if not then please clarify it you know as we've mentioned pricing environment has remained relatively stable and prices.
The the discounting levels are relatively muted.
On a seasonal basis and that is driving some some higher prices and inflation in the marketplace, but.
Pet is a category that we believe is resilient towards a recession or inflation in that particular manner, we haven't really seen an impediment to demand or momentum.
In the business right now we expect that to continue to be that be the case.
And as a supply chain to start recovering and inventory positions become healthier. We do believe this debate and ultimately you know go back to the pricing environment that we were pre pandemic.
Yeah.
Okay. Thank you.
Our next question comes from Laurent <unk> with Morgan Stanley.
Great. Thanks, so much I guess marrying a few of the previous questions. I mean, when we look at your guidance for that 50 to 100 basis for instance.
Margin improvement versus the revenue guidance for thinking implies a flow with a range of around 6% understanding you know, there's the $60 million in wages, which brings you closer to nine 5%, but like can you just help us think about if there's any other sort of one time investments maybe you know that the second automated D C.
And that is holding Bachelor thrill air or potentially offsetting some of the COVID-19 costs that I would've thought what would have benefited flow through this year and then as a follow up maybe this is a piece of it but we're hearing from a variety of different retailers that shipping delays for any cost increases anything that you're seeing there on sort of a like for like basis I'm heading it.
For 2021.
Okay. Laurie this is mark I'll take the first part so when you think about the guidance that we provided.
There are several factors that go into it and obviously, we're providing you the guidance based on the balance of risks and opportunities we see for the year. So if you think about the revenue. We mentioned we have positive demand trends that carry into the first quarter pricing promotions remained stable.
Which are going to be the pluses too to the to the guidance range on the other hand, the customer behavior itself is still a post pandemic is still evolving.
And they are some industry wide supply chain challenges for certain products.
So those I would consider the headwinds so so I'll give you there was a plus or minus on that too.
Two the two there on the revenue guidance range.
And then two the adjusted EBIT for a portion of it.
We called out a few factors that we know this year or that we expect this year to be a certain way things like our marketing our investments there the launch of the Juno UFC. So you mentioned.
And then the incremental $60 million for so in wages and benefits.
For our team members.
And it is those are those factors that I that depending how they materialize that's going to determine exactly where we end up in that guidance range and then what is the actual flow through to EBITDA.
So I'm, sorry, I'm going to say.
So you know as we've said before look we operate the business over the long term.
So we this year may choose to make some short term investments, including marketing and additional capacity that may impact our profitability on the short term, but produce produce benefits over the long term. So that's that's all in the guidance range we provided.
But I think advertising and marketing is an interesting one and 2021 and it's hard to predict sitting so far up in the air on how this line is actually going to play out. So it is helpful to sort of extract ourselves from the current and look at it as a 30000 foot view.
We've been first of all we believe 6% to 7% spend of net sales in advertising and marketing to be the right range for a business like this and you know the past couple of years, particularly specifically the last three years, we've scaled marketing expense from 11% of revenue in 2018, two this past week, we were eight.
8% in 2019, and then 2020 was seven to seven 3%.
The 160 basis point improvement as we mentioned in the script, we believe half of that was driven by organic pandemic.
Drilling efficiency and so that would have put the scaling at right about eight 8% of marketing and so I think starting with kind of current inputs on how we scale marketing, how we understand evolving trends, how do advertising platforms evolve and the ambiguity around that plus any opportunity that we find.
Be able to invest in marketing and drive scale.
It's a it's a tough area to talk to right now so I think as we play the quarter out quarters out we'll likely keep you updated on our long term.
Are you already thinking here.
But let me just add one more item because I want to make sure that it's clear how we think about the the EBITDA for the year, but the guidance, we provided would have us adding over $100 million for EBITDA to the bottom line, even while we grow $1 $8 billion, both at midpoint of the guidance. So there's a pretty significant.
It can increase both topline and bottom line.
And then your second question was about shipping.
The.
The variability the variability in peaky Ness, and demand and forecasting in our business is punitive when planning our supply chain or a transportation network.
And that is where we believe it.
We're proud of the teams for.
Jointly planning our forecasts and.
And coming through with a high degree of forecast accuracy of course supported by the fact that 70% of our sales is roughly 70% goes for the ownership model and so in some way, we provide a predictable and stable base load forecast to our suppliers and transportation carrier partners that then enables them to optimize their micro and macro level lots of utilization and that.
With the strategic nature over for partnerships I mean it.
It's shielded us from any material changes in rate structure during the holiday season, we're presently.
Very helpful. Thank you.
This concludes our question and answer session I would like to turn the conference back over to some net Singh for any closing remarks.
Thank you very much for the questions enjoyed evening. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.