Q3 2021 Chewy Inc Earnings Call
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Good day and welcome to the Chewy third quarter 2021 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star Keith followed by zero.
Speaker 1: Good day and welcome to the CHEWI 3rd Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchdown.
Speaker 1: To ask a question, you may press star then one on a touchtone phone. To 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, Vice President of Investor Relations. Please go ahead.
To 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, Vice President of Investor Relations. Please go ahead.
Thank you for joining us on the call today to discuss our third quarter 2021 results. Joining me today are chewy, CEO Sumit Singh and CFO Mario Martech.
Speaker 2: Thank you for joining us on the call today to discuss our third quarter 2021 results. Joining me today are CHUI CEO , Sumit Singh and CFO , Mario Marte.
Our earnings release and letter to shareholders, which were filed with the SEC earlier today have been posted to the Investor Relations section of our website investor Dot Chewy Dot com.
Speaker 2: Our earnings release and letter to shareholders, which were filed with the SEC earlier today, have been posted to the investor relations section of our website, investor.chui.com.
On our call today, we will be making forward looking statements, including statements concerning <unk> future prospects financial results business strategies investments industry trends and our ability to successfully respond to business risks, including those related to the spread of COVID-19.
Speaker 2: On our call today, we will be making forward-looking statements, including statements concerning two future prospects, financial results, business strategies, investments, industry trends, and our ability to successfully respond to business risks, including those related to the spread of COVID-19.
Such statements are considered forward looking statements under the private Securities Litigation Reform Act of 1095 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward looking statements.
Speaker 2: 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.
Speaker 2: 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 in <unk> 10-Q, and 8-K filed earlier today and in our other filings with the SEC.
Speaker 2: For further information, please refer to the risk factors and other information in CHOE's 10-Q 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 financial measures to the most directly comparable GAAP financial measures are provided on our Investor Relations website and in today's SEC filings. These non-GAAP measures are not intended as substitutes for GAAP results.
Speaker 2: Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are provided on our investor relations website and in today's SEC filings. These non-GAAP measures are not intended as substitutes for GAAP results.
Additionally, unless otherwise noted results discussed today refer to third quarter of 2021, and all comparisons are accordingly against the third quarter of 2020. Finally this call in its entirety is being webcast on our Investor Relations website.
Speaker 2: Additionally, unless otherwise noted, results discussed today refer to third quarter 2021, and all comparisons are accordingly against the third quarter of 2020.
Speaker 2: Finally, this call in its entirety is 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 Sumit.
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 to all of you for joining us on the call.
Demand in customer engagement remains strong throughout the third quarter Q.
Speaker 2: Demand and customer engagement remained strong throughout the third quarter. Q3 net sales were $2.21 billion, adding 24% growth on top of strong comps last year.
Q3, net sales were $2 to $1 billion, adding 24% growth on top of strong comps last year.
These topline results and our continued growth this year demonstrate the durability of our business model and the overall strength of the pet category.
Speaker 3: These top line results and our continued growth this year demonstrate the durability of our business model and the overall strength of the pet category.
Our metrics measuring demand and customer engagement, such as site traffic new customer acquisition order volume order size purchase frequency and net sales per active customer or less pack were strong throughout the quarter.
Speaker 3: Our metrics, measuring demand and customer engagement, such as site traffic, new customer acquisition, order volume, order size, purchase frequency, and net sales per active customer, or NESTPAC, were strong throughout the quarter.
We ended Q3 with $20 4 million customers.
Speaker 3: We ended Q3 with 20.4 million customers, a year-over-year increase of 15%.
Year over year increase of 15%.
<unk> with the trends we have seen throughout 2021 gross customer adds continue to exceed pre pandemic levels and retention rates continue to track in line with historical levels.
Speaker 3: Consistent with the trends we have seen throughout 2021, gross customer ads continue to exceed pre-pandemic levels and retention rates continue to track in line with historicals.
More importantly, the strength and quality of our new inactive customers continues to improve for example, we estimate that the expected lifetime values of the Q3 2021, new customer cohort is 12% higher than the pre pandemic counterpart.
Speaker 3: More importantly, the strength and quality of our new and active customers continues to improve. For example, we estimate that the expected lifetime values of the Q3 2021 new customer cohort is 12% higher than their pre-pandemic counterpart.
Additionally, third quarter auto ship customer sales as a percent of net sales increased 140 basis points to 76%, reaching a new company high and last but not least the average order value for new to chewy customers was 6% and 13% higher than the Q3 2020 and Q3 two.
Speaker 3: Additionally, third quarter order ship customer sales as a percent of net sales increased 140 basis points to 70.6 percent, reaching a new company high. And last but not least, the average order value for new to CHUI customers was 6 percent and 13 percent higher than the Q3 2020 and Q3 2019 cohorts, respectively.
19 cohorts respectively.
These positive new customer behaviors flow through to the netback, which is an important gauge of overall customer engagement and lifetime customer contribution here.
Speaker 3: These positive new customer behaviors flow through to NSPAC, which is an important gauge of overall customer engagement and lifetime customer contribution. Here, we are pleased to share that the third quarter NSPAC increased 15% to $419. This reflects year-over-year growth of $56, which is a record increase for us.
Here, we are pleased to share that the third quarter netback increased 15% to $419. This reflects year over year growth of $56, which was a record increase for us.
It is exciting for us to see netback growth accelerate as a large 2020 cohort matures and our expanded customer choices and increased discovery ability expedite share of wallet gains.
Speaker 3: It is exciting for us to see Nespac growth accelerate as the large 2020 cohort matures, and our expanded customer choices and increased discoverability expedite share-of-wallet growth.
Even with these gains we are still only capturing a fraction of the average U S. Pet spend per household from the over 20 million loyal customers, who deemed chewy the preferred destination for everything pet.
Speaker 3: Even with these gains, we are still only capturing a fraction of the average U.S. pet spend per household from the over 20 million loyal customers who deem Chewy their preferred destination for everything pet.
And so further expanding <unk> Pak is an important piece of our growth and profitability flywheel. We are encouraged to see our efforts bear fruit in this area and at the same time, we are highly motivated and remain focused on driving additional netback growth.
Speaker 3: And so, further expanding Nespac is an important piece of our growth and profitability flywheel. We are encouraged to see our efforts bear fruit in this area, and at the same time, we are highly motivated and remain focused on driving additional Nespac growth.
Moving onto gross margins third quarter gross margin expanded 90 basis points year over year to 26, 4%. This is something we're proud of achieving when operating in the present challenging environment as.
Speaker 3: Moving on to gross margins. Third quarter gross margin expanded 90 basis points year over year to 26.4%. This is something we're proud of achieving when operating in the present challenging environment.
As we execute at Q3, we observed two factors that affected gross margin that had been largely absent through the first half of the year elevated inbound freight costs and product cost inflation.
Speaker 3: As we executed Q3, we observed two factors that affected growth margin that had been largely absent through the first half of the year, elevated inbound freight costs and product cost inflation.
Together. These two factors net of a favorable mix shift and pricing adjustment muted gross margin expansion in the quarter by approximately 100 basis points.
Speaker 3: Together, these two factors, net of a favorable mix shift and pricing adjustment, muted gross margin expansion in the quarter by approximately 100 basis points.
The elevated inbound trade costs reflect macro trends that are impacting imports and the flow of shipments across the country.
Speaker 3: The elevated inbound freight costs reflect macro trends that are impacting imports and the flow of shipments across the country. And we believe these costs will remain elevated in the near term until the global supply chain disruptions begin to abate.
And we believe these costs will remain elevated in the near term until the global supply chain disruptions begin to abate.
On product costs, we saw inflation ramp up on an expanded assortment of inventory items throughout the quarter.
Speaker 3: On product costs, we saw inflation ramp up on an expanded assortment of inventory items throughout the quarter. In consumables-led categories, many large national brand suppliers have raised MAP to pass through the higher product costs, and we are adjusting our prices accordingly.
Consumables led categories. Many large national brand suppliers have raised map to pass through the higher product costs and we are adjusting our prices accordingly.
Hardgood led categories, which are typically not governed by map pricing, we have seen a greater delta between cost and price, which is primarily driven by higher demand elasticity of products in these categories.
Speaker 3: In hard goods-led categories, which are typically not governed by MAP pricing, we have seen a greater delta between cost and price, which is primarily driven by higher demand elasticity of products in these categories.
Given the inherent price transparency across online channels. This lag between higher cost inputs and the eventual rationalization of consumer facing prices creates a short term drag on profitability overtime.
Speaker 3: Given the inherent price transparency across online channels, this lag between higher cost inputs and the eventual rationalization of consumer-facing prices creates a short-term drag on profitability. Over time, we expect increased prices will offset higher product costs and negate any long-term negative impact to gross margin without impacting customer demand.
Over time, we expect increased prices will offset higher product costs and negate any long term negative impact on gross margin without impacting customer demand on.
On the advertising and marketing front, we reversed the sequential spike that we saw last quarter and delivered higher marketing efficiency, even as customer acquisitions remained steady and netback ramped nicely.
Speaker 3: On the advertising and marketing front, we reversed the sequential spike that we saw last quarter and delivered higher marketing efficiency, even as customer acquisitions remained steady and Nesbacked ramped nicely.
Q3 marketing expense is scaled to six 8% of net sales the drivers of improved efficiency. In Q3 are a combination of AD cost correcting from their Q2 high and sharper more targeted execution from our team across channels and across customer segments.
Speaker 3: Q3 marketing expenses scale to 6.8% of net sales. The drivers of improved efficiency in Q3 are a combination of ad costs correcting from their Q2 high, and sharper, more targeted execution from our team across channels and across customer segments.
Efforts, which included predictive propensity modeling, while taking macro conditions into account proved effective in aligning customer segments and maximizing acquisition LTV.
Speaker 3: Our efforts, which included predictive propensity modeling while taking macro conditions into account, proved effective in aligning customer segments and maximizing acquisition LTV.
The results of this approach were twofold first we saw strengthening of traffic or sessions to our website, which we converted at a higher rate both sequentially and year over year.
Speaker 3: The results of this approach were twofold. First, we saw strengthening of traffic or sessions to our website, which we converted at a higher rate, both sequentially and year-over-year.
We also improved efficiency across various channels and reduced CPA in the quarter by 12% sequentially.
Speaker 3: Second, we also improved efficiency across various channels and reduced CPA in the quarter by 12% sequentially.
Moving on to SG&A, the higher labor costs and related costs. We saw in SG&A. During Q3, essentially offset our gross margin improvement and marketing efficiencies leading to Q3 adjusted EBITDA margin that was flat compared to last year.
Speaker 3: Moving on to SG&A, the higher labor costs and related costs we saw in SG&A during Q3 essentially offset our gross margin improvement and marketing efficiencies, leading to Q3 adjusted EBITDA margin that was flat compared to last year.
Shifting gears from in quarter performance to innovations across chewy I'd like to share some of the latest developments and our growing to Ehealth franchise.
Speaker 3: Shifting gears from in-quarter performance to innovations across CHUI, I'd like to share some of the latest developments in our growing CHUI health franchise.
I am pleased to announce that we have expanded access to our popular connect with the vet Telehealth service to our entire base of 20 million active customers plus any new to chewy customers on a paper concept basis across chat and video.
Speaker 3: First, I am pleased to announce that we have expanded access to our popular Connect with a Vet Delhi Health Service to our entire base of 20 million active customers, plus any new to CHUI customers on a paper consult basis across chat and video.
Access for auto ship customers remains free of charge and now non auto ship customers can also enjoy the peace of mind that comes from having nationwide access to professional veterinarian care 15 hours a day 365 days a year.
Speaker 3: Access for autoship customers remains free of charge, and now non-autoship customers can also enjoy the peace of mind that comes from having nationwide access to professional veterinarian care 15 hours a day, 365 days a year.
Continuing our innovation streak and chewy health, we recently announced that we will offer an exclusive suite of pet health insurance and wellness and preventative plans in partnership with <unk> starting in spring 2022.
Speaker 3: Continuing our innovation streak in ChewyHealth, we recently announced that we will offer an exclusive suite of pet health insurance and wellness and preventative plans in partnership with Drupanian starting in Spring 2022.
Since its inception, the mission of Chewy health has been making bad health care more accessible and affordable and these insurance and wellness plans were designed to do booked.
Speaker 3: Since its inception, the mission of Chewy Health has been making pet health care more accessible and affordable, and these insurance and wellness plans were designed to do both.
And designing them, we wanted to give pet parents the peace of mind to always say, yes, when it comes to taking the best possible care of their pets.
Speaker 3: in designing them, we wanted to give pet parents the peace of mind to always say yes when it comes to taking the best possible care of their pets. We will share more details on
We will share more details on future, earning calls.
Finally in chewy held a rollout of practice hub is continuing to generate buzz and interest in the industry. As a reminder, with practice hub. We have designed a complete e-commerce solution for veterinarians that can be integrated with their existing practice management software using our proprietary app west can easily create preapproved and manage Rx and but died.
Speaker 3: Finally, in Chewy Health, our rollout of Practice Hub is continuing to generate buzz and interest in the industry. As a reminder, with Practice Hub, we have designed a complete e-commerce solution for veterinarians that can be integrated with their existing practice management software. Using our proprietary app, vets can easily create, pre-approve, and manage Rx and vet diet prescriptions, all in one place.
<unk> all in one place.
They can on revenue as a seller on our marketplace. When customer has placed an order in clinic or purchase their items at home on <unk> Dot com with chewy handling all of inventory fulfillment shipping and customer service.
Speaker 3: Then they can earn revenue as a seller on our marketplace when customers place an order in clinic or purchase their items at home on chewy.com with Chewy handling all of inventory, fulfillment, shipping, and customer service.
Our manage the initial rollout of practice up continues with over 50 clinics participating on an invitation only basis and we continue to receive positive feedback from veterinarians and stop using the product.
Speaker 3: Our managed initial rollout of PracticeHub continues, with over 50 clinics participating on an invitation-only basis, and we continue to receive positive feedback from veterinarians and staff using the product.
We have a healthy pipeline of hundreds of interested users ranging from independently operated practices do multi clinic veterinary groups we.
Speaker 3: We have a healthy pipeline of hundreds of interested users ranging from independently operated practices to multi-clinic veterinary.
We are excited about the initial success of practice hub and look forward to expanding the rollout to the broader vet community.
Speaker 3: We are excited about the initial success of PracticeHub and look forward to expanding the rollout to the broader web community.
When evaluating the potential contribution of chewy held to our long term objectives and within the $35 billion Pet health Tam. It is worth emphasizing that presently less than 15% of chewy customers, our chewy health customers. So the opportunity within our base of 20 million customers is meaningful not to mention the opportunity for.
Speaker 3: When evaluating the potential contribution of ChewyHealth to our long-term objectives and within the $35 billion pet health TAM, it is worth emphasizing that presently less than 15% of Chewy customers are ChewyHealth customers.
Speaker 3: So the opportunity within our base of 20 million customers is meaningful, not to mention the opportunity from pet parents who are not yet Chewy customers.
Pet parents, who are not yet chewy customers.
Integrating new healthcare services like insurance wellness plans connect with them at and practice hub with our existing pharmacy operations, where we have nearly tripled our run rate pharmacy revenue over the short 10 quarter period since our IPO will help us drive deeper penetration into this vertical with our customers and with partners.
Speaker 3: Integrating new healthcare services like insurance, wellness plans, Connect with the Vet, and Practice Hub with our existing pharmacy operations, where we have nearly tripled our run rate pharmacy revenue over the short ten-quarter period since our IPO, will help us drive deeper penetration into this vertical with our customers and Vet partners.
I'd also like to take a moment to reiterate that we continue to manage chewy for the long term by looking beyond the near term noise in the macro environment today, and instead by sticking to the strategic roadmap, which has been <unk> North star since our IPO key.
Speaker 3: I'd also like to take a moment to reiterate that we continue to manage Chewy for the long-term by looking beyond the near-term noise in the macro environment today, and instead by sticking to the strategic roadmap which has been Chewy's North Star since RIPO.
Key components of that roadmap include customer lifecycle management, which includes both acquiring customers and expanding their share of wallet. It also includes growing our private label brands and expanding our healthcare offerings.
Speaker 3: Key components of that roadmap include customer life cycle management, which includes both acquiring customers and expanding their share of wallet. It also includes growing our private label brands and expanding our healthcare offerings.
Since 2018, we've nearly doubled our customer base and increased net pack by 30%.
Speaker 3: Since 2018, we've nearly doubled our customer base and increased Nespac by 30 percent. Our private label catalog has more than quadrupled and its penetration in the hard goods business has increased to nearly 20 percent.
Private label catalog has more than quadrupled and its penetration in the hardgoods business has increased to nearly 20%.
Actually I just outlined the progress we are making in chewy health with our B to C and b to b offerings to customers and veterinarians.
Speaker 3: Additionally, I just outlined the progress we are making in Chewy Health with our B2C and B2B offerings to customers and veterinarians.
Overall, when evaluating <unk> progress from our customers' lens, we now offer a rapidly growing multi dimensional customer experience that spans consumables hard goods private label brands and an emerging full ecosystem of health offerings.
Speaker 3: Overall, when evaluating CHUI's progress from a customer's lens, we now offer a rapidly growing multidimensional customer experience that spans consumables, hard goods, private label brands, and an emerging full ecosystem of health offerings.
This makes our customers stickier and gives them an opportunity to strengthen their engagement and spend with us and.
Speaker 3: This makes our customers stickier and gives them an opportunity to strengthen their engagement and spend with us.
And finally, while we have not made any announcements yet on our last two roadmap components non vet services and international expansion, both remain questions of when and not if.
Speaker 3: And finally, while we have not made any announcements yet on our last two Roadmap components, Non-Web Services and International Expansion, both remain questions of when and not if.
So looking back we have accomplished a lot and have much to be proud of but looking forward tremendous opportunity still lies ahead and in so many ways. We are just getting started.
With that I will wrap up by reiterating that were pleased with our Q3 performance and our ability to deliver strong results in the face of disruptions and challenging macro conditions.
Looking beyond these near term challenges there is plenty of reason for optimism consumer engagement is high business momentum is strong and we believe the long term positive trends of more pet ownership higher per pet spending and increased E. Commerce penetration are as strong as ever.
This our ability to retain the significant revenue gains we recorded last year during the height of the pandemic and then adding meaningful growth on top of that this year clearly reflects the soundness of our long term strategy and our efforts to build an enduring franchise to serve millions of loyal pets and pet parents in short we are bullish about <unk>.
And with that I'll turn the call over to Mario Mario.
Thank you submit our third quarter net sales were $2 to $1 billion, representing 24, 1% growth on a two year stack basis year to date net sales through the third quarter grew by more than $3 billion or 80% versus the same period in 2019.
As Sumit mentioned in his remarks demand remained strong throughout the quarter, while inflationary pressures product shortages and labor constraints made execution challenging.
Shortages of wet dog food persisted well out of stock levels in areas like third party and proprietary branded hard goods also increased.
As a result of these the negative impact of supply shortages in Q3 net sales was approximately $15 million more than our internal expectations third quarter auto ship customer sales increased 26, 7% to $156 billion faster than overall net sales growth and up 80% on a two year stack basis.
Third quarter auto ship customer sales as a percentage of net sales increased 140 basis points to 76%.
This improvement in auto ship penetration rate reflects the maturation of the 2020 customer cohort and auto ship's unmatched value proposition, including free access to connect with event.
Third quarter net sales per active customer or netback increased $56 or 15, 4% to $419.
On an absolute dollar and percentage basis, the year over year netback improvements were the largest in the company's history.
We expect <unk> growth to remain strong for the balance of 2021, as we continued to successfully grow customer share of wallet across all cohorts.
Our strong mass spec performance is a clear indication of the health of the underlying customer demand that continues to drive our topline results.
We had $20 4 million active customers at the end of Q3.
An increase of 14, 7% year over year.
As a reminder, net customer ads are a function of new customers added in the period and the retention of customers acquired in prior periods.
Assistant with our year to date trends are gross customer adds continued to run above the pre pandemic levels of 2019 and below the elevated levels. We saw in 2020 during the peak of the pandemic and corn team.
Retention rates, where customers heading from their first year into their second year remained within the historic range as do retention rates for our more mature cohorts.
Moving down the income statement third quarter gross margin increased 90 basis points to 26, 4%.
Our ability to expand gross margin 90 basis points against the backdrop of higher inbound freight costs and accelerating product cost inflation reflects our ability to navigate a challenging operating environment, while still making solid progress towards our long term targets protecting customer experience and remaining competitive in the market.
On the SG&A front, we entered Q3 expected to see improvement in labor markets that has not materialized to the extent, we expected and labor shortages continue to hinder our efforts to fully staff our fulfillment centers.
This affects our ability to process, both inbound and outbound shipments and achieve optimal levels of operational productivity.
In the face of these macro driven challenges, we spent more to maintain customer experience and business continuity, which was a drag on Q3 profitability.
Third quarter operating expenses, which include SG&A and advertising and marketing were $616 $8 million or 27, 9% of net sales compared to 27, 3% in third quarter of 2020.
The 60 basis points of Opex deleveraging reflect significant labor cost pressure in SG&A offset by positive operating leverage in advertising and marketing.
Let's go through the Opex details.
SG&A, which includes all fulfillment and customer service costs credit card processing fees corporate overhead and share based compensation totaled $466 4 million in the third quarter or 21, 1% of net sales compared to 19, 8% in the third quarter of 2020.
Excluding share based compensation SG&A totaled $447 3 million or 22% of net sales an increase of 180 basis points versus the third quarter of 2020.
This de leveraging of SG&A net of share based compensation is largely driven by ongoing increases in labor costs.
As has been widely reported across the country demand for labor continues to outpace supply and as a result labor costs have yet to stabilize.
In the face of these ongoing labor shortages, we spent an incremental $30 million on a higher wages benefits recruiting and hiring incentives in the third quarter, which was inline with the expectations, we laid out in our previous earnings call.
Q3, SG&A expenses also included approximately $10 million in cloud computing and software costs related to our build out efforts as we upgrade our technology infrastructure to meet the needs of growing customer demand and increased work from home capabilities.
These investments provide us with a solid tech platform on which to grow the business, which over time allows us to focus more of our capex on building out our fulfillment capacity.
Net of the $40 million attributable to the incremental labor costs in the computing and remote work infrastructure expenses.
Which would not have been in SG&A expenses last year Q3, SG&A, excluding share based compensation would represent 18, 4% of net sales, which is flat compared to Q3 last year.
As we have shared previously our ability to scale costs in our existing network and corporate functions enable us to fund new initiatives technology and incremental fulfillment capacity.
Over time, we expect the deployment of automation combined with our revenue growth and margin accretive businesses to drive improvements in this line.
As sumit elaborated on earlier.
Third quarter advertising and marketing expense was $150 3 million or six 8% of net sales an 80 basis point improvement over third quarter 2020.
Third quarter net loss was $32 $2 million, improving zero point $6 million versus the third quarter of 2020, and net margin improved 30 basis points from negative one 5%.
Adjusted EBITDA was $6 million, improving zero point $5 million versus the third quarter of 2020, and adjusted EBITDA margin was flat at 0.3% as gross margin improvement and greater marketing efficiencies were offset by cost pressures in SG&A.
Moving on to free cash flow third quarter free cash flow was $2 3 million, reflecting $74 $3 million in cash flow from operating activities and $72 million of capital expenditures.
Operating cash in Q3 reflects a nearly $100 million increase in inventory since the start of the year as we took action to protect against further supply chain deterioration and prepare for holiday sales.
Capital investments included initial spend related to our new fulfillment centers in Reno, and Nashville, which are projected to launch in 2022 or.
Our most recent FCC opening in Kansas City, and capitalized labor for software development.
In line with historical trends over 80% of our capital spend this quarter was focused on building capacity for growth.
We finished the quarter with $727 million of cash and cash equivalents on the balance sheet and no debt.
This cash combined with available capacity on our ABL provides us with nearly $1 2 billion of available liquidity.
That concludes my third quarter recap, so now, let's discuss our fourth quarter and full year 2021 guidance.
As Sumit also articulated in his remarks, we have plenty of reasons to be optimistic about the pet industry E Commerce in general and our business in particular.
The overarching positive trends of more pet ownership higher spending per pet and the secular shift to online or are strong as they've ever been.
Balancing the strength of these underlying demand trends I guess do you expect the sales impact of ongoing supply shortages. Our current revenue outlook is as follows we expect fourth quarter net sales to be between $2, four zero and $2 $44 billion, representing 17% to 19% year over year growth.
This brings our full year outlook for 2021 net sales to between 890 and $8 94 billion.
Representing year over year growth of 25% or approximately $1 8 billion.
At the same time macro uncertainty remains elevated and we expect supply chain disruptions labor shortages and product and inbound freight cost inflation will continue to weigh on near term profitability.
Additionally, we will start to absorb higher shipping costs in January when our outbound freight and logistic contract renews.
<unk>. These factors, we now expect our full year 2021, adjusted EBITDA margin to be in line with full year 2020.
With these net sales and adjusted EBITDA margin ranges 2021, adjusted EBITDA would have increased 26% year over year.
Here at Chewy, we continued to execute and follow our long term growth and margin expansion roadmap.
Even as consumer demand patterns shift from a pandemic to postpone to make footing, we will less significant growth on top of the record growth we achieved in 2020.
This is a testament to the strengthened durability of demand in the pet category and.
<unk> ability to attract new customers expand share of wallet and gain market share.
Moreover, during a period of unprecedented cost pressures on multiple fronts, including inventory labor and freight we still expect to expand gross margins and growth adjusted EBITDA on a full year basis.
As we continued to execute our long term strategic plan, we remain optimistic about the future and the progress we are making their journey to be the most trusted and convenient destination for pet parents and partners everywhere.
And with that I'll turn the call over to the operator.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
And anytime you question, that's been addressed and you would like to withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to one question and one follow up at this time, we will pause momentarily to assemble our roster.
Our first question will come from Doug Anmuth with J P. Morgan. Please go ahead.
Thanks for taking the questions Sumit, maybe you could just talk about customer acquisitions, a little bit I know you said they are they remain above pre pandemic levels not sure. If you quantified perhaps at all relative to the 20% growth that you talked about in the first half of the year and then related to that.
Is your view on the higher LTV for the current cohort is that essentially just driven by the higher net pack that you're seeing early on for that cohort.
And then just perhaps on the cost side.
Any sense of visibility or how youre thinking about timing around the easing of freight cost and product cost inflation labor.
What was the competitive pricing dynamics as well thanks.
Sure Hey, Doug.
So three questions in terms of.
Quantifying the ratio of the volume of acquisitions.
They remain within the range that we've reported before Doug so not much to report there.
Exciting trend continued to be on the <unk> side without any concern on the acquisition side is the way that'd be interpreting the business in third quarter and so on the LTV. We're projecting are estimating this on two two bases one yes on the way the customers that are interacting with NES back. So for example, when you look at the.
Cohort now that has completely mature one full year and a cohort of customers that we acquired even last year when.
When they have lapped the full year, they rapidly spending roughly $420 in this pack, which is higher than the three quarter cohorts when you compare them to 2019 levels.
By a reasonable amount so that's sort of a data point on indication number two.
Looking at customers engaging with Ultrashape and the way that they are building baskets in the way that they are interacting with our other verticals institutions that we're launching so combination of all of that is how we're sort of estimating we're predicting LTV and usually where we're fairly good at their fairly accurate at this point because this is also something that we guide.
In the in the background to be able to make marketing investments.
Then guides, our LTV to CAC ratios and the way that it spends and amplifies our investments in marketing and customer acquisition and then that's been the netback flywheel et cetera et cetera.
Your last question on cost and timing.
So of course, we're really seeing just to summarize we're seeing.
Three different types of costs are right. One is in terms of.
The flow of material domestically and internationally what hit Q3 was primarily import driven.
Driven by Port congestion and container rates really spiking in fact, what we saw in Q3 was a three times increase in inflation on spot rates relative to Q1, Timeframes and Q3 is generally a quarter. When you start ramping up we're preparing for peak and holiday and therefore the ramp curve.
Multiplied by the rate of inflation that we saw on that side is what drove the costs.
We have seen that starting to abate. So there we expect the prognosis to be in the next couple of quarters, we should essentially be able to claw back any investments that went towards improvement.
<unk> important.
Our freight management the second type of costs that we're seeing of course is you know product inflation.
Costs, which as we've articulated it can be script, there was an escalated or an escalation both in terms of rate as well as in terms of the volume.
Or the assortment that actually took the inflation now given the price transparency that exists and e-commerce channels price catches up to cost a little more gradually and we have to execute through that thoughtfully and deliberately so as not to impact customer demand in the near term. So we expect a few quarters in the way that this price sort of moves through.
The marketplace.
It also depends on how others react to the demand that they might be seeing in their channel and therefore, how they how the <unk>.
Asked of the market invest in pricing to be able to drive demand. So in that way you know we remain an observation mode and providing a clear answer or is it a little bit.
It was a little bit hard today, but we don't expect this to be a long term thing should be should be.
A few quarters and then the final one is labor cost.
That's been.
Everybody has been following the same data patterns that we have and in terms of labor our fill rates did improve post the September timeframe that we were anticipating but we still remain materially below our fill rate in terms of the expectation and what we need to run our network in an optimal manner.
There are we are.
We're not projecting.
Any.
You know near term recovery or we're not projecting a recovery and rather would just sort of wait for signals in the market as we exit 2021 and into 2022, so more to come and I'm sure we'll have more conversations on that front.
Thank you that's helpful.
Our next question will come from Steph Wissink with Jefferies. Please go ahead.
Thank you good afternoon, everyone. We have two related questions about marketing. The first is just on your marketing efficiency. It seemed like there was a nice step up inefficiency in the quarter I'm wondering how sustainable you think that is that related to ad rates or just better precision around the money you're spending.
And then related to today I think you mentioned in your prepared remarks that there were some shortages that accounted for about $50 million of maybe mis revenue in the third quarter did.
Did you pull back on marketing because of shortages or was there an opportunity maybe to lean a little bit more heavily into marketing or can you in the coming quarter and to try to drive either active or nest pack. Thank you.
Pes Epitomate I'll I'll take that one so you read you read on marketing in Q3 is exactly right. You know it was a combination of both AD cost reverting from their Q2 highs as well as the team executing just you know on a on a more targeted than just executing shop in shop.
And we provided the details in the script around the way that we demand generated across certain audiences and the way that our propensity modeling kicked in to be able to generate greater efficiency, which we also saw when customers came through our website. If you were to quantify the two I would say likely a 65% to five.
Sort of ratio, where AD cost probably were responsible for 60% of the improvements 60% to 65% and then.
The rest was all of our own efforts.
In terms of sustainability. So far you know Q4 is coming in line with our expectation.
So we will continue to monitor this.
And any any investments that we've baked in are already reflected in the way that we're.
We're providing guidance today.
And yes of course, you know been out of stocks.
Escalate it does reflect directly in the way that we go to market and spend marketing towards that particular set of assortment that then drives customer acquisition.
So there was definitely opportunity.
Uh huh.
I believe a few more million dollars that we could've spent in marketing, but outside of that we optimize marketing to the full extent.
Our next question will come from Mark Mahaney with Evercore ISI. Please go ahead.
Okay I apologize I came in late I hope these aren't repetitive questions at the end you talked about a.
New wrote last two roadmap components, one is non pet services could you just remind us again, what would be in there secondly.
The two opinion deal are you disclosing any economics.
Round that and how should we interpret that I.
Our guests from Evercore as part as that that should be a nice over time, a nice gross margin boost for you, but if you could explain talk through that and who's going to own the customer relationship of who's going to record. The revenue maybe that would be a useful way for us to think through the gross margin impact of that deal. Thank you very much.
Hi, Mark this is Smith.
Your first question was the okay. The non vet services. So on non vet services, we interpret that market to be you know everything that is not related to healthcare services, which is boarding grooming puppy training anything that you would like to.
To add in there in that regard, so we anticipate or estimate that to be roughly 10% to $14 billion in Tam.
And the way, we think about it I think I'll just add a note here.
Our our entry here will not we will not have to prepare our business and our teams to enter this where to go from scratch and then that way you know the investments that we've made in developing our architecture and technology around healthcare solutions, you know you should.
The best way to think about that as you know, we're creating a scalable and dynamic platform.
It allows us to reach customers and on on the other side of the platform today in terms of the business provider you could consider a veterinarian, but tomorrow, we could vary.
Efficiently.
Extend that same service to a different service providers, such as a groomer and so in that way, it's not a net new effort on our part and it's a matter of focus on prioritization.
And that's why we say, it's a matter of when and not have.
Now coming to the second part of your question in terms of insurance.
So a couple of different things that we haven't disclosed the deal structure and its entirety or detail and we will have more detailed conversations when we get closer to launch in the spring timeframe, but what I can tell you today is that the.
The deal is a combination of cash and equity.
And you know we will essentially respect companions.
IRR guard guidelines, and allowing them to stay within their iron IRR guidelines and extracting the maximum value.
<unk> that.
Some cash and some in equity.
And we will utilize the cash which would essentially be you can you can view that as cost of marketing or acquisition.
To be able to fund the growth in business to be able to drive customer conversion education awareness.
And we are essentially providing the customer base in the platform and companion is underwriting the policies.
Okay. Thank you very much in it.
Yeah.
Our next question will come from Brian Fitzgerald with Wells Fargo. Please go ahead.
Thanks, guys, you kind of talk to us a little bit but.
I wanted to ask about the reduction at the high end of the annual revenue guidance range could you walk us through the key factors influencing your thinking there is that supply chain issues.
And stock outs more they need to get a little slower in marketing. Despite the improved efficiencies youre seeing just given the various supply chain issues cost pressures SG&A and so forth.
Wanted to drill down a little bit on the key drivers there.
Sure Hey, Brian It's Mario So I'll take that question.
Look as we said in the opening remarks, the consumer's healthy demand with strong site traffic conversion and customer acquisition order volume.
<unk> size purchasing frequency all of those are strong and we see positive trends in.
In the third quarter.
What we're doing with the guidance as we're acknowledging what we're seeing in the market and as you said.
Out of stock remains a.
Persistent in the in certain part of the catalog so coming into the third quarter.
We expected additional capacity to come online in the wet food category, specifically and that has yet to happen in fact supply has become more constrained than than it was in the second quarter.
So I think youre exactly right. The short answer to your question is that our updated guidance is simply just reflecting the FX the reality on the ground.
Now keep in mind that we have continued to provide.
Topline guidance throughout the entire pandemics and and even with all the macro uncertainty that spin around supply chain and labor.
Been exceptionally accurate if you look at our.
Net sales guidance range, and where we've come in.
We have either hit or exceeded our guidance range for <unk>. Since we went public by the way and in the last two quarters, we've been right in the middle of the very tight guidance range.
So.
Again, what we're doing is reflecting the reality on the ground when it comes to to supply.
Really appreciate it thank you.
Okay.
Our next question will come from Deepak Mathew <unk> with Wolfe Research. Please go ahead.
Hey, guys. Thanks for taking the questions just a couple of months from us. So first on the <unk> side, you're seeing nice benefits from the maturation of logical we'd cohorts this year, but as we go into next year, what will be the main drivers of that.
Sustained netback growth mitigating this by continuing to grow at these rates at some.
Some of the larger cohorts mature further and then.
Second question on the cost side. Thanks for all the color on the cost side in response to Doug's questions could you elaborate on two areas. One is aggressive competitive pricing that you noted in the prepared remarks, and then the second increase in freight cost that kicking off in January maybe some color on how much.
A contributor to gross margin and how we should think about some preliminary expectations for gross margin trends for next year. Thank you.
Yes.
Hey, Deepa, it's Mario so I'll start off and maybe submit can touch on the second part of your question. So in terms of the NASDAQ Let me not comment on 2022, just yet, but what I will tell you is this if you look at what's happened this year.
Submit touch on this in one of his answers just a few minutes ago. We've had the maturation of our 2020 cohort, which is very large and it's proven to be a more engaged early on cohort than prior then if we look at for example, 2019. So we are seeing their first year revenue or purchases with us.
Due to be even higher than.
And the 2019 cohort.
If you then turn to what we've seen this year.
Cohorts that we've acquired in 2021 are showing their first order is even higher than the ones from last year, which will already was higher than the year before and in fact, it was about 6% higher.
And then what we saw customers purchasing the initial order in 2020.
And 13% higher than than 2019.
Factors that are driving that of course. It is we expand the catalog we've gotten better at our selection we're.
We're providing to our customers. We certainly have provided broader set of categories and we certainly we've talked about that in terms of our proprietary brand catalog and the development in that area, which tends to focus on the white space. So products that are not in the market that we create and offered to our customers.
And of course, our pharmacy business, which is doing very well.
The more customers.
Get exposed to end.
And by from our pharmacy, the bigger the netback all of that is.
Absolutely evident in our revenue breakdown that we show in the 10-Q.
If you look at our.
Our other category, which includes proprietary brand in pharmacy.
That's growing at almost twice the speed as the rest of the business.
So think about it that way there are.
Catalog expansion there is category expansion and we're just getting better at presenting the customer with what they want when they want it.
Which means that there are we can continue to expand netback and so.
If you want to touch on the on the outbound freight contract Hey, Deepak you had two questions in your second question I'm not sure I fully followed the competitive pricing comments I'll have you repeat that but let me offer you the Fedex our.
On so first.
So logistics companies as you know, we're very clear in their recent earnings calls that they were looking to raise rates in 2022, and we recently completed negotiations on a new contract that goes into effect in January and we will see outbound shipping rates in 2022 go up under this calendar.
That said, we're pleased with our new contract as pleased as we can be and believe that our new rate card while higher.
And it remains favorable relative to the broader market.
It's too early to quantify the impact of gross margin impact of these higher rates given the many factors that will ultimately drive our outbound freight costs in 'twenty two.
Including volume average shipping distance and others.
Plus we're very actively.
Dealing with many macro uncertainties and constraints. So we will have more details to share with you in the next quarter when we provide 2022 guidance.
Got it yes, we met the first part was basically you noted one of the factors of gross margin.
Impacted gross margins were aggressive competitive pricing is that just related to that product inflation that youre not seeing some competitors kind of follow in the marketplace or is there something else, maybe one competitors being aggressive with prices.
More broadly.
Oh.
Is that a Q3 question, you're asking or is that a carryover from Q2 that you're asking about.
Yeah Q3 question.
The.
All we're essentially saying is that there's a delay between map and cost inflation increases given the because it takes some it takes a little bit of time on the online channels for the map pricing that determines the floor in the market and the prices to reflect that plus if you notice. The you know the range of the cost inflation that has come through that.
Usually it needs to be piecemeal back into the market so as to not impact demand for momentum.
Any any pricing comment that I believe was made.
In the past as being an.
In relation to muted pricing environment or the lack of promotions and discounting given the supply chain constraints and we've seen that obviously starting to abate a bit.
It normally does as you exit Q3 into Q4, because it's a more seasonal and demand elastic period.
On the balance the debt.
That phenomenon that effect has not gone away yet.
Got it okay. Thanks.
Thanks, guys very helpful.
Okay.
Our next question will come from Dylan Carden with William Blair. Please go ahead.
Thanks, a lot yeah, just curious the comments about stable netback fourth quarter to third quarter, what was that meant to be in dollar terms or <unk>.
Sequential and annual growth.
I'm just curious when that the sort of churn overhang eases should we start seeing that by the fourth quarter or do we really need to get into 2022.
And then finally related on the on the gross ads running higher than pre pandemic levels do you attribute that to still some benefit and that theres, some broader sort of consumer anxiety and being in stores or do you think that's actually now at this point more organic online migration.
Hey, Devin this is Mario so maybe I'll start and maybe so we can add.
Some to my answer but.
When it comes to.
The stable netback I'm not sure I do.
I think I mentioned that I don't think I said that maybe.
Maybe I'll ask for a clarification on that one.
Let's start there.
Yeah, sorry that might just been maybe being distracted I thought the comment was that nest egg.
Growth would be stable <unk> versus <unk>.
And I just wonder if that was in dollar terms or do you think maybe you will get 15% sort of steady state growth into next quarter.
So actually I would maybe flip that Dell on let's say that we expect and expect growth to continue to be strong through the rest of the year.
That's that's maybe more of the takeaway there that you can see that in our sales guidance and obviously, where we're trending in terms of active customers for the year.
In terms of the overhang you really have to get into 2022 and the reason being is that when we look at the 2020 cohort very large core like we've talked about before it was pretty evenly spaced throughout the year.
Any any first year into second year attrition that we normally see with every cohort from the beginning of the company.
We're going to see that happen throughout this year. So the impact will continue to be.
Through 2021, and we should work through that.
As we enter 2022.
Okay.
Great and then.
I was just curious on the sort of the the comments around gross adds been above pre pandemic levels.
To what you attribute.
If that's more organic online migration or still some benefit from sort of the environment that we're in.
Yeah, So maybe I'll again I'll touch on this one and then somebody if he wants to add anything but part of it is we are investing more you can see that in our financials.
To drive to help more people find us.
But it is the shift to online that we are not only benefiting from but also we're helping.
Customers fine.
<unk>.
Find us and buy the products and the services they need online.
We're not this is not I don't think it's apples and oranges compare so were purely comparing organic state that existed up until 2019 to the same organic state and I don't believe we're getting any benefit from depend on make movement towards the ongoing pandemic. In this particular case excellent. Thank you very much guys.
Our next question will come from Lauren Schenk with Morgan Stanley. Please go ahead.
Hey, this is Nathan feather on for Lauren Cheng I know in the past you guys have talked about being more of a price taker in the market.
Given the inflationary environment.
Is there any change in your price strategy or is that broadly similar and then are you able to quantify to what extent you are flowing through those increased costs and prices or how much that delay between the change in met pricing and the actualization within prices affects revenue. Thank you.
Sure not much more to add than what I've already provided context, so at the risk of being slightly redundant.
We are reflecting.
And one of our tenants the most competitive prices that we can be at which.
Which is usually respecting mapped guidelines.
So because we believe that's an important tenant to retain customer trust.
Indeed in the marketplace and through in relation to our brand.
The comment on map and the cost and price catching up.
We're not estimating yet the number of quarters it might take us.
But in certain large consumables brands maps already reflected and fully caught up.
So I think we don't have to go and observe this on a piece by piece and a portfolio by portfolio basis. It will also depend upon the demand and supply balance between in the way that inventory flows through or supply becomes available in the marketplace and how quickly or how much of a lag there exists in the way that this correction.
So as we play through Q4.
We'll come back and educate to you and share with you more in the on the March earnings call relative to that.
Alright, great. Thank you.
Our next question will come from Eric Sheridan with Goldman Sachs. Please go ahead.
Thank you so much maybe just one question on the health side of the equation you gave the stat around 15% as the overlap between core customers and health customers can you give us a little bit sense of how you want to align investments, especially on the marketing side to drive adoption of the health initiatives and create a well, let's sort of larger venn diagram between the cusp.
<unk> sets as we look out to 'twenty, two and beyond thanks, so much.
Hi, Eric This is Smith.
The mental model is very much aligned to investing.
Heavily as we can.
Up until the point that we see a return.
So this is a this is you know is that legacy category.
And the rate of migration towards online has been muted up until the point, we believe we have credibly.
Improve the customer experience on the online side, and therefore were driving sort of a rate of migration towards online which is different than what consumers have enjoyed or are used to as it comes to buying dog food or their accessories online. So there's a little bit of that that impacts.
This, particularly particular conversion that we're driving in that way, we're balancing investment the conversion and the returns that we're getting now of course, you know we mentioned in the past that healthcare customers are more profitable and higher LTV.
Given the stickiness and the longevity of the off the need state that we're serving there.
So that naturally also suggests that the LTV, if a customer is higher and therefore, we tolerate higher marketing cost.
On a per customer basis, and healthcare as well, but again it goes back to the methodology of LTV to CAC and we don't have a specific budget that we spend to we spend as much as long as.
There is a return that we can find.
Overall this is an enterprise level priority for us and where what you are seeing US do here is we're leaning in offering many different choices. So if you're if you're if you're interested in insurance. We can offer you that if you're interested in telehealth, we can get you to that if.
If you were if you just have a pharmacy prescription need we can serve you the best customer experience in the market right now.
If you would like to subscribe to veterinarian diet, we can do that as well and so overall you should think about US building an ecosystem that has many tentacles.
And attract customers through many different dimensions and keeps them within that ecosystem and connects it in a closed loop banner across the veterinarian community.
Is the way that we can grow healthcare.
And Eric This is Mario So two quick things one is welcome back it's good to hear your voice.
Number two is last time, we spoke about the overlap it was about 10%. We had said so you can see the progress we're making.
And and getting more of our customers to shop across more categories.
On our platform.
Great. Thanks, so much guys.
Our next question will come from Seth Basham with Wedbush Securities. Please go ahead.
Thanks, a lot and good afternoon. My first question is just around the gross adds that you mentioned you said that there was higher than 2019 last quarter. You said that the first half was up about 20% versus 2019 year to date now are they still at 20% versus 2019.
Yes, I think so submit to answer that question a few minutes ago that is theres still about in line with what we had shared with you before.
So in line with the rate of the second quarter of 20% versus 2019.
It's not a metric that we're planning on repeating every quarter I think the perspective was important than slightly different when we showed it last time, but mostly customer adds continue to run above 2019 and very much.
In line with what we've seen so far.
Throughout the rest of the year as well without the preceding year as well.
Got it Okay and my follow up question just around the supply product constraints that you mentioned, which were more pronounced in the branded side of the business, but I don't think you called out private label mix shift being a positive driver of gross margin like you did last quarter can you square away those two things.
So private label was a driver if you look at the overall hard goods growth.
Three P hard goods grew at about 8% year over year, but private label grew 32% year over year, taking share and so.
The private label component is also there are import supply chain kicks in and as a result of the disruptions. We were in fact delayed in launching some assortment that we had planned to launch in Q3.
And in Q4, which is of course reflected in the elevated out of stock.
The numbers that we've quoted here in Q3 and that we're making into the guidance.
On a gross basis private label in Q3 grew at 32% and the penetration remained between 18 and 20% levels.
Wonderful thank you.
Sure.
Our next question will come from Peter Keith with Piper Sandler. Please go ahead.
Hi, Thanks, and good afternoon, everyone.
Looking at the <unk>.
Guidance now for EBITDA margins to be flat I guess work, we're calculating that Q4 EBITDA margins is going to decline about 300 basis points year on year. So I'm wondering if is this kind of a low point for margin decline because there is maybe some nuances to Q4 with hard goods or freight.
Wages could you just kind of help frame that up for us or is this the type of pressure, but it certainly could continue into next year.
Yeah.
Yeah.
The answer essentially lies in a combination of you know how do we see so far right.
If you breakdown <unk> progress.
Through our IPO gross margin has expanded 700 basis points marketing has scaled roughly 400 basis points.
And SG&A.
It was on track of scale up until we started absorbing the cost that has come through the pandemic. So in terms of the way you should think about EBITDA moving forward is we still have room to expand gross margin.
Along with the balance of dealing with headwinds off obviously rising freight costs and the inflation that we talked about today.
In terms of marketing efficiency, we continue to deliver that so and so that brings us back to EBITDA. It brings us back to SG&A.
We've essentially incurred roughly $100 million of investment.
In 2020.
And up until the point the labor markets are going to relax or.
The imports get better.
It is hard to assess.
Assess the health and state of SG&A as of this point and all of that is baked into the EBITDA guidance for the year.
If there's a more specific question happy to answer it.
Sure maybe I'll just focus specifically on gross margin youre not guiding for gross margin, but it seems like what youre talking about with with ocean freight pressure in the competitive environment that gross margins can be abnormally pressured in the fourth quarter. So can you confirm that and then are these pressures, peaking in the fourth quarter, maybe a hard good mix comes.
Down a little bit as we get into the early part of next year and so the the overall gross margin pressure abate somewhat.
Yeah, certainly hey, this is Mario so I won't comment on 2022, just yet but.
So what we talked about when we explain the Q3 results and how.
Some of the challenges on the cost side are not abating, just yet for the for the fourth quarter. So let's take that off the table and say look I, we expect that to continue in the fourth quarter.
If you compare to so that would obviously affect gross margin. If you compare to last year in Q4 last year. We also had a let's call. It a one time.
Item.
Special item that was a $16 million.
As our release that flowed through to EBITDA. So you have to take those two things off the table and then you say, okay. What else is new this year, we have the higher labor costs that are still affecting us and we expect it to continue into fourth quarter, we expect that to abate sorry, we expect that to abate in the second half however did not abate in Q3 and now we're.
<unk>.
To continue into Q4.
<unk> for Q4, we expect it not to be $30 million as opposed to the <unk>.
Roughly 15 that we had guided to or had spoken about.
And when we did the second quarter call.
So take the onetime item off the table you say gross margin continues to be.
Somewhat pressured in the near term and then you have the higher labor cost and that kind of gets you the maps on fourth quarter.
Okay. Thanks, so much guys. Good luck with the rest of the holiday season. Thank you. Thank you.
Our next question will come from Rick Patel with Credit Suisse. Please go ahead.
Hey, guys. Thanks for taking my question.
I'm, hoping we can zoom out and we can talk about how you see <unk> trending in the future relative to your IPO plans. So historically I believe when you acquire a new customer year. One spend is between 150 to $200 jumps to $300 in year, two and so on but the curve has obviously shifted higher so just curious what's the right way to think about spec.
And for newer cohorts as we think about their multiyear journey with you.
Spent to acquire those customers or do you mean their spend yeah. The netback, yes, so I answered those questions a few minutes ago I won't comment on it.
2022, and beyond at this point, but I can tell you that what we're seeing from customers that we acquired last year and we acquired this year is up their netback curves are shifting up.
One of the things that we've talked about before is that the way, we improve LTV to CAC for our customers over time or accelerated payback period period.
By acquiring more of their share of wallet earlier, moving up the netback and making every order more profitable we're doing exactly that.
Over the last few years, you've seen us expand.
Gross margin by 300 basis points roughly in year over year, we're looking to increase gross margin you've seen us also increased netback.
And we've talked about specifically for cohorts in 2020, and 2021 and how their netback is moving up so normally we are grabbing more of the share of wallet from those customers, where then also moving out of the overall curve and we're making those orders or those dollars more profitable profitable.
All of that helps us in that payback period, all of that helps us improve the LTV to CAC.
And so these are very good indicators for us this early on in their journey.
Thanks very much.
Our next question will come from Chris Basta, Glary with Pete BNP Paribas Exane. Please go ahead.
Thanks, guys for taking the question. So first one more high level on the Trepanning partnership should we view this as an isolated high margin revenue stream.
Or are there meaningful synergies with your broader help authoring I'm trying to understand if there is incentives in place for insurance to use telehealth Rx drugs or even to like refer somebody's pet insurance customers towards practice all that he can get it give us any sense of the strategic view here it would be helpful.
Sure. So we believe the value of insurances dual fooled presently pet insurance in the U S is 2% to 3% penetrated where some markets such as U K, but the penetration as I was mentioning was north of 25%. So we view this as a huge opportunity to open up Tam. Additionally, we expect we'd be unexpected.
Sure and to be a profit center in itself, but in addition to that we also expected to drive greater customer engagement brand loyalty and greater consideration for healthcare purchases that happens.
On or through our platforms like the ones that youre alluding to.
Now you know.
We arent.
We have a lot of innovation left we will launch in spring and kind of go on a state by state basis, So theres going to be many opportunities for us to have these type of conversations has become and share sort of the plans that we're bringing to market the value proposition behind that plan. The way that we will perhaps think about go to market marketing strategy.
In a way that we talk to customers and veterinarians.
Which I believe will provide more light to some of these questions that you're asking.
But broadly speaking what you should walk away with that is it's a law.
Long term play, we expected to drive greater engagement and greater consideration.
Healthcare approaches ease that happens on or through our platform.
Got you that's very helpful. And then just the last one I'm not sure you can answer this or willing to answer it but.
Could you give us some sense I know, there's obviously a dip between map pricing and the hard goods side, but can you give us a sense of other cost inflation price inflation, how that compares to an overall I think just around retail we're seeing somewhere between four and 7% inflation and a lot of our categories starting to just get a sense of where that stands for pet.
That's actually a pretty good range or upper end of the range lies all the way up to 9%, but that's a fairly you abandoned it fairly well.
Perfect. Thanks, guys.
This concludes our question and answer session I would like to turn the conference back over to submit thing CEO for any closing remarks.
Thank you very much we hope you have a happy healthy and safe holidays. Thank you.
Yeah.
The conference has now concluded thank you for attending today's presentation.
May now disconnect.