Q1 2022 Chewy Inc Earnings Call
[music].
Good afternoon. Thank you for attending today's chewy Q1.
Why 22 earnings call. My name is Anna and I will be your moderator for today's call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star one on your telephone keypad I would now like to pass the conference over to <unk>.
Host Robert before price Vice President of Investor Relations. Please go ahead. Thank you for joining us on the call today to discuss our first quarter 2022 results. Joining me today are <unk> CEO Sumit Singh and see it.
F O Mario Marte J.
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 dotcom.
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.
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 factor.
<unk> and other information and she was 10-Q and 8-K filed earlier today and then there are 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 measures are provided on our Investor Relations website and in today's SEC filings.
non-GAAP measures are not intended as a substitute for GAAP results.
Additionally, unless otherwise noted results discussed today refer to the first quarter 2022, and all comparisons are accordingly against the first quarter of 2021.
Finally, this call in its entirety is being webcast on our Investor Relations website. A replay of this call will be also available on our IR website shortly.
I'd now like to turn the call over to submit.
Thanks, Bob and Hello, everyone.
On our Q4 earnings call in March I characterized the environment at that time as a tug of war between the fundamentally strong consumer demand that underpins our business and the challenging operating environment.
Then evaluated through that lens Q1, 2022 was not much different which is why I'm, even more proud of our results.
Across the organization from our frontline teams in fulfillment and customer care to our corporate team members to Adobe and this came together and delivered top up service to our customers and strong topline and bottom line results for our shareholders.
Our Q1 results are a testament to the resiliency of the pet category and clearly demonstrate our ability to capture consumer share of wallet and execute against our stated objectives.
So with that let's review our Q1 performance.
2022 is off to a good start as we delivered solid topline growth and sequential improvements in both gross margin and overall profitability.
Q1, net sales increased 14% to $2 $43 billion consumables and healthcare were the strongest categories. This quarter, reflecting the non discretionary nature and higher ultrashape penetration rates, notably first quarter order ship customer sales increased to 72, 2% of net sales which is a.
A new record high for the company.
We saw strong spending behavior from both new and existing customers as Q1 net sales per active customer or netback increased 15% and reached an all time high of $446.
As a reminder, netback is a powerful indicator and input to our long term revenue growth since the pandemic began we have grown net pack by $86 or 24%.
The power of Netback metric is more fully appreciated when you also consider the fact that approximately two thirds of our active customers have been acquired within just the last three years. So they are still relatively early in the process of consolidating their spend with us.
Overlaying this 10 year data with a consistent lifetime spending curves our customers demonstrate overtime spending.
Spending less than $200 that first year over 400 by their second year, approximately 700 by the fifth year with our oldest cohorts spending nearly $1000 per year you can truly appreciate how much future revenue growth is already embedded in our active customer base revenue potential which we can.
Can and will unlock overtime.
Moving on to customers, our active customer base grew four 2% year over year and Q1 at $20 6 million.
Mario will share specific details in his remarks, but let me spend a few moments talking about the customer engagement and cohorts spending patterns that are key to understanding our business model.
Each year, we acquire a new cohort of customers.
While a certain percentage of those customers will attrit over time, we are focused on engaging with the high value customers within each cohort, who will provide us with long term record revenue streams.
These customers have predictable purchase patterns that are anchored by strong ownership participation.
They tend to stay with us over long periods of time and increase their spend with us year after year, which is clearly demonstrated in the cohorts spend data I mentioned a moment ago.
As a result of these predictable patterns each cohort generates progressively more revenue for us every year.
Which more than replaces any revenue loss to subsequent cohort to Christian.
This pattern has repeated itself over time, resulting in net revenue retention in excess of 100% for each one of our cohorts going back to the original 2011 cohort.
This is a key differentiator between our model and our fixed rate subscription model in our model the ability to grow share of customer wallet over time is as important as adding customers as if not more so to the revenue flywheel that drives long term growth.
Now shifting from topline and customer engagement to profitability Q1, gross margin and adjusted EBITDA. Each showed positive sequential momentum from Q4.
Q1, gross margin was 27, 5% down 10 basis points year over year, and up 210 basis points sequentially compared to Q4 2021.
We are pleased with the sequential rebound in gross margins, especially against the backdrop of a tough macro environment and our new outbound trip contract.
Our gross margin recovery this quarter reflects improved product margins driven by pricing strength throughout Q1, and our disciplined execution around price management and promotions.
Fortunately, we have been able to execute these measures while preserving our competitive position in the market and maintaining the strong value proposition that customers expect from Julie.
Our Q1 gross margin performance also reflects the ongoing benefits of supply chain and logistics initiatives that we have undertaken to improve customer experience and to mitigate the higher freight costs associated with our new rate card and escalating fuel prices.
We said could be 100 to 150 basis points headwind this year.
In Q1, longhorn shipments to customers improved 15% and on time delivery improved sequentially by approximately 800 basis points, resulting in lower cost and a better customer experience.
Even with our strong Q1 gross margin performance, we still expect the macro and supply chain environment to remain volatile and inflationary pressures to persist throughout the balance of the year.
As always we are prepared to react as these conditions change or as new challenges emerge.
Moving on to marketing Q1, advertising and marketing expenses scaled 80 basis points year over year to 6% of net sales.
As I've articulated previously we spend up to the level of profitable returns closely monitoring marginal CPA and LTV levels and our approach in Q1 was no different.
Q1, adjusted EBITDA was $60 $5 million and adjusted EBITDA margin was two 5% a year over year decline of 110 basis points on a sequential basis adjusted EBITDA margin improved 370 basis points from negative one 2% in Q4 <unk>.
<unk> the strength of our gross margins are focused execution as well as improved SG&A efficiency, which Mario will detail in his remarks.
Moving out of her financials I'd now like to update you on some of our latest innovations.
Waiting to improve our customers experience our value proposition is the cornerstone of our customer strategy.
First half is care, plus our wellness and insurance offering which is set to launch publicly this quarter.
Recall that we've partnered with a high quality partner in companion to develop these bespoke wellness and insurance plans.
The us represents an important step in our mission to make that healthcare more accessible and affordable.
Our wellness plans cover preventative care, such as annual exams vaccines routine lab tests and parasiticide, while our insurance plans offer protection against accidents unexpected illnesses and surgeries.
Pet parents looking for a comprehensive protection. Unfortunately, the plans together.
As we built these bespoke plans, we were intentional about bringing together two means unique assets that enable us to offer a differentiated value proposition to pet parents seeking wellness and insurance coverage.
A few examples of this include access to choose award winning $24 seven customer care team for those seeking education on insurance.
Ability to offer telehealth service connect with that as a program benefit to insurance customers.
As well as 100% cashback after deductibles for medication purchased from Chewy pharmacy.
We also strive to make that experience and interaction with our offerings seamless with direct payments at participating practices.
Overall, careplus represents an opportunity to drive even greater brand loyalty customer engagement and incremental consideration for healthcare purchases with chewy.
Today, we believe the U S pet insurance Tam is approximately $2 $5 billion and covers less than 3% of the pet population.
We see a compelling opportunity to serve our customers expand this tab and gained meaningful market share in a highly profitable and underpenetrated part of the pet health ecosystem.
We are looking forward to the launch and sharing our progress with you as we wrap up this exciting new offering.
Moving to innovation within our logistics and supply chain.
Both the logistics initiatives that I mentioned on our last earnings call launched during Q1 and are off to a good start.
Chewy freight services, our CFS is our line haul initiative, where we are now operating a portion of our own middle mile Network, We launched CFS in Phoenix market in Q1 and have since expanded it to cover 700 fulfillment centers or Fcs.
We will continue scaling this throughout 2022 and 2023.
Our second initiative import routing was also successfully launched in Q1.
This initiative enables us to route international inventory more optimally and in larger batches, thereby improving our inventory allocation in our fulfillment centers and lowering our overall cost to serve.
This initiative will be fully scaled in 2022.
And finally, let me wrap up this innovation section with an update on how our automated fulfillment centers are performing.
The data points, which I'm about to share showcase the magnitude of potential contribution that <unk> can have to our SG&A leverage and continue to give us the confidence that our strategy of investing in automated fulfillment centers is the right one in.
In Q1, we were able to significantly ramp our AVP to Pennsylvania automated FC.
As a result, AVP to shipped over 10% off the entire networks volume at a variable fulfillment cost, which was 19% cheaper on average that our first generation Fcs.
During its peak weeks in Q1 this AVP to site demonstrated overall throughput that was approximately 60% higher than the average throughput of our legacy FC network.
We are encouraged by these results and believe that as we scale our network of automated FCS. This operational strategy will enable us to reduce our capital spend in the SP network footprint, thereby unlocking greater SG&A leverage and expanding free cash flow.
Before turning over to Mario let me close by saying that even with the uncertainty that we see in today's macro environment nothing has shaken our confidence and the secular current which continues to grow strongly towards higher pet ownership more per pet spending and greater online penetration.
Nor shaken our confidence in our long term strategy and mindset.
At the same time, we are cognizant of many operating challenges, we continued to face such as inflation ongoing supply chain disruptions.
And related stresses these are placing on consumers and.
In response, our teams remain highly diligent and disciplined about our investments and P&L management as we run the business and build appropriately scaled infrastructure.
<unk> long term growth and sustained profitability.
Truly is value proposition remains as compelling as ever and our approach remains unchanged.
Robustly.
Customers with high lifetime values drive engagement nurtured loyalty and capture a greater share of wallet.
As we follow our strategic roadmap towards that future.
As optimistic as ever.
With that I'll turn the call over to Mario.
You submit first quarter net sales increased 13, 7% to $2 $43 billion at.
A significant achievement in a quarter, where e-commerce sales have been flat to down across multiple industries net sales growth was driven by resilient consumer demand and pricing strength in our consumables and healthcare categories, while non discretionary categories such as hard goods remained pressured which we believe is a result of strong year over year comps and the current deflationary in.
Environment.
First quarter auto ship customer sales increased 18, 5% to $1 $75 billion outpacing total net sales growth in the quarter by 480 basis points.
First quarter auto ship customer sales as a percentage of total debt sales increased 290 basis points to 72, 2%.
First quarter net sales per active customer were netback reached a new all time high increasing $58 or 14, 9% to $446.
As Sumit mentioned since the pandemic began in Q1 2020, we have increased our netback by $86 or 24%.
Demonstrating our ability to sustain robust growth and customer share of wallet across all of our customer cohorts.
We ended Q1 with $20 6 million active customers, an increase of four 2% year over year.
On a sequential basis active customers were basically flat compared to Q4 2021.
As we expected one year customer retention rates for the first quarter 2021 cohort were stable compared to the fourth quarter of 2020 cohort and remained low single digit percentage points lower than pre pandemic levels.
We believe these lower retention rates are the result of the reopening of the economy as well as the impact of inflation is having on discretionary spending in categories such as hard goods.
All of that said, we should note that the 2020 customer cohort had net revenue retention in excess of 100% in 2021.
Again, demonstrating the growth in individual customer spend more than offsets any customer attrition, we may see for any given cohort.
Moving to the financials first quarter gross margin was 27, 5%, a 10 basis point decrease year over year and up 210 basis points improvement sequentially compared to Q4 2021 in Q1, we closed the gap between pricing and product cost through surgical pricing actions and better observed market.
Compliance management.
In the first quarter, we were also able to mitigate some of the impact of our new outbound shipping contract through improved inventory replacement and supply chain logistics initiatives.
Now, let's go through all the details.
SG&A, which includes all fulfillment and customer service costs credit card processing fees corporate overhead and share based compensation totaled $504 3 million in the first quarter or 28% of net sales compared to 19% in the first quarter of 2021.
Excluding share based compensation SG&A totaled $477 1 million or 19, 6% of net sales an increase of 170 basis points versus the first quarter of 2021.
On a sequential basis SG&A, excluding share based compensation improved to 140 basis points, let me provide some color on boats.
Three factors contributed to the year over year deleverage of SG&A, excluding share based compensation.
The first is the full quarter impact of higher wages and benefits that we began to implement halfway through the first quarter last year.
We estimate the year over year wage and benefit cost increase to be approximately $20 million.
Or 80 basis points.
Second in 2021, we launched our expanded three fulfillment centers and two pharmacy locations, which along with higher depreciation contributed to 80 basis points of deleverage year over year.
The remainder of the increase in SG&A reflects the upfront investments, we are making in personnel and technology to support our growth and profitability initiatives in areas such as fresh prepared meals healthcare loyalty program and supply chain.
The 140 basis points sequential improvement in SG&A, excluding share based compensation was primarily the result of tight operational execution, including the actions, we took to optimally staffed and run our fulfillment and customer service teams strict operational discipline across all corporate G&A and to a lesser degree the release of a small <unk>.
Reserve.
First quarter advertising and marketing expense was $144 $7 million were 6% of net sales an 80 basis point improvement over first quarter 2021.
On a sequential basis advertising and marketing expenses improved by 40 basis points are.
Our marketing spend in the quarter reflects advertising demand are disciplined in the investments, we make to efficiently acquire new customers and our customer development and reactivation initiatives.
Wrapping up the income statement first quarter net income was $18 5 million a decline of $22 million year over year.
Net margin was 0.8% a decline of 100 basis points versus the first quarter of 2021.
Adjusted EBITDA was $60 5 million or $16 $8 million decline from first quarter of 2021.
And EBITDA margin was two 5% a year over year decline of 110 basis points.
Notably on a sequential basis, our adjusted EBITDA improved by $89 million and adjusted EBITDA margin increased by 370 basis points returning to positive as a result of the recovery in gross margin and scaling of operating expenses noted earlier.
Moving on to free cash flow first quarter free cash flow was $6 $4 million, reflecting $82 $4 million in cash flow from operating activities and $76 million of capital expenditures.
Capital expenditures were primarily comprised of investments in upgrades to our existing fulfillment network.
Future fulfillment center launches and ongoing investments in technology.
We finished the quarter with $605 million of cash and cash equivalents on the balance sheet and between cash and availability on our ABL, our liquidity stands at $1 1 billion.
That concludes what first quarter recap, so now, let's discuss our second quarter and full year 2022 guidance.
While our core fundamentals remain strong.
<unk> and volatility in the macro environment continues to make accurate forecasting difficult.
Our current guidance reflects the balance of the opportunities and risks we see today.
We expect second quarter net sales to be between $2, 43, and $2 $46 billion, representing 13% to 14% year over year growth.
We are reiterating our outlook for full year 2022, net sales to be between $10 to $10 4 billion reps.
Representing year over year growth of 15% to 17%.
We are also reiterating our outlook for full year 2022, adjusted EBITDA margin to be between breakeven and 1%.
As you update your models here a couple of housekeeping items to keep in mind.
While we may see some quarter to quarter variability, we still expect our full year 2022 gross margin to be broadly in line with full year 2021 gross margin was 26, 7%.
Full year Capex is expected to equal approximately two 5% of net sales this year and we expect that across 2022, and 2023 Capex will balance out in our normal range of one 5% to 2% in aggregate.
The pet category is durable and has proven itself to be resilient through the full range of economic cycles.
Should we continue to execute in the face of unprecedented macro volatility to deliver strong topline growth and improving sequential profitability.
As we navigate the current economic landscape, we remain diligent and disciplined in the investments we are making to support the growth and margin expansion roadmap contained in our long term strategic plan.
We are pleased with the progress we've made to date and remain optimistic as we look towards the future.
And with that I'll turn the call over to the operator.
Okay.
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Our registered.
The first question is from the line of Mark Mahaney with Evercore. Please proceed.
Okay. Thanks, if I could ask two questions. Please that advertising and marketing I think six 8% of sales I think that's a record low but just talk about the sustainability of that is that.
Are you at a point now because of a spilt up into subscription model that that's kind of the new normal going forward or is there anything that was onetime ish that may have helped that state down so low and then secondly talk about please the net adds so I think this was the first quarter in which your net adds declined sequentially. How should we think about that and I know in the past you've talked about some of the issue.
You said you had in terms of the big cohorts came out coming out of Covid and having normalized attrition against that but we're still leading to high churn numbers when do we normalize that what's the which how should we expect to see net adds growth through the balance of the year. Thank you.
Hey, Mark.
To hear from you I'll take the first one Mario will take the second question.
Rob on marketing so if you recall a mark on the March at the March call. I had said that 2022 is going to be a super interesting year, as we sort of figure out the ebb and flow of consumer mindshare.
And spending patterns as the economy reopens and some of these other macro factors continue to trend through and Q Q1 was no different we executed with regular and with discipline and I can tell you we're not guiding to a specific level of spend in this area you have seen the line scale over time and I expect we will remain within our current range of spend.
But some quarters being higher but others being lower.
Tend to remain disciplined and at the same time, we don't intend to leave any opportunity on the table when it comes to making investments.
That will might or will drive acquisitions that engagement over time.
That helps.
Hey, Mark it's Mario Great to hear from you would look at.
I'll give you a bit of color on this one so first as you know as we mentioned in the prepared remarks, we ended the first quarter with 26 million active customers and that is an increase of 800000 customers.
Over 4% year over year.
A sequential basis, our customers were basically flat, we retained 99, 7% of active customers into Q1, and our revenue continues to grow you can see that as well in both the topline and the netback that we provided.
But let me break down the the dynamics of the active customers again.
You start with the retention rates in the Q1, 2021 cohort, which would have now anniversary one year.
There are retention was in line with our expectations and what we said on the last call.
Single digit lower than historical levels.
But no nothing changed no material change from that and it was full stop.
Retention level for that for that cohort.
In terms of new customer acquisitions, those came in more or less in line with our expectations and recall that we said that net active adds would.
It would be muted in the first half of the year.
And we say that because of data was telling us two things.
One was that.
Google searches on things like pet adoptions and categories like hard goods.
We're down double digit percentages in the first quarter and we can see them in the data.
That's basically in line with the discretionary categories, which is down year over year.
And for us and the industry by the way, it's not just it's not chewy.
My connection customer acquisitions were also software in that category.
I should add that the customers that we did acquire in the first quarter. They show a favorable initial purchase behavior and we look at that as well.
The bought into stickier categories that correlate to longer to higher long term retention and lifetime values.
So that's the way to think about it.
You said you know I'll add one more thing, which is how we should think about it.
For the rest of the year, we did see.
You know first of all you know we don't guide to active customers of course, and we don't also don't like to netback, but we as I said in the in their Q4 call.
We said we expected.
First half net active adds to be muted.
And we still believe that's going to be the case in the second quarter.
We do expect a year over year increase in active customers.
So from that standpoint, we still continue to increase.
But even on a on a flat.
Active customers, our netback would increase based on the guidance. We provided on net sales. So hopefully that gives you the full picture of how we think about net adds and netback and everything else.
Okay. Thank you Mario Thank you Sumit.
Thanks Mark.
Thank you Mr Mahaney.
Our next question comes from the line of Doug Anmuth with J P. Morgan. Please proceed.
Thanks for taking the questions.
Given the <unk>.
Syed on EBITDA, just hoping you could talk about some of the other considerations and maintain them.
Zero to 1%.
For the full year and then second can you talk about some of the ways you proactively engaging those high value customers, who will have greater.
Within the Covid cohort. Thank you.
Yes.
Doug This is Mario I'll take the first question and somebody will answer the second part.
But so I'll start by saying that we're certainly pleased with the results of the first quarter. I think you can see that in just one quarter from Q4 into Q1, we made material progress on adjusted EBITDA, We return EBITDA to positive and we had a $90 million improvement quarter over quarter.
So a ton of work by every team member in the company.
So we are off to a good start.
But it's just one quarter. So we still have 75% of the year to go.
And so the way we're thinking about the year, we are still holding to our we're reiterating the guidance rather for the full year of being somewhere between breakeven and 1% on EBITDA.
Yeah.
And Doug. Your second question was are you may need to repeat that for me because I caught how are we driving engagement with high LTV customers was that the question.
Just how you're proactively engaging goes higher LTV customers within the Covid cohort.
Sure sure.
We.
I'll come at it from both standpoint.
And I think this is important to understand how we grow NES pack as well.
In terms of us spending money externally to acquire customers as we said our philosophy is to spend or monitor marginal CPA and spend to the highest level of ltvs and our sophistication and continues to improve as we invest in Martech and science and.
Our capabilities to target these customers and to.
Prevents them towards the right category and Incent them to grow spend from there is the way that we approach engaging with these customers. So now once a customer has acquired at this point and the site targeting and segmentation sort of takes over and our capabilities there are materially in <unk> and.
And rigorously improving on a year over year basis. So internally when you look at our data. These are some of the data points that I've shared with you in the past, which is the number of customers who will prevents towards healthcare in the way that the ratio has grown from 5% of customers in 2019 to just under 20% of our customers at this point.
Being prevents to a category like that and so that's us kind of developing an engaging an existing customer to be able to get them to purchase cross category and enhance their participation poor category across the company were.
We're combining services were flowing this back into our customer care engine and developing technology that allows our customer care agents to be able to recognize how to approach a customer what conversation should we be having where where do the triggers lie for us to be able to incent the customer the right way to be able to complete their purchase consideration et cetera. So those.
There are just many ways and then underneath one last thing I would say, which I mentioned last in the last March call is we're developing capability or enhancing our capability for CRM or customer relationship management, given that we have such a large customer file and a huge network of complementary offerings, which we want to make sure that customers.
Our discovering and if not then we are helping them discover but also the fact that we are developing net new categories or complementary offerings in the future. So CRM is going to come in really handy.
And it'll be fully live within.
Within a 12 month period here.
Great. Thank you Bob.
Sure.
Thank you Mr and Mrs.
The next question is from the line of Nat Schindler with Bank of America. Please proceed.
Yes, I just wanted to and I know this is probably an annoying question, but I want to follow up on the question that Mark asked earlier.
Net sub adds and I know you don't guide to this but because of the challenges of looking at you're looking at a trailing 12 month subscribers. So it gets very hard to know did you actually service more customers in Q1 than you did in Q4, we don't.
How 'bout answer we have an answer whether it could be the post people fell off.
At the end of Q1 of last year. So can you help us guidance around when the timing of those.
So moved.
Or users.
Yeah, absolutely. So we did of course muted service more customers in Q1 not in fact, when you look at the rate of customer acquisition, just to sort of double click on this a little bit more it has not materially off off the pre pandemic levels.
And so so.
It's a really interesting dynamic the ebb and flow of gross adds and net adds that we're seeing right now and let me qualify this because I think it might actually answer some some follow up questions here.
What you saw in Q1 was when you come at it from a marketing and point of view input costs are cpc's rose as search demand in the pet category softened. This Mario also kind of mentioned this about.
The Google searches being down for certain type of searches and so as such demand in the pet category softened what it also saw was we saw resulting.
And shortages of the AD pool to bid on.
If you just if you sit back and just think about this observation youll find it to be consistent and logical what I have articulated in the previous April March April learning Kohl's. So essentially this is a result of two broad factors that is happening right now first.
Is factors like inflation.
Are weighing in on consumers as mines and as a result, they are rationing spend away from discretionary from non discretionary categories introduced discretionary and non discretionary categories and as a result of higher degree of incentive ization needs to be applied to get them to declare their intent to purchase.
And the result of that actually is you have a smaller pool of customers that were shopping in Q1 and more dollars that are required to be spent per customer.
This is an industry statistic. This is not just kind of chewy specific second is the fact that as the economy reopening, but it's not exactly clear if all of that traffic is normalizing into retail stores to us. It reads as if some of that traffic is actually going back into retail, but the other portion is redirecting purchases towards categories, such as travel and dining. This again is an.
Later of customers holding back intent.
And so and then retail marketing engines, having to work harder to acquire and engage those customers.
So.
We are amidst this dynamic we are adding customers at a really healthy clip on non discretionary categories, such as consumables and healthcare and any shortage that we're seeing is primarily coming from discretionary categories and so on top of that our engagement with existing customers and their customers spend patterns remained.
Really strong so were servicing.
Larger batch of customers no doubt.
Okay and then just.
Further clarify on this effect.
Discretionary spend being limited in and getting harder.
Consumers are facing more inflation across other categories. When you look back historically this category isn't seemingly impacted by recessions do you see that dynamic changing or is it just parts of this category are affected.
So non discretionary category, which is where the resiliency that we're seeing which I believe is consistent with the rest of the staple as well is being seen in non discretionary categories discretionary categories, such as hard goods, even treats to some degree are counted as discretionary. These subcategories are essentially <unk>.
Seeing pressure.
<unk>.
And suffering from the current macro environment.
The general resiliency that is pushing through is in consumables core food and primarily in healthcare, even in healthcare flea and tick by the way was soft in Q1 at the industry level and we grew overall kind of pet Madden, including OTC flea and tick at a very healthy clip of its indicates that we took share from the market in Q.
One.
Great. Thank you.
Sure.
Thank you Mr Shan Li.
The next question is from the line of Brian Fitzgerald with Wells Fargo. Please proceed.
Thanks, guys I had a couple of questions on Careplus offering I'm wondering if you could talk to some of the ways you can increase penetration among the customer base, where do you think awareness of pet insurance and wellness plan stands among the current customer base today could you talk through some of the potential drivers of penetration gain.
<unk>.
Whether that's the strength of that trust and chewy product differentiation wellness plans or your ability to highlight central pharmacy savings anything you can share there and then second question is about Mrs.
Amidst the current macro kind of trade wins.
Where do you what are you seeing in terms of substitution of private label we've been.
Reading and hearing about people are weaning off of premier brands in and going onto a cheaper private label brands any color there. Thanks.
Sure Hey, Brian .
So on insurance.
Hey.
I don't believe I will satisfy your curiosity on the call today is since we are just preparing for a launch and.
But let me just say a few things right. We're excited to officially launch care plus over the next kind of few weeks and we see this as an important step we believe.
First of all we're bringing bespoke offerings to the marketplace. So these are plans that are curated for our customers and they were created with obviously.
Quality partners, such as companion hand in hand, working backwards from what our consumers might actually be prevents towards.
The first kind of.
Our notion of earning trust with customers is to design products that will appeal to the segmentation of that a number of other demographic of customers that are <unk> for these type of products number. Two then it's about our ability to raise awareness and we believe we have several opportunities to do this one obviously, we have a large active filed where we have a <unk>.
One to one connection number two we have.
Our highly customized curated concierge customer care team.
And we've actually trained a specific part of our customer care team to be able to really really have high engaged conversations and drive education and awareness finding the right triggers when customers actually call in number three is our veterinary partners and the ability that insurance can be.
Embedded in our complementary offering breakfast hub, just like compounding was last quarter. It allows us to fully close the loop.
From the service provider standpoint, which is the third very important leg of this particular store. So I think we're thinking off all levers as we kind of build into the brand, which our marketing teams are working very hard to make sure that the brand has built both at the upper funnel level, but also down.
<unk>.
Kind of down to the full fund level. So we believe we have a fairly well thought out construct of how we will generate awareness awareness that builds consideration consideration.
On the back of crust should drive customer conversion.
Essentially the strategy that we will follow.
We believe awareness is.
Sure.
Familiarity of insurance is roughly 80, 85% levels.
But propensity of insurance is likely in the low teens and actual conversion from that low teens is probably a few single digit points, which is reflected in the penetration that you see today. So we clearly have an uphill challenge in front of us, but as I have articulated previously.
No.
We are bullish on our ability to unlock this vertical and to commercialize the space with the help of our partners.
And in servicing our customers that way.
And then your second question was about macro.
Trades on private label substitution. So just generally speaking we're not seeing any.
Any material or noticeable trade down effect in the business.
And we're also not seeing any discernible shift towards private brands away from national brands.
There are two reasons for this are there, possibly two reasons for this on our side. One is our private brands are built with the highest quality in mind as you recall, we're not out there competing for one SKU per one SKU national brand, we bring skus that are highly valuable and highly.
<unk>.
Desirable in a certain space, whether it would be a certain price point or a certain sub category and we essentially anchor on quality and we believe our private labels can drive attractive pricing.
And <unk>.
Attractive conversion on the back end they can hold their view on price. So we're not really offering quote unquote cheap private brands and then two I believe we have work to do in terms of really building consideration behind our private brands and so particularly in consumables.
Folks migrate to private brands when the brand is essentially well known and we have work to do there.
Okay.
Thank you Stuart I appreciate it.
Sure.
Thank you Mr Fitzgerald.
Our next question is from the line of with.
Zinc with Jefferies. Please proceed.
Yes.
Thank you good afternoon, everyone I had a question for you on like for like pricing. If you could just give us a sense on the consumable side of the business how much pricing has been passed through to the consumer and how much may still need to be pass through based on the vendor conversations youre, having thank you.
Sure.
So.
If you look at if you look at Q1.
Pricing and volume both contributed to the growth that we saw in Q1 and to give you an idea.
I think this is really this is really helpful too to take.
Taken this data point in Q1 about half of our Skus had a price that was flat or down versus Q1 2021. So so broadly speaking right across our catalog average prices increased in line with expectation, which was in the low to mid single digits as we had expected.
Articulated in our in our March earnings call and the cost that has come through nearly.
All of it has been converted into pricing.
Now what remains to be seen is if there are future rounds of cost that are going to flow through which we are getting some indication from our supply partners that might be the case and we stand ready to act in a manner that is.
Sponsel fiscally and at the same time takes into consideration that we don't erode competitive position and we're gonna be watching demand really carefully when that happens.
That's really helpful.
One of the follow up question on the impact of out of stocks I don't recall you talking much about it in your prepared remarks, what's actually might be a good thing I just want to make sure we close the loop on out of stocks. Thank you.
Sure I mean out of stocks.
We didn't see any material impact of out of stocks that was beyond our expectations that we'd already projected.
And number two we're seeing some.
Positive signs of recovery as we indicated towards the latter half of the year the.
The sustainability of that remains to be remains yet to be seen and then three we did.
Deliberate work around positioning our inventory as I talked about are as we've mentioned on the prepared remarks today that has helped draw.
Drive greater or better availability within the right zones that is essentially improve customer experience and also help lower some cost for us in Q1.
Yeah.
Alright helpful. As always thank you both.
Sure.
No.
Thank you Ms Lindsay.
The next question comes from the line of Dylan Carden with William Blair. Please proceed.
Thanks, a lot.
Yeah, just on sort of a broader level do you guys have a sense of what the online.
Space grew in the quarter, even sort of broad strokes.
And whether or not you're kind of trying to see some of that over correction maybe to the retail channels.
Robert back maybe to the industry trend.
And then I just wanted to quickly confirm the truth Canyon launch that's not necessarily in any meaningful capacity in guidance at this point.
So I have that right.
Starting with the second one that is right there.
Okay.
The first part of your question. So there is no refresh off specific to E com.
<unk> data what we have is a couple of different triangulation in the way that we're understanding the overall retail landscape as well as the Pep landscape and I'll share those data points with you. When you look at overall retail retail grew 11% year over year in Q1 E Comm sales overall.
Retail not pet grew six 5%, so clearly youre seeing some impact off the economy reopening and traffic going back into retail in this particular case.
When you put chewy com on top of these data points clearly we grew 14% of course is not an apples and apples and a point, but it is an indication of the fact that we continue to buck the trend.
In general when you look at Nielsen data, what we can see is that we grew consumables categories, such as consumables, roughly 300 to 350 basis points higher.
Dan.
Pet industry.
We also you also see similar data in our pet medications flea and tick type spaces.
Where we materially outpaced the industry in Q1 all of this indicates.
And then finally when you when you combine this data point to what Mario was mentioning which is search intent or traffic as a proxy.
For online chair all of this indicates that yes, there is ebb and flow going back into retail and on top of that E. Com continues to grow not sure what level and should we continues to grow and take share.
Understood.
You had mentioned that as a real quick the intent on things like adoption do you think about some early signs of exhaustion.
Just given kind of the two years that we've had as far as sort of what do you expect the panel pet ownership.
Yes, when you look at pet adoption data.
So far in Q1, roughly 480000 pets have been adopted and 478000 I mean, the data is always somewhat.
But what we see is that it's one to one on adoption and relinquishment.
That's what we saw in Q1.
Now when you double click underneath of that obviously.
What would be interesting is to correlate income data to be able to see if the relinquishment is actually coming from low income.
And the adoption is actually continuing to.
Pushed through.
Dubai categories, which is which is our.
Our data point corresponds with the so whatever adoption pet profiles, we are seeing corresponds to the fact that.
It's it's.
Right now prevents towards kind of medium or hiring them.
Yeah.
Fair enough. Thank you very much and good luck.
Yeah.
Sure.
Thank you Mr Garden.
Our next question is from the line of.
Lauren snack Schenker with Morgan Stanley . Please proceed.
Great. Thanks wondering if you could parse out the magnitude is.
The contribution in sequential gross margin improvement between the improved pricing that commercial discipline and then the logistics initiatives and then any commentary with what youre seeing on pricing and promotion in May.
And then second question just back to your commentary around sort of pet adoption and hard goods searches weekend <unk> I guess, what gives you confidence that those trends will improve as we enter the second half of the year. Thanks.
Pilar and this is a bit I'll take the first one Mario will take the second one.
So in terms of parsing out the magnitude of sequential improvement again, I won't fully satisfy your curiosity, but I'll give you a directional indication that pricing and discipline on promotions played a bigger part.
Or a material part.
And the logistics initiatives played a lesser part given that we're starting early in the in the in the innings here.
So I would just leave it at that.
And then.
I think you also asked me.
We're expecting a rational environment Lauren for the balance of the year on on promo and pricing.
And I think so far nothing gives us the indication that that is changing.
Hey, Lauren so the second part of your question was about what it gives us confidence for the further growth in the second half of the year, yes.
Yes, specifically around you know, maybe just that hard good embedded option breathing.
Yeah, Yeah. So it's.
It's a good question I think there are a couple of factors.
The drive our expectations of a pickup in growth.
In the second half first if you look at comps get a little easier in the second half mainly as we said in hard goods.
At 2021 that part of the business grew faster in the first half in the second half I mean first first quarter 2021 was roughly 42% growth year over year and hard goods.
And then and then moderate into the second half so comps get easier.
Part is as we articulated on the on the Q4 call. So the last time, we spoke is that we're expecting in stock levels to be relatively better in the second half of the year versus the first half of the year. So the question earlier about where was in stock and how we expect those levels to play out there playing out roughly in line with what we expected and what we said.
We expected last time, we spoke so it's a combination of those two factors.
Drive why we expect growth to be higher in the second half versus the first half.
I think.
In our opinion.
<unk>, obviously are naturally going to have to watch.
Where inflation trends continue to develop those product fuel.
Other inputs that are competing for share of wallet for the customer.
But specifically how much inflation that's left in the system and how that how much more than inflation can consume and consumers absorbed without impacting demand. We're obviously watching that part of the.
Looking ahead.
Great. Thank you.
Thank you Ms snack.
The next question is from the line.
Deepak Monoszon, none with Wolfe Research. Please proceed.
Great Hey, guys. Thanks for taking the questions. So I'll ask the question earlier on the gross margin a little bit differently more specifically on the logistics initiatives what percentage of the volumes ourselves currently served under this improved import routing and the injection into the keyboard.
Delivery models at this time and where do you start to see that go towards the end of the year and then another piece on the pricing side. Some of you noted that your conversations with vendors and indicating potentially additional.
Cost inflation.
Friends on certain products can you elaborate on that what type of Paas Skus are those how do you think about kind of the map compliant on that going forward.
Yeah, So I'll take the second one first.
We don't have perfect visibility, but this is going to be broadly across the catalog given that it's the core inputs that are fundamentally absorbing the cost.
And that essentially passed through so it's primarily <unk>.
This less from hard goods vendors, obviously, we've heard more from consumables vendors, so perhaps that <unk>.
You are an indication of kind of the core inputs flowing through into the inflation here.
In terms of.
A map keeping pace.
I think it's a question also grounds or baselines from what we saw in Q4 and I think it is helpful. Perhaps to spend a minute understanding the different dynamics between the seasonal changes in quarters.
So what we saw in Q4 from a price and product cost like price normalization tends to be delayed during the holidays, and that's especially true for ecommerce channel given the transparency.
And so when you look at kind of pressures on map it actually exacerbates our escalates during the holiday season, which we don't expect to get into as we play to Q to Q2 or Q3, and then and then second our Q1 results demonstrate kind of two things one our ability to take action and to do so reasonably quickly.
The second as well as the fact that our pricing technology can work surgically.
And be impactful in effecting change when we decided to take action.
So we're looking at pricing through a surgical lens and we're going to be really thoughtful and deliberate.
About not making perhaps blanket pricing changes and considering how pricing actions would impact customer trust and the shortened the long term and how those actions could shape customer demand, but will be fiscally responsible without eroding customer trust is the way that we're going to play this out.
And then your first part of your question on gross margins.
<unk>.
There's a lot going on amongst within logistics right now so it's hard to it's hard to actually specifically pinned down or.
Put too much weight on the two initiatives. So let me give you. An example, like we in Q1, we improved our utilization of spot rates, where we essentially pay beyond contracted rates by roughly 15% to 20% levels on a year over year basis and that contributed roughly 15 basis.
The 15 basis points of impact to.
Two gross margins.
So what.
What is that that's the impact of better planning.
Developing a tool.
Tools and test that provides us the transparency and the reactionary measures to be able to play through changing and changing inputs.
On an appropriate basis. Some of these other ones that I've talked about like chewy freight services for example, I mean.
On an entitlement basis, we could see 30 40, 50% of our volume flowing through this right. But this is a longer term initiative that scales or perhaps eight to 10 quarters the import.
No.
Service that we launched will actually scale over the next four quarters. So you can say hey, you guys have played through 25% of the entitlement right now and thats likely flowing in.
Several basis points of improvement into the gross margin that you saw in Q1. So hopefully that gives you a bit of an appreciation for the ebb and flow.
And how the team is looking at to overturning each lever.
I'll also mention the order routing technology that we've actually been developing to make sure that our inventory is placed in the right zone closeness to the customer so that we don't.
Incurred longhorn shipping cost, which you saw improved by 15% Longhorn has improved by 15% as mentioned in the prepared remarks Paul.
All of this essentially plays through and lowers our freight entitlement that flows through the gross margin will that context helps.
No that's very helpful. Thanks, so much.
Sure.
Thank you Mr Murphy on Ian.
Our next question is from the line of Justin clever with Baird. Please proceed.
Hey, good afternoon, everyone. Thanks for taking the question.
Wanted to just ask about the profitability of auto ship, recognizing you probably don't look at the business that business in a silo, but it's annualizing at $7 billion. Today. So just curious you know what.
The EBITDA margin profile look like on those sales given.
Marketing and AD spend related to retention, it's fairly low with your model.
Perspective, you guys can share on that I think would be helpful.
Hi, Justin without staying away from specific.
Number is.
No.
Our builder infusion on obviously why auto ship and helpful to us one the a O.
Average order values for auto ship orders are higher.
Kind of mid to high single digits or non auto ship owners. So it just it starts there and then you multiply on top of that the fact that we're able to get customers to consolidate their baskets or build baskets around an order ship order because our ultrashape customers, our non dormant customers, it's not like they're not.
Aging theyre very much actively engaging to put peripherals or build attach and we help them build that attach so that again gives you a perspective of how we kind of build around an auto ship order and how that order might actually provide leverage through the fixed infrastructure that we've built because those are fixed costs that the auto ship orders.
Leveraging underneath of that clearly the base that run through water ship allows us to lower the entire cost structure for the company because you need fewer number of people you can plan using algorithms versus tons of humans trying to plan a business that is repeat unpredictable.
You better labor planning leads to better staffing levels better staffing levels leads to a better optimal productivity levels. We can.
Can build effective middle mile routes right one of the reasons, we're taking on the freight initiatives. We have predictability in last mile delivery, we provide a base load to a carrier network that allows us to leverage.
To draw favorable or the most favorable rates in the industry. So.
Without giving you specific kind of impact it just broadly plumbing it through our network and allows us to run a really efficient business.
And it really disciplined operation so hopefully that context helps.
No. That's helpful. Thank you just a follow up.
Sorry go ahead Mario.
And this is what I wanted to add was that I think the point that you brought up is exactly right I mean that business.
Part of our business now is over $7 billion run rate and as Sumit mentioned that as a consistent flow of products that helps every single order that flows through our warehouses.
There's real power in the auto ship program.
Okay, Great just a follow up then on unrelated but was there any headwind on gross margin from from mix just given the.
The 8% decline in hard goods during during <unk> and is it fair to assume that you think that the first quarter marks the low point for.
For hard goods, just just in terms of year over year change given the comparisons as you mentioned starting to ease.
Here in <unk> and over the balance of the year.
Yes. The second part of your question is an interesting one we're not we're not speculating and we're not kind of we're not yet providing guidance on how we feel about this.
It goes back to Mario's point about just waiting and watching how macro trends change and how the consumer's mindset continues to remain pressured and windows.
Constraints actually Olivia to the back half of the year or to the rest of the year. So so we'll share more in our Q2 results on that.
Yes, I would say to a point about the mix I mean, if it was all going into the consumables part of the business. They would have more of a mixed pressure, but if you notice how fast our other revenue grew in the quarter you can see the other shift is mostly happening into the other part of the revenue stream. So.
I would say that's not necessarily the case.
Project Q1 gross margin through the rest of the year thinking about the full year.
Guidance or at least color that we provided in terms of gross margin. That's what you should think about sort of the ebbs and flows.
Gross margin quarter to quarter throughout this year.
Okay.
Alright. Thank you best of luck the rest of the year.
Thank you. Thank you.
Thank you Mr. Herbert.
That concludes the Q&A session I will now hand, the call over to submit for closing remarks.
Thank you everyone stay safe and we'll see you next quarter.
Yeah.
That concludes today's call. Thank you for your participation you may now disconnect your lines.
Okay.
Okay.
Yeah.