Q2 2023 Chewy Inc Earnings Call
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[music].
Hi.
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Good afternoon. Thank you for attending today's chewy second quarter FY2023 earnings call. My name is Dana and I will be your moderator for today's call all lines will be muted during the <unk>.
Here's some portion of the call with an opportunity for questions and answers at the end if you will.
To ask a question. Please press star one I would now like to pass the conference over to our host Jen.
A lot of Investor Relations you May go ahead.
Thank you for joining us on the call today to discuss our second quarter 2023 results. Joining me are cheers Eric Schmidt.
I'm CFO .
Our earnings release and letter to shareholders, which were filed with the SEC earlier today and posted to the Investor Relations section of our website investor <unk> Com on our call today, we will be making forward looking statements, including statements concerning <unk> future prospects financial result, strategies and investment industry trends and our ability to successfully respond.
The business risks such statements are considered forward looking statements under the private Securities Litigation Reform Act of 995.
Certain risks uncertainties and other factors described in the section titled Risk factors in our annual report on Form 10-K, and other subsequent quarterly report, 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 it is.
We disclaim any obligation to update any forward looking statements, except as required by law.
During this call we will discuss certain non-GAAP financial measures reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided on our Investor Relations website and in our earnings release and letter to shareholders, which were filed with the SEC. Today. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unlike others.
As noted results discussed today refer to the second quarter of 2023, and all comparisons are accordingly against the second quarter of 2022.
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 Investor Relations website. Shortly I would now like to turn the call over to Sumit.
Thanks, Dan and thank you all for joining us on the call today.
Before we begin I want to introduce Stacy Boldman, our chief Accounting officer, as previously announced CFO Mario Marte retired on July 28, and Stacy is serving as our interim CFO , while we continue to search for a permanent CFO .
She is a respected leader who has been with chewy for more than eight years and is deeply familiar with our finance organization systems and processes welcome Stacey.
Now let's begin.
Our second quarter carried on the positive trends, we saw in our Q1 results delivering mid teens growth exceeding guidance as well as robust profitability.
In Q2, we reported $2 78 billion and net sales up 14% and a 3% adjusted EBITDA margin.
Consistent with our expectation active customers were broadly flat on a sequential basis, while net sales per active customer or NASDAQ reached $530, reflecting a 15% increase.
Net sales growth was underpinned by strong participation from our customers underscoring the ever increasing strength of the jewelry ecosystem.
This momentum was evident across many of our focus areas, including auto ship, where sales continued to grow at a faster pace than our top line increasing their share of total net sales to 76% in the second quarter.
<unk> remains a key differentiator of Chili's business model, enabling high visibility and predictability driven by recurring revenue stream, while engendering customer loyalty.
Additionally, we are also successfully driving discovery off of our two Ehealth platform. For example, cross category penetration into pharmacy now represents nearly 20% of our overall active customer base.
Elsewhere across chewy.
Our teams are continuously enhancing our CRM capability, improving targeting and supporting strong customer engagement.
Moving down the P&L, we delivered another quarter of robust profitability.
Gross margin of 28, 3% was broadly in line with expectations.
As anticipated promotional activity in the second quarter was higher than in the first quarter. However, the promotional environment on the whole remains largely rational.
Adjusted EBITDA margin came in at 3% for the quarter benefiting from our strong gross margin trends and fulfillment cost efficiencies offset by the impact of our exciting growth investments, including our Canada expansion, which remains on track for a Q3 launch.
As we indicated during our Q1 earnings call. We continue to utilize our growing free cash flow to self fund a meaningful portion of these growth initiatives.
Additionally, our automation efforts continue to be both a driver of margin improvement to date as well as a source of continued upside.
Two of our four automated facilities are still ramping and our script automated site is opening in early 2024 combined.
We expect them to provide additional operating efficiency in the future years.
Before spending time on business initiatives, let me share our perspective on consumer behavior in the pet industry and in particular, how these trends may impact active customers and netback at chewy.
Coming out of the summer months, we are sensing a shift in consumer mindset towards being more discernible.
And at the same time with a higher willingness to consolidate their share of wallet to their trusted retailer of choice there.
This behavior is driven by a more fluid macro environment, including high levels of inflation, which has been pass through the industry over the past 18 months.
Our dialogue with our suppliers confirms that these trends are permeating throughout the pet industry.
At <unk>, we are in many ways insulated from these pressures given our high quality customer base, the mix of our consumables and healthcare businesses, which drove nearly 85% of our net sales in Q2.
Our powerful auto ship subscription service best in class healthcare experience and our overall promise of competitive prices convenience and unparalleled customer service.
Our loyal customers recognize these attributes as key differentiators and continue to demonstrate robust ordering behavior, which in turn continues to support our strong performance.
Further to this point, we see significant potential to continue growing share of wallet with our existing customers evidenced by our strong track record of sustainable netback expansion.
As you May recall, we have grown net pack from around $330 in the year preceding our IPO to $530 this quarter up approximately 60% over that time.
While we saw a modest benefit from price increases efforts, such as growing chewy health ecosystem, increasing uptake of our auto ship program and our large customer base that spend more with us over time have driven the majority of our netback expansion.
This underscores the sustainability of our track record as well as the ongoing potential to outperform the pet industry and deliver strong and profitable growth.
Now.
While we are more insulated than some others. We are not fully exempt from the pressures currently facing the pet industry that.
That household formation remains relatively muted and as I mentioned above the consumer mindset continues to be pressured.
These factors taken together make the current environment, a challenging period to forecast consumer behavior.
Taking this into consideration we continue to see potential for returning to net adds growth during the second half of this year, but in light of recent trends. We are now expecting a wider range of potential outcomes.
While the industry wide trends I, just described make it challenging to forecast net add these dynamics are not specific to chewy and we believe we are well positioned to drive improved active customer trends as macro factors and consumer behavior patterns normalize.
Now I would like to provide an update on some of our strategic initiatives.
Our upcoming expansion into the Canadian market remains on track for Q3 of this year, Canada represents a large and fast growing pet category and our teams are hard at work finalizing selection, ensuring the same convenient delivery experience and high bar service that our U S customers enjoy.
We look forward to sharing our progress over the quarters to come.
And sponsored ads one of our prospective margin accretive growth vectors, we are executing against a compelling roadmap and remain on track to ramp the program throughout the second half of the year and into 2024.
We remain encouraged by the opportunity ahead, and we will continue to update you on progress as we scale the business.
Lastly, I am excited to announce that we intend to host our first Investor Day. Later this year chewy has come a long way since our 2019 IPO, having nearly tripled our net sales to north of 10 billion expanded gross margin by 800 basis points and adjusted EBITDA margin by nearly 1000 basis points.
Yet we are just getting started and believe that we still have considerable runway with clear potential to outperform the broader pet industry and drive both strong growth as well as significant margin expansion.
We look forward to sharing a deep dive on our highly integrated pet ecosystem unveiling our exciting roadmap ahead and Recalibrating, our long term financial expectations to reflect the upside we see in the chewy platform.
In closing I am, particularly proud of our strong results and the high levels of customer engagement that we achieved in Q2.
We operate in a secular growth category with demonstrated consumer resiliency and Q2 once again showcased the strength and durability of our platform with that I will turn the call over to Stacy.
Thanks, Tim and I look forward to engaging with many of you in this new role.
In the second quarter net sales grew 14, 3% or $347 million to $2 78 billion non.
Non discretionary consumables and health care categories continued to meaningfully contribute to growth in the quarter collectively representing approximately 85% of second quarter net sales.
Auto ship customer sales were $2 1 billion up 18, 1% and continued to outpace aggregate topline growth by almost 400 basis points.
Auto ship customer sales now represent 75, 5% of total net sales.
Active customers remained broadly flat on a sequential basis and finished Q2 at $24 million. However, our primary measure of customer engagement net pack grew 14, 7% to $530.
Notably, both NASDAQ and auto ship customer sales, yet again reached new record highs.
As we move down the P&L. Please note that my discussion of financial where applicable.
<unk> metrics, excluding share based compensation expense and related taxes as well as certain other adjustments disclosed in our SEC filings where relevant.
Same applies to my discussion of guidance and financial outlook.
Gross margin reached 28, 3% in Q2, which reflects a 20 basis point expansion broadly consistent with our expectations for the quarter.
Continuing on to Opex.
SG&A, excluding share based compensation and related taxes totaled $550 9 million or 19, 8% of net sales.
Leveraging 20 basis points compared to the second quarter of 2022.
This temporary increase was largely driven by corporate payroll increases related to our growth initiatives, such as sponsored ads and our expansion into Canada.
Ahead of realizing the associated expected net sales growth.
The SG&A deleveraging was partially mitigated by continued fulfillment cost efficiencies supported by our automation initiatives.
Q2 advertising and marketing expense was $185 5 million or six 7% of net sales consistent with our expectation of 6% to 7% of net sales.
Second quarter adjusted net income was $63 3 million, an increase of $1 2 million.
Second quarter, adjusted EBITDA reached $86 9 million up $3 8 million, implying an adjusted EBITDA margin of three 1%.
Second quarter free cash flow was $101 1 million, reflecting $158 8 million in net cash provided by operating activities and $57 6 million in capital expenditures.
Capital expenditures were primarily comprised of automated fulfillment center investments and ongoing technology projects.
As a reminder, we regularly see fluctuations in capex intensity for the quarter to quarter.
Following below average capex intensity in the first quarter Capex spending increased in the second quarter.
Overall, we expect 2023 and capital expenditures to remain in the range of one 5% to 2% of net sales.
We finished Q2 with $905 4 million in cash and cash equivalents and marketable securities nearly 300 million higher than the balance at this time last year and we remain debt free.
At the end of Q2 between cash on hand, marketable securities and availability on our ABL, our liquidity stood at $1 7 billion.
That concludes my second quarter recap. So now let me cover our third quarter and full year 2023 guidance as.
As always our guidance reflects a balanced view that incorporates the strength of our business model and customer engagement along with the latest views on the evolving economic outlook.
We expect third quarter net sales to be between $2 74, and $2 76 billion representing year over year growth of approximately 8% to 9%.
We are reiterating our full year 2023 net sales outlook.
Evan one five to 11, three 5 billion representing growth of approximately 10% to 12% compared to full year 2022.
We are also reiterating our full year 2023, adjusted EBITDA margin outlook of approximately 3%.
As you update your models also note that we expect our free cash flow for full year 2023 to be approximately two five times the free cash flow we generated in full year 2022.
Okay.
Before we open the call to questions I would like to reiterate that our strong second quarter earnings reflect the resilience of our operating model in an evolving macro environment. We believe that Chile is exceptionally well equipped to navigate the road ahead and deliver strong performance as our execution is grounded in our operating philosophy of driving some.
Stable profitable growth.
And with that I'll turn the call over to the operator for questions.
Certainly.
Thank you I'd like to ask a question. Please press star followed by one on your telephone keypad and for any reason you would like to remove that question. Please press star followed by two again to ask a question Press Star one as a reminder, if you are using a speakerphone. Please remember that pick up your handset before asking a question we will pause briefly our questions are answered.
Sure.
Okay.
Our first question is from the line of Doug Anmuth with J P. Morgan you May proceed.
Thanks, so much for taking the questions.
If you could talk more about the wider range of outcomes or active customers in the back half.
Curious how much is hard goods driven acquisition of factors year, even though it's not a big piece of your business and if my math is right. The <unk> guidance ranges around 5% to 12%, which feels pretty wide.
Hoping you can help us understand what's happening.
Both of those extremes.
Okay, Doug just to clarify the guidance range Youre talking about a revenue item trained or somehow customer guidance range revenue.
The implied revenue guidance range for <unk>.
Okay.
That's not so good just to address that head on that's not how wide. We're thinking we're we're estimating the range of outcomes on net adds to be a bit wider we've clearly communicated that we expect growth in the back half of the year and while that certainly possible, we're sort of modeling a couple of different types of scenarios, but on the back of that I want to reiterate.
The guidance that we provided which we actually feel pretty good about given the strength that we're seeing from ordering customers and the engagement.
From those customers on our platform.
Now, let me go back and kind of give you the color on why we are projecting a wider outcome or wider range on the net adds are active adds kind of conversation that we've been having the last couple of quarters.
Essentially essentially what's happening is.
I'll provide a short version happy to dive into the details here so consistent with what.
What we've previously communicated.
If you did large COVID-19 cohorts that were a headwind to net adds during the first half of the year.
We continue to expect this impact will diminish in the second half now that we've reached the two year Mark for a majority of these cohorts at.
At the same time coming out of Q2, what we've seen is a slightly more discernible customer and it really started in July for us much more than it did in May and June .
And so we just haven't had enough time for this to play through so we're projecting what we're seeing right now forward.
And what it is is that for the more recently acquired or newer cohorts of customers, whose behavior is proving difficult to forecast given kind of the the pressures that they're under given the high inflation. We just have to we believe we have to work harder we will have to work harder to earn their trust simply because they are more distracted by the current macro pressure.
And they haven't yet had the cycles to experience the chewy magic.
So.
So we know that we have to execute even more sharply to deliver value to the cohorts of customers that are seeking value in the near term.
Such that we are winning with them as much as we win with the customers that are already loyalty.
So it's really kind of a tale of two cities.
The loyal cohorts stay loyal and they are consolidating their share of wallet with us. So that is driving the netback expansion and then this recent kind of July trend that we're slightly seeing projected into August so far is what's causing us to say hey, maybe we shouldnt, we should widen the aperture here and play through a range of sensitivities yes.
But on the back half, we're pretty confident about delivering the are holding our guidance, which by the way is going to be a chevron and position in the back half of the year.
And if I could just follow up on.
Our netback can you just help us parse out what's happening and kind of <unk> between inflation and like for like pricing.
Yes, sure so pricing is going to impact in two different ways and.
So if you can also provide some color if he wants to hear but essentially on pricing what youre going to see is the back half.
The cost increases that came through in <unk> of 'twenty two we benefited from them in the first half of 'twenty three so going into the back half hour growth is driven as a combination of the revenue composition is weighted volume and price and not over weighted towards price.
Our net pack as well.
Decompose, our netback or deconstruct, our netback, what we can confidently state is that inflation over the past years has provided a modest benefit so greater than greater than kind of two thirds to north of 70% of the benefit that we're seeing in the netback growth is organically cohort development plus auto ship developer.
<unk>, plus health development et cetera, et cetera. So it's all it's all accretive and obviously Q4, we expect a little more transactional given kind of the holiday season, and the ESP compressions that generally pick based on time like that so it's a bit more transactions in Q3.
Great. Thank you Sumit.
Sure.
Thank you Mr <unk>.
Our next question is from Eric Sheridan with Goldman Sachs.
You May proceed.
Okay.
Thank you so much for taking the question.
Back to the AD business potential both to the end of this year and into the Mexico School year, maybe to more pressure on some of the key learnings you've had from.
Debating and working with partners on the ads business rollout and how should we be thinking about.
Elements of AD coverage or Advertiser response with individual trying to line up ahead of that.
More wider launch later this year. Thanks, so much.
Sure.
Hey. This is this is essentially a tale of two cities also the demand on the platform is far exceeding the supply that we have right now opened up to our suppliers, which is obviously.
A point that who is going to the conviction behind the product as well as the quality of the product that the team is launching.
The guardrail on opening up supply is limited to make sure that we're making sure that the organic experience that customers have come to enjoy by it doesn't get over call over overrun by sort of the Erie.
I just want make sure we're very portable and opening up that supply. So the plan has always been to ramp this up into edge and we're on track for that.
In fact the.
Original forecast that we had kind of coming into perspective.
As the program scales, we were sort of thinking of this as 115% off of opportunity that we are now kind of squarely thinking in the 1% to 3% range and widen our aperture as the program kind of takes hold per se. So the response rate is there. The teams are appropriately focused customer customer experience forums, the right type of bar to make sure.
Our quality and go to market execution is high.
Rois that our vendors are seeing or at least a participating suppliers are seeing are high, particularly as you deal with the subscription nature of our business and therefore, the rois are appropriately converted into an LTV basis, rather than a onetime transaction that most of that platform is going to run in the market per se.
We have always been aware of and that we believe with the strength of the jewelry platform.
And but allow our suppliers too to kind of build their brand and an even more compelling.
Okay.
Thanks for the color.
Sure.
Thank you Mr. Sheridan.
Our next question is from the line of Steven Zaccone with Citi. You May proceed.
Great. Good afternoon. Thanks for taking my question Stacy Congrats on the new role a Smith I was hoping you could elaborate a little bit more on the commentary about the consumer changing out of the summer months are you seeing more trade down are you seeing smaller baskets from these customers I guess like what makes you concerned its a new trend.
I suggested two months' period at the end of this summer and when you say you need to work harder with these new customers does that mean more promotional at the start should we assume that's had some gross margin implications.
Sure sure sure yes.
Yes, it's a great question. So are we seeing are you seeing concerning trends not not really not yet so what do I mean by saying we are observing the consumer become a bit more discernible.
For the first time in July we really noticed a shoe.
Shift out of kind of bet food more towards the dry food and that generally is an indication of more value seeking behavior.
We're also we're also seeing kind of treat.
Pulled back a little bit that gained traction in Q1 coming out of 2022 and they pulled back slightly in Q2, particularly coming out of July , but it's not material yet to come out and actually raise any alarm bells. Then we're not because we believe we're fairly insulated. So let me give you kind of color on what's happening and I think to <unk>.
Get gain the color you've.
Sort of like broadened the aperture and gain some context here. So from 22 2022. The storyline was all about dealing with the pandemic.
So coming out of last year through 2022 became the year of recovery supply chain stabilized, but costs rose dramatically through this period and have been passed onto the consumer by way of unprecedented high prices.
And these inflationary pressures are now showing up industry wide and also impact now recall that pet household formation was already muted that hasnt changed through 2022 and continued through the first half of 'twenty three.
In addition to that this this behavior that I am kind of calling out here.
It indicates that the consumers being more value conscious at this point.
And that makes sense.
Think that in times like these the consumer preferences towards value or convenience makes sense, but the winning combination is offering them both value and convenience and we believe that for a majority of the consumers. We do that we offer both value and convenience and therefore, we believe we're somewhat insulated from the full impact of these current times given the strength.
And the business model.
Now for our recently acquired customers right.
We are their behavior is hard to predict right their order purchase frequency might be slightly off usually when we see customers come back in four weeks that might be five weeks et cetera. So so we believe that we have to be extra sharp and the CRM capabilities that we've deployed that we develop kind of towards the latter half of last year into this year, but those are going to be much.
More sharply deployed towards the back half of the year. So in terms of promos, we are not going to lead the market as we never do right where price borrowers, we're not price leaders in that way, but we stand ready to respond internally, we're going to find ways to self fund right creative ways to pass on the value to the customer and that doesn't have to be.
Promo line per se it could be other tactics as well. We also have a series of kind of a roadmap where that we're taking into account and in <unk> as well as next year that will that will formulate our strategy to both acquiring net new customers as well as improved retention of these recently acquired pool.
I can I can continue but hopefully that provides a bit of a color.
That's very helpful detail I appreciate all that color I guess just have a brief follow up then.
Do you think the overall industry gets more promotional as we get into the back half of the year. So I'm curious as the two months.
Activity of what <unk> seen has your peer set we do more promotional.
Yes, we do expect that so if you recall, we've been we've been transparent about our expectation of greater promotional activity in 2023 from our Q1 call itself.
And both Q1 and Q2, we saw higher promotional activity.
Relative to the.
The pandemic years, but the promotional activity so far has been lower than our expectation as we move out from first half into second half. We've continued to bake in an incremental promo spend because our expectation is that promotions are going to be higher in the back half of the year. So like I said, we're not looking to lead the market, but we stand ready to respond to make sure that.
Customer experience and demand are both protected.
Okay. Thanks for all the detail best of luck in the back half.
Thank you.
Thank you Mr <unk>.
Our next question is from the line of Anna entering <unk> with Needham you May proceed.
Great. Thank you so much good afternoon guys.
Just a follow up on that previous question just any color on how we should think about the gross margin for the third quarter, just given your comments on potentially higher promo for the industry as we approach the back half.
And then secondly, just as a follow up you had talked about 50 to 75 basis points from Canada investments. This year, what was the amount in the second quarter and should we think about the balance more or less evenly split in the back half.
Sure Hi, Ana this is Stacy I'll take that first question on gross margin so.
As you know, we don't typically against formal guidance around gross margins, but we.
We do know it is typical to see some fluctuations from quarter to quarter, but we feel good about this quarter and expect gross margin to remain around the 28% level for the balance of the year.
Longer term, we're excited because we believe there is still meaningful room less gross margin expansion. So for example, and I think I mentioned earlier, we continue to grow and obtain market share in existing high margin verticals like chewy health.
We also are investing in and scaling new initiatives such as sponsored ads that are margin accretive.
And then on the second question.
The EBITDA guidance essentially.
Employers and consumed.
The level of investment that we're going to make so they started we started ramping investments into Canada and other verticals such as sponsored ads et cetera in Q2, and we will see those continue to ramp up through the back half of the year, which is baked into the guidance also if you recall, we mentioned in our on our Q1 call we're going to ramp up.
New fulfillment centers that launched in the middle of a middle of the year, which has continued on its pace and we should expect some short term dilution as a result of that and then finally, the incremental promo or promotional environment that we are talking about is also baked in.
So that kind of formula.
The way that guidance is built for on a profit basis for the back half.
Alright, thank you so much.
Sure.
Thank you Ms Andrea <unk>.
Our next question is from Dylan Carden with William Blair You May proceed.
Thank you very much.
Just trying to reconcile the idea of a wider range of outcomes now anticipated for net customer ads, albeit still positive.
And keeping the guidance for the year I'm, just kind of curious what levers or optionality.
Envisioning in doing that.
How we plan on on exceeding our own expectations is that basically the question.
Well it just seems like the certainly kind of caution on the net customer adds in the back half and then for keeping the guidance as it is.
Sure where each of the third quarter, just trying to understand just reconcile those two seem to be at all.
Got it okay. The strength that we're seeing the balances essentially drawing the line from the strength that we're seeing from customers. So market prices are holding up pretty pretty good auto share penetration rates are holding up study aspects in the water ships are holding up study and so our.
Audra frequency was higher for existing customers.
And so it's this notion of during times like these customers look to consolidate their share of wallet instead of continuing to perhaps cross shop, even a little bit that they do as part of their normal day to day and so we believe that trend will continue through the back half of the year. Secondly, we provided a bit of a data point here today.
And the penetration that we are driving into our verticals such as to Ehealth, particularly prescription food and medication that continues through the back half of the year as well.
Three our mobile App continues to gain traction in the percentage of orders that went through the app.
The benefit that we see for customers that are more engaged is also going to built in a little bit in the back half per se. So all of that essentially hold us.
Right now.
It gives us the confidence that we can deliver the back half and the way the PR on the customer side.
It's more recent rate if these recent cohorts that have been a little more <unk>.
<unk> seeking and value conscious and so we're just we're watching this one really carefully to understand what kind of cohort behaviors are being demonstrated our the repeat order rate like we expect and want them to be as their ASP compression and basket sizes as the cohort kind of ramps up et cetera et cetera, So primarily we're going to deploy a series of tactics.
To make sure that we are protecting ourselves as well as serving both value and convenience. The overall, we feel good playing out from here.
Got it.
Wanted to just about automation.
Any way to kind of quantify or scale of the impact that you're seeing already from automation and kind of where you are on the utilization.
Those children given the historical.
Yes. So if you recall, we've launched four we're on track to open our first one next year of the four that have launched two are ramped and two are ramping and for every fulfillment center that we ramp you should expect roughly 2020 to 30 basis points of leverage that we will we haven't provided.
Of the of the remaining.
10 fulfillment centers, we have left room.
And are actively starting to retrofit with other ideas that will serve to provide leverage in the future for us.
We're actually excited to share our road map of the future at the Investor day that we announced today.
In the back half of this year.
We're all is on track on the supplies transformation cycle.
Great. Thank.
Thanks Ross.
Okay.
Thank you Mr Hernan.
Our next question is from Mark Mahaney with Evercore you May proceed.
Thanks, I wanted to ask a question on the Canada launch and our sponsored ads on the Canada launch could you give us a sense of the timing of that during the quarter.
If it's successful should we start seeing that in net adds already in the September quarter or is it a late quarter launch in Salford successfully would only show up in Q4 and I know you are I know, we're talking starting from nothing so.
There will be a small contribution but just trying to understand the timing and then on sponsored ads are you doing this all internal organically or are you working with.
Our third party retail media networks to start rolling that thank you.
Sure. So on sponsored ads were doing most of this internally mark.
Yeah.
Short version of that answer.
In Canada, we are.
<unk> launched imminently and it starts ramping really in Q4, so the impact would likely start we will start feeling the impact in Q4, but we haven't built in any materiality in our forecast for this year.
Okay. Thank you so much.
Sure.
Thank you Mr Mahaney.
Our next question is from Brian Fitzgerald with Wells Fargo. Please proceed.
Thanks, guys a couple of follow ups.
The cross category form a penetration of 20%.
Where do you think that can get to.
Maturity and is that accelerating and then.
Follow up on a mask pack hitting $5 30.
Can you opine, a little bit on what's going on with it.
Household spend and how much of that you think you can eventually capture as you continue to add different products and different skus and services.
Sure Hey, Brian .
<unk>.
On the cross category for Rx.
In one of our top priorities inside the company is one where we believe every active chewy customers should also be a TUI pharmacy customer.
So there is a lot of headroom here for us and we are excited about that and yes on a year over year basis, there is accelerating.
Or has accelerated.
And so.
All positive here.
Net net pack.
Household spend can recapture.
We believe we are for our loyal customers were likely capturing a majority of their spend in the food and health segment today.
Supplements was an opportunity for us two years ago, but we close that gap pretty credibly last year, which is actually also contributed to the <unk> expansion for us. So on these march classes that constitute food toppers.
Health, whether its diet or a prescription medication or OTC.
All of our supplement we believe we are actively consolidating and gaining share.
And that truly is kind of where the consumers' mindset is today because if you recall, what's happened is consumer allocated $100 towards pad in.
In the past it used to be $80 and consumables and health $20 on hard goods at $20 are good those essentially shifted out of there and most of that is now being spent on consumables and health and it will remain so until the macro recovers in our opinion.
Long term we're actually.
The fact that the.
The the spend continues to move from offline to online I believe.
We will emerge as a stronger company in the future given both our base the level of investments that we've made through the pandemic.
And the execution quality that the team continues to demonstrate the overall, we're much we're bullish about the future.
We all collectively have to endure just a short term macro as it plays through.
Thank you Sumit I appreciate it.
Thank you Mr Fitzgerald.
Our next question is from Martin <unk> with Morgan Stanley You May proceed.
Hi, everyone. Its main competitor on for Lauren.
We'll dig in a little bit more of a true up.
What gets you from the encouraging 20% cost out of our penetration today to the call it 100% and pharmacy, how much of that SKU expansion versus getting more customers to discover and adopt.
Thank you.
Yes.
Primarily it's a great question primary our primary challenge is discover ability.
Off this platform and essentially.
Winning customer trust.
Notice or if you recall I may have mentioned this data point.
Third of the customers today in the United States don't visit their pets set a record in frequency or don't consume medications of the record <unk> frequency and so we have an opportunity to not only expand the current Tam that we see in this particular space.
Also have the opportunity by by driving essentially by driving incremental compliance and that has truly been the power of how we go to market with customers on the back of our Ultrashape platform, Yes. So our auto ship eligibility for pharmacy is at par or even higher than our consumables businesses and we are rapidly innovating to make sure.
That customer sign up any kind of friction around customer experience, whether it's sign up or whether its discovery or whether it's sort of checkout.
Is being addressed actively by the team.
Overall, our NPS on this platform continues to remain high and we're pretty proud to serve a large base of customers. So this is less about adding skus. It's much more about just making sure that there's awareness as well as discover for it.
Okay. Thank you.
Thank you.
Our next question is from Trevor Young with Barclays. You May proceed.
Great. Thanks for the questions first on a category basis. It looks like hard goods returned to growth in the quarter does that kind of consistent with your expectations and do you expect that cadence to improve from here or does that more discerning customer and tougher compares make it likely that growth stays a bit more challenged and then any update on the <unk>.
Since initiative, which your opinion and eliminated I think that's now available nationwide just any initial comments on uptake there relative to your own expectations and can you shed any light on how that maps to the P&L. Thank you.
Hi, Trevor this is Stacy so I'll take the hard good question first.
Historically, we always do have some seasonality in our hardware sales with a small pullback between the first and second quarter.
So that also combined with the value seeking behavior that Tim had spoke about shown by the consumer recently contributed to some softness in hyper growth for this quarter.
Our expectations for the rest of the year have not really changed.
Yes.
On the hard goods is also easier easier comps. If you noticed last Q2 was a negative.
Just a high higher single digit low double digit decline and so you're comping a much softer year from last year.
On insurance we are.
Super excited about having two best in class providers on our platform.
<unk> eliminated as expected what it has done is it's opened up.
The range of plans and choices across various different price points and coverages to a wider range of our customers and as you would expect what that has translated to is the rate of policy sign up has gone up proportionately because you opened up assortment it drives to incremental revenue.
On a pretty direct correlation basis, so while that's a really positive data points.
The goal itself requires a ton of agitation and awareness and we're seeing we're seeing our metrics in the positive direction, our quote to conversion rates or.
<unk>.
Call to quarter. It in court to conversion rates are all improving.
Our either as you would expect our customer care team is actually becoming a pretty powerful source of educating customers about insurance and therefore also driving.
On a higher cost basis.
Riding the information and driving the conversion.
This was always our hypotheses to start with because you don't really buy insurance online you buy it <unk> channels and we have one of the best assisted channels out there. So overall, we're super excited about what's to come.
I must kind of note on you that this is a bit of a longer arc vertical given that the consideration cycle for customers is longer. So we're not we're going to be appropriately patient and played this game over the long term.
Yeah.
Yes.
Thank you. Thank you Mr. Yates.
Thank you Mr. Yang.
Our next question is from Seth Basham with Wedbush You May proceed.
Thanks, a lot and good afternoon I was wondering if you could provide some color on gross adds relative to 2019 like you did in recent quarters and then also provide some color on CAC trend better year over year or sequentially.
So gross adds continue to run higher than 2019 were not entirely dissatisfied by the pace of our gross adds we believe the team has executed incredibly well.
Yes, the categories that are muted our of course.
Pausing the pullback on gross adds and I think Doug mentioned weather like the contribution of hard goods is weighing in on customer acquisition. It absolutely is but on the balance we're not totally dissatisfied by the pace off of gross adds.
Net new to chewy is.
<unk> is a slightly softer than pre pandemic, but reactivation are much stronger than pre pandemic. So if you combine those two the overall output is that gross adds are stronger than 2019, and then color on CAC.
Much has changed from what I believe I shared last time, which is.
The CAC has increased over the last couple of years at least through the as we've come out of the pandemic. Because then you are picking up.
Everybody was declaring intent and you were picking up customers quite quite.
<unk>.
But candidly the when viewed from the lens of LTV to CAC. LTV has also continued to go up so all ratios are actually very nicely maintained an ROI standpoint, where.
We're spending where we believe we should be spending from a marginal point of view. The reason cap continues to go up right now and will remain high up until the macro recovers in my opinion is there is a shallower pool of customers declaring intent. So clearly the competition for the same customers higher and that drives up the bid rates and then be recall.
All that social used to be a pretty active channel.
Few years ago, and the loss of targeting has actually led to a loss of yield that drives up Tac and the social channels. So it's a combination of those two but LTV is going up appropriately.
That's helpful and just as a follow up.
As LTV going up appropriately for the most recent cohorts.
Cohorts of customers too.
That LTV to CAC ratio is weakening said the most recent cohorts are you going to adjust where your.
Spending time.
Tiny customers.
We always do actually so cumulative contribution profit is what we go after and we're always trying to sort of find that tangential point, where this fits solar to the fact, we're to the point, where the campaign actually becomes negative returning so far the team has been very diligent and we've actually experimented with.
Trying to spend money to put pick up discretionary customers and its just not not a high ROI effort right now so we're not we're not really going after that.
Because we would rather maintain the quality that drives the repeat purchase otherwise you never really get out of the spiral of churn and spending money to keep that customer per se.
And so we are our engines our performance marketing teams appropriately adjust to find the best customer the best return across the best channel.
And that is done on a on a on a daily weekly monthly basis, not on a quarterly basis were fairly responsive.
Thank you.
Thank you Mr Bastian.
Our next question is from Lee Horowitz with Deutsche Bank You May proceed.
Great. Thanks for taking the questions two if I could when you think about the consistently challenged household growth environment. Do you think you need pet household growth to turn more meaningful more meaningfully positive in order to return chewy back to more meaningful meaningfully positive user growth in the medium term and then maybe digging in again through these recent.
We acquired cohorts in the platform and some of the caution you are seeing amongst these users can you talk a bit more specifically on what you maybe youre seeing from these cohorts in terms of repeat purchase rate auto ship penetration basket size.
Relative to the core anything that these users are flagging to you.
Modest caution.
That leads you to believe maybe the season structurally higher churn.
Thanks, so much.
Sure sure on the on the first question of do we need them to turn more meaningfully positive well. There is certainly a factor household penetration as a factor in that it is an important input into the model, but it's not the it's not what we are solely dependent on in fact.
Four.
We.
Our teams are progressing multiple features across chewy dot com, which we expect and this is all kind of in the back half, which will continue some of this will continue into into next year per se.
Our teams progressing multiple features across two dot com, which we expect.
We will expect to credibly reduce friction and lower conversion barriers in areas of for example account creation and improve both sign up rate as well as customer retention rates. So some of these specific examples might be in areas of account creation payments our content platform.
CRM mechanisms.
Or.
We've talked about.
Which I will discuss more in detail at our next earnings calls, but we're <unk>.
We're excited to talk to you about chewy loyalty, which we're progressing for an early 2024 launch. So we're not we're not sitting idle waiting for the macro to recover right. It's just this notion of what cannot be cured has to be endured. So we're going to deal with that and at the same time everything that is controllable and RF.
<unk> on our side, which is improving experience and opening up net avenues to acquire and retain customers. We are absolutely focused on that.
And then your second question was with the more recent cohorts what are you seeing on repeat order frequency.
We're seeing the repeat order frequency that is essentially what I was mentioning earlier auto ship penetration actually is fairly fairly intact theyre basket sizes are slightly lowered because of their more value seeking so obviously theres an ASP compression that is taking place there the attach rates are.
Slightly lower so the units per order metric is where you will see that impact, which ultimately it goes back and kind of talks to the basket size also repeat order frequency.
They need they need a little more nudge relative to our kind of loyal customer basis. So we're just we're watching right now.
And Thats, we are essentially baked that in into the guidance.
Baked that in into the active customer forecast as well.
Very helpful. Thank you.
Sure.
Thank you Mr Horowitz.
Our next question is from Steven Forbes with Guggenheim You May proceed.
Good evening.
<unk>.
Just two quick follow ups one on ownership one on pharmacy, some personal ownership Smith can you comment on how the average number of net ownership ordered by customers in some of your more mature cohorts are trending relative to plan and then on pharmacy can you also talk about how the customer journey.
Pharmacy customers has evolved over the years, such as time to trial usage statistics auto ship adoption and maybe most importantly churn rates right among those.
Those customers that could try and convert into pharmacy earlier in their lifecycle.
Yeah.
Sure.
They will be able to satisfy your full curiosity relative to some of the metrics that you're asking but I'll builder infusion generally in stating that.
Auto ship continues to be more powerful in the way that it is creating value for customers and passing that value on to customers.
We've done that by making sure that the assortment underwater ship is maximized. We've also done that by making sure that barriers to either auto ship conversion.
Our ultrashape retention, whether they may be payments related or whether they may be attached related have continued to be Lord our improvement in segmentation and targeting ability does does allow us to speak with customers a little more meaningfully and that will only get better in the future and then from a from a from a cohort development point of view.
Invested.
Across our kind of discover ability on attach engine to make sure that customers not only discover.
Complementary attached products, but are essentially attaching through them.
Meaningful manner. So all of this is essentially leading to the incremental auto ship sales that youre looking at.
Ultrashape the beauty of water ship is.
It is a very flexible program and customers' trust.
The wound.
The Board trust, the flexibility and they have come to trust the reliability that we put behind auto ship and so it's a high value program from that point of view not not only from a from a from a pricing point of view, but also from an overall experience point of view.
On the RF side.
This is the this.
We believe we have the best health care experience that e-commerce can offer or that customers can find.
In the in the in the best of kind of retailers out there per se.
So our metrics on pharmacy.
Our adoption ownership adoption is even higher than pharmacy than it is in some of our other March classes, our churn rate is lower given how Ohio bar we have.
And at the same time, we always have opportunity that we're working on to make sure that we get even better with products like the.
Overall, we're excited about about this vertical.
Thank you.
Thank you Mr <unk>.
Our last question is from the line of <unk> with Raymond James You May proceed.
Thank you good afternoon, everyone.
Can you talk about what youre seeing in terms of spending by cohort for those customers that are not new to chewy. So I. Appreciate the answer back is growing but just as we think about how much customers are spending further along in their lifecycle I'm curious if you're seeing changes in that trend line.
Yes, we are we absolutely are in fact, our.
Like our more recent cohorts are slightly.
As we've kind of mentioned on this call they require a little more nudging.
But the netback development curve through our older cohorts.
If you look at the three main factors of mass spec development right cohort majority.
Leads the way.
Followed by kind of the other two which is a combination of.
Auto ship, plus health and other merch classes kind of mixing it per se.
So without kind of talking to specific numbers, hopefully thats enough infusion building, if not happy to happy to take a doubleclick.
Great and can you also talk about your go to market strategy for Canada.
New customers going to learn about chewy and how are they going to experience the brand and anything to think about in terms of marketing spend over the next couple of quarters as you ramp in Toronto.
Yeah sure. So this is this is a we're very excited about this we are going to.
I think the.
The punch line here is that we will.
Our aspiration is to show up in Canada, as a Canadian brand not as an American brand that.
So essentially what you should hear in that statement is we will we are.
We are going to try and understand the customer their needs their wants their desires their behaviors and then model the offering in a manner that appeals to them in the best possible manner that by the way is also the most efficient way to market to customers and the most efficient in a way of keeping our costs.
Mineralized per se.
Going to be much more.
<unk> focused on delivering the experience through kind of trusted proven mechanisms that we have here in the United States. Those we do believe carryover pretty nicely.
I was in the Canadian market with the rest of the senior leadership team a few weeks ago.
Walk into the stores and the experience all the way from our fulfillment side to the delivery side to the to the end market and we're excited there's going to be a ton to learn here.
We're going to try and self fund a bunch of this and at the same time whether investments required.
Be upfront and candid about them.
Overall, we're looking for high quality high quality.
Growth not dilutive growth here.
Thank you all the best.
Okay.
Okay.
Thank you Mr Patel.
That is all the time, we have for questions I will now turn the call over to <unk> for any closing remarks.
Thank you very much just want to welcome Tricia again and wish everybody a nice evening. Thank you.
That concludes todays <unk> second quarter fiscal year 23 earnings call. Thank you for your participation you may now disconnect your lines.
I see thank you.
Right.
That concludes todays <unk> second quarter.