Q3 2023 Chewy Inc Earnings Call
Hello, everyone.
You for attending today's chewy third quarter 2023 earnings call.
My name is here and I'll be your moderator today.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
If you'd like to ask a question press star one on your telephone keypad.
I would now like to pass the conference over to our host Jan Sue with Chewy. Please proceed.
Thank you for joining us on the call today to discuss our third quarter 2023 results. Joining me our series C. E O Smith's thing and interim CFO Stacy Bowman, 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 doctors outcomes on our call today.
We will be making forward looking statements, including statements concerning <unk> future prospects financial results strategies and investments industry trends and our ability to successfully responded business risks such statements are considered forward looking statements under the private Securities Litigation Reform Act of 1995 and are subject to 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 five are 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.
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 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, unless otherwise noted results discussed today refer to the third quarter of 2023, and all comparisons are accordingly against the third quarter of 2022. Finally this call in its entirety is being webcast and armed after religions 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 this.
Isn't it.
Thanks, Ken.
Thank you all for joining us on the call today.
Before we jump in as we have previously announced we will be hosting our inaugural Investor Day next week on Thursday December 14th.
We look forward to seeing many of you in person and encourage everyone to tune into the live webcast, which can be found on our investor Relations website IMAX.
I'm excited to introduce you to our broader senior leadership team next week, we plan to provide a comprehensive update on our strategic roadmap, including a deep dive into our chewy health business.
Let's see I refreshed long term financial targets in light of our Investor Day next week, we will streamline todays call to focus on this quarter's results and a few notable recent updates.
We believe most strategy and innovation topics for next week now that could be a Q3.
Sure he continues to outperform and gain market share to the present environment.
Reported $2 $74 billion in net sales this quarter up 8% against an industry that grew in the low single digits with pet inflation continuing to return to historical levels.
The team is executing admirably against controllable factors as reflected by another strong quarter of 3% adjusted EBITDA margin.
Consistent with the expectations, we shared on our last earnings call active customers declined marginally on a sequential basis.
Looking beyond the near term, we believe we remain well positioned to drive improved active customer trends as the macro environment in pet household formation trends recovered.
Notably, we yet again demonstrated our ability to grow wallet share with our customers as net sales per active customer or netback exceeded $540 up nearly 14%.
Throughout the third quarter customer engagement remains strong our industry, leading mix of non discretionary consumables and health bolstered by our auto ship subscription service continues to reinforce the structural soundness and defensible nature of our business model.
The loyalty and spending resiliency of our auto ship customers remains unabated with no changes to their ordering behavior.
Finally, our conversion of new customers into other ship continues at a healthy rate as a result auto ship customer sales continued to outpace overall topline growth and were up nearly 13% in the quarter and represented over 76% of net sales.
Non discretionary consumables and health categories anchor our business collectively representing approximately 85% of third quarter net sales in.
Pharmacy continued to grow at a premium to the overall company and now represents north of $1 billion business for US based on trailing 12 months net sales at <unk>.
This scale chewy is the number one pet pharmacy in America, we look forward to sharing more with you about the financial performance and strategic direction of our health business Holistically at next week's Investor day.
As anticipated, we launched chewy, Canada at the end of September, bringing <unk> compelling value proposition to millions of pet parents in Canada.
Initial customer demand has been strong auto ship sign up rates are healthy our delivery experience as compelling and customer satisfaction is high.
While it is early we are pleased with our progress and market, thus far with key indicators of success pointing towards a bullish future <unk>.
Turning to profitability, we reported gross margin of 28, 5%, which is a new record in itself.
<unk> gross margins reflects mixed rate benefits tightly managing promotional spend and strong performance in logistics by our team.
Finally, adjusted EBITDA margin came in at 3% for the quarter, even during a period in which we had planned the pronounced growth investments.
Shifting gears from in quarter results.
I'd now like to provide some commentary on how we performed on Black Friday and cyber Monday of this year.
We observed strong customer purchasing intent during this important holiday shopping week traffic and sales exceeded our expectations across all categories, including hard goods and conversion rates were up year over year, New customer acquisition was 40% higher than our Q3 weekly average while we have seen trends returned to pre holiday levels, our black Friday and cyber Monday.
Performance is encouraging specifically, while consumer spending behavior remains opportunistic in the current environment.
Our results illustrate that choice value proposition continues to resonate loudly and will prevail when consumer demand and industry inputs improve.
Before I turn the call over to Stacey I would like to share some context regarding a couple of important companywide developments.
In November as part of our 2020 for strategic planning process, we implemented actions to reduce our head count in certain areas of the organization.
Decision was carefully considered as part of our ongoing focus on becoming an ever more agile and disciplined company and aligns our efforts into priorities, which we believe will gain us the most significant customer wins and generate the highest business return.
While we consolidated some roles within the organization, we continue to invest in other high priority areas as we head into 2024, we expect these actions to create room for us to continue investing behind our growth initiatives.
We are incredibly grateful to our team members for their contributions and remain committed to supporting them. During this transition.
Lastly, I am excited to announce that David reader will be joining us as <unk>, New Chief Financial officer, starting early in 2020 for.
David joins us from Globalfoundries, where he is currently CFO.
He brings with him extensive experience across a multitude of operational and financial roles at Globalfoundries, Lexmark, Cisco and Broadcom amongst others I look forward to working with Dave as we continued to execute against the many compelling growth and margin opportunities across our ecosystem.
I would also like to thank Stacy for all that she has done to support me and the chewy team in her role as interim CFO. Following Dave start date, Stacie will continue to serve as our chief accounting officer.
With that I will turn the call over to Stacey. Thank you Sumit and thank you all for joining us today.
In the third quarter net sales grew eight 2% to $2 74 billion.
Auto ship customer sales growth outpaced total net sales growth by almost 460 basis points and came in at 2.09 billion in Q3 up 12, 8%.
<unk> customer sales now represent 76, 4% of total net sales.
We ended the third quarter with $20 3 million active customers.
Primary measure of customer engagement, NASDAQ grew 13, 8% year over year to $543, yet again, reaching a new record high.
As we move down the P&L. Please note that my discussion of financial where applicable refers to metrics, excluding share based compensation expense and related taxes as well as certain other adjustments disclosed in our SEC filings where relevant.
The same applies to my discussion of guidance and financial outlook.
Gross margin reached 28, 5% in Q3.
Our Q3 gross margin highlights our ability to deliver steady margin accretion in this part of the P&L and we continue to believe there is meaningful room for continued gross margin expansion overtime.
Continuing on to Opex.
SG&A totaled $545 9 million or 19, 9% of net sales deleveraging 30 basis points compared to the third quarter of 2022.
This increase was largely driven by investments related to our growth initiatives.
Q3 advertising and marketing expense was $179 2 million or six 5% of net sales consistent with our expectation of 6% 7% of net sales.
Third quarter adjusted net income was $63 million, an increase of $14 6 million.
Third quarter, adjusted EBITDA reached $82 1 million up $11 7 million, implying an adjusted EBITDA margin of 3%.
Third quarter free cash flow of $48 5 million continues to be strong, reflecting $80 2 million in net cash provided by operating activities and $31 7 million and capital expenditures.
Our third quarter trailing 12 month free cash flow with over $300 million and demonstrate our ability to execute sharply and generate meaningful cash flow.
Through all economic environments.
Capital expenditures continues to be comprised primarily of automated fulfillment center investment and ongoing technology projects.
As planned our capex spend tapered this quarter following above average capex intensity in the second quarter.
And we expect 2023 capex to remain in the range of 1.5% to 2% of net sales consistent with past investment levels.
We finished Q3 with $957 2 million in cash and cash equivalents and marketable securities nearly $351 million higher than the balance at this time last year and we remain debt free.
At the end of Q3 between cash on hand, marketable securities and availability on our ABL, our liquidity stood at one 7 billion.
That concludes my recap of our third quarter results. So now let me cover our fourth quarter and full year 2023 guidance.
While we remain confident in the overall resilience of the pet category as well as to his ability to deliver growth above the industry average in light of the near term macro environment. We are updating our topline guidance as we head into year end.
We expect fourth quarter net sales to be between $2 48 and.
And $2 8 billion representing year over year growth of approximately 3%.
We are narrowing and revising our full year 2023, net sales outlook to be between 11.08, and $11 1 billion representing growth of approximately 10% compared to full year 2022.
We are reiterating our full year 2023, adjusted EBITDA margin outlook of 3%.
As you update your models also note that we expect our free cash flow for full year 2023 to be in excess of two and a half times the free cash flow we generated in full year 2022, implying an adjusted EBITDA to free cash flow conversion rate north of 80%.
Our third quarter results once again demonstrate the unique ability to deliver strong results in the current environment, we expect to continue taking share and expanding profitability, while the pet industry works its way back towards steady state trends and we remain highly encouraged by the various strategic opportunities that lie ahead.
We look forward to seeing many of you next week.
With that I will turn the call over to the operator for questions.
Thank you.
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Our first question today comes from Eric Sheridan with Goldman Sachs.
Please proceed.
Thank you so much for taking the question I just wanted to come back to the Q4 guidance on the revenue side can you walk through some of the headwinds and <unk>, we should be thinking about in terms of the revenue build for Q4 and how much of this is down to broader promotional or competitive intensity versus elements of the macro environment.
Basket size or just the lapping effect of inflation from a year ago. Thanks, so much.
Hey, Eric this estimate.
So I'll speak to it our guidance.
It reflects sales growth that is expected to outpace the industry first of all so we're continuing to see the changes happen.
Post our commentaries from the July August timeframe, when we last spoke so here's a couple of main points. When you look year over year. The revenue composition is shifting out of pricing.
And more into structural unit.
And attach so there is little or no benefit from pricing from a comp point of view that combined with continuing lower mix of hard goods and discretionary this year relative to last year.
Explain the year over year comps that you're seeing as it relates to guidance the softness that we called out last quarter. We started seeing in the July August timeframe has persistent we're seeing the impact of the softness most materially in the non ownership portion of our business and so the 25% of the business that doesn't go to ownership.
And primarily across highly discretionary components. Some consumable components. This is related and coupled with the impact of the newer customer cohorts that we talked about last time, but royalty is still continuing to be harmed by these customers are early tenure and we're taking steps to engage with them and making forecasting a little bit difficult to cross.
The macro that is keeping discretionary softer neuro and spending patterns a little bit opportunistic.
So that is all reflected in the new guidance that we're providing.
We came out of last quarter, starting to see these trends the trends of social sort of persisted. So this.
This time was the right time to make the call to update the guidance as we're seeing it at this time.
Having said all this we have a moat in order share portion of the business that remains strong and has proven to be to be resilient to the current macro per se.
Happy to take a wallet and just want to reiterate that at the mid point of our 23 net sales guidance, we will deliver approximately 10% growth.
What's your share gaining and then next weeks Investor day, we intend to share additional perspective on our long term growth algorithm and expectations.
Great. Thanks for the color Smith.
Sure.
Your next question comes from Doug Anmuth with J P. Morgan.
Please proceed.
Thanks for taking the questions.
I got the color there and <unk> revenue can you just help us square a little bit the strong black Friday, and cyber Monday performance you called out with the rest of the outlook for <unk> is that just purely promotional driven and I guess why does that give you some degree of longer term confidence and then.
Second perhaps you can just provide a little bit of color on how youre thinking about gross margins in <unk> and <unk>, obviously, the EBITDA implied EBITDA guidance as is.
Is down.
You mentioned, a few things there on revenue, but as that.
Related to promotions normalizing inflation some seasonality any other factors, we should think about.
Sure there is a.
There are nice to hear from you that there's a lot there. So let me decouple it one by one and Stacey can jump in at any point, if I Miss anything so first of all.
Promotional activity during black Friday was slightly steeper than prior year, although it remained broadly rational.
What we are essentially calling out is the way that we went to market specific golfers that we took to market the way customers engage with the overall proposition to our existing customers engaging along with some along with the healthy mix of new customers that we picked up essentially signals to the fact that structurally the business is sound and.
Similarly, stimulated the right way and customers being in the right mind frame. They do respond so it sort of speaks to the 10 ability of the industry rebalancing.
Once a customer pressure sort of a bit that's the reason we provide.
Provided those commentary we thought it would be helpful. Overall, the way that we're thinking about gross margin, we expect to hold within the 20% ranges that we have been communicating so far so we don't expect an impact to gross margin.
Because we expect the promotional environment moving forward to remain rational with typical seasonal guardrails similar to what we've observed but where other black Friday cyber Monday is happy to provide more promotional color.
And the way that we've played through Q4. So all of the Q3 implied EBITDA that you are seeing is essentially as a result of incremental dollar spent during this black Friday, which was roughly approximately 30 basis points higher than last year, but that component is building in and then two other growth investments started flowing through.
Q3, and are continuing to flow through into Q4, So if you normalize for that.
Essentially gets you back to the to the healthy levels of EBITDA.
Uh huh.
And in the front half of the year.
Yeah, I would just reiterate that our Q4 profitability reflects the usual seasonal impact of holiday promotional activity, but as I just mentioned.
The rationale and within our expectations.
And we will see some investment behind our growth investments.
Flow through to the adjusted EBITDA, but I do want to reiterate that we are really proud that we're able to self fund our growth and so we continue to do so throughout the year.
Thank you Bob Thank you Bob.
Sure.
Our next question comes from Lauren Schenk with Morgan Stanley.
Please proceed.
Hey, everyone. Thanks for taking my question. This is Nathan southern on for Lorraine.
Can you dig a bit more into the direct impact of macro across each of gross adds churn and as pack and then.
Is the embedded macro environment in the <unk> guide worsening for <unk> or is it just just largely stable. Thank you.
Hey, Jason this is sumit.
So on on the macro.
It is the trend that we started.
Seeing coming out of Q3 have largely persistent for the most part you're seeing discretionary.
<unk> spending and discretionary being low persisting, you're seeing a shift out of that into drive persisting.
So nothing has broadly chains, we're not seeing broad.
<unk> downs happened on our side so.
Customers that are engaging with premium items assortment arent the ones essentially trading down.
So loyalty within core consumables categories and customers a general reluctance to switch from a proven food that works well for their pet that is pretty intact. The power of the authorship model, which facilitate the stickiness and behavior is intact.
And all of the softness that we're seeing is primarily in our non auto ship driven.
Driven businesses.
Which are more ingredients to be weighted towards.
Discretionary.
Including categories, such as tweets per se.
You had a second part to your question.
Additional commentary.
Okay.
Our commentary on customers hasn't necessarily changed you know we guided in Q3 that we expect a wider outcome.
You can I mean of course, we you know we've been about roughly 100 150000 customers down on a year over year basis on an average 100000 customers. We don't expect to make that up in our customer sentiment doesn't change.
And kind of the macro starts resolving we're happy with the way that we play through Black Friday Cyber Monday, we're happy with the way our customers are responding to.
To us across our consumables auto ship held.
Type categories, our reactivation rate remains pretty strong.
So all of those are positive trends Q.
Q4, typically comes with a very high mix of seasonal discretionary categories and if you look at it from a year over year perspective, it's down relative to last year, but compared to 2021 discretionary is down roughly you know on a mixed basis roughly 15%.
And that definitely has an impact.
Yeah, I would just go back to the nest pack point as well, we continue to meaningfully meaningfully expand our wallet share. So it continues to show our loyal customer base and they continue to.
Penetrating to other categories, such as our high margin health category and whatnot. So we are seeing some growth there as demonstrated by our.
A record high this quarter.
Okay, great. Thank you.
Our next question comes from Andrew <unk> with Needham.
Please proceed.
Great. Thanks, so much good afternoon.
A couple from US I guess this will continue to see inflation exit this space into next year and the consumer remains pretty price sensitive how do you think about the trade down for chewy in margin versus top line I guess in other words would you pull back on promotions.
<unk> auto ship customer to preserve margins or not necessarily.
Secondly, just to follow up on Canada did you break out Canada in terms of net adds and sales during the quarter and are you seeing similar consumer behavior, but trade down to value in the region as well. Thanks so much.
Sure Hi, Ana So first of all our discounting slash promo spend isn't materially elevated from the beginning of this year, we had said that there.
There is an opportunity that we might spend up to 30 basis points higher and promotions on a year over year basis, and so far you know we would be we had not seen.
The environment, where that spend had come through and we've seen that only during the holiday period, where our discounting slashed promotional spend was roughly 30 basis points higher than last year.
And beyond that we've gone back to our normal levels of discounting, which may be very slightly elevated now just responding to seasonal patterns, but broadly speaking.
Most analogy remains relatively rational from our vantage point.
I want to make sure that it is clear that you know.
Uh huh.
The ability to navigate to kind of get promotional variability.
However, small it might be is reflected in <unk>.
Flex to the continuous strong gross margin performance.
And last I would say, we continue to work closely with our supplier partners.
To ensure a high degree of map of compliance, which essentially protects prices and large variability in the pet space and we expect enough discipline to be enforced by the overall market as we continue to move through Q4 and beyond.
So that was the first part of your answer.
Number two in Canada, yes, we like the business the way, it's performing we're continuing to add assortment in open up.
Geography, which will come talk to you.
Here in the next one to two quarters.
Alongside overall in FY2023 the business has not immaterial impact so we'll stay away from providing numbers our guidance accordingly.
We're seeing consumers respond well to promotions around the boxing day timeframe and even there we've actually pulled back and going back to leading our businesses are building it.
Why a record <unk> team in mind. So we are heavier on auto ship and not so much on non auto type transaction or offers.
Alright fair enough. Thanks, so much.
Sure.
Our next question comes from Rick Patel with Raymond James. Please proceed.
Thank you and good afternoon, everyone I just had a question on an active customers. So to what extent are you still being impacted by churn of Covid cohorts in.
In terms of the headwind and as we think beyond macro and pet household formation can you talk about the levers you have to accelerate new customers that are under your control I am curious if you would consider leaning more into discounting or marketing to get more consumers into your ecosystem.
Sure. So our cohort cohort I'm just looking at the data here they continue to settle out well and.
The highest amount of churn that we're seeing is actually in the near term cohorts. So I had provided a little bit of color on this.
In my in the last.
Quarters' earnings script around customers that were picked up in the 22.
The near term cohort that we're that we're demonstrating more discretionary type.
Behavior.
Beyond that our cohorts cohorts continue to settle out well ensuring grid there.
Has continued to stabilize now that we're past the two year Mark for the 2020 cohort into 'twenty one are for.
For the most part 21 cohort as well.
And so just to be sure you know we've been consistent in saying that their retention was.
Just low single digit percentage point lower than our classic kind of best high quality legacy cohorts and that team has essentially.
Essentially stayed consistent as well.
The second part of your question is what levers do you have to TV.
When you leave the discounts on marketing so our marketing our philosophy as you know is not to not to govern ourselves with a specific dollar amount rather to essentially spend up to the point, where we see profitable returns.
So it's a more fluid budget and our marketing teams are fully empowered.
A large portion of our spend is lower funnel with healthy mixes into mid and upper funnel, while upper funnel budget less flexible you know on the lower funnel basically react.
Based on how we see market demand in consumer Oh.
Kind of predictive lifetime values.
So we are optimizing their appropriately in our opinion the.
The discretionary that actually drives a very healthy level of customer acquisition into the into the platform of course is muted and the gaps that we're seeing primarily from a historical point of view are all deltas that are coming from those categories primarily.
Our premium businesses continue to outpace his.
Historical acquisition rates, which bear, which we're happy about it because they've been high quality cohorts.
In terms of discounting.
<unk> always believed in building a high quality recurring business less so a transactional business.
We leaned into discounting tactics early in 2003 and later in 'twenty two.
And that is part of the reason why we believe these cohorts are not as sticky as.
Our legacy cohort so that's a good lesson learned.
Even though our intuition was true you know we went out and tested it found it to be true again, and we've pulled back on that pretty dramatically, we don't expect to bring that back.
Yes happy to take all of them.
Thanks very much.
Sure.
Our next question comes from Steven Zaccone with Citi.
Please proceed.
Great. Good afternoon. Thank you very much for taking my question.
I wanted to follow up on the pricing discussion. So it sounds like the fourth quarter outlook Embeds that pricing will basically be flat year over year is that the right way to think about.
Your initial outlook for 'twenty four.
We've heard more about pet food supply coming to the market. So I'm just curious how you think pricing trends into next year.
Yeah, It's a good question.
So a couple a couple of points there first.
From our vantage point, we do not expect deflationary deflationary pressure in the consumables or the health categories.
We we've heard certain questions are acknowledged that there's been commentary out in the market around potential food deflation in the near term.
We do not believe the deflationary pressure, which may exist or impact traditional grocery and food players will translate into the pet category.
So there's a.
Consumables and pet category, our branded vendors are significantly invested.
And jointly we are motivated and protecting map pricing framework.
Broadly speaking does not exist in conventional grocery per se, which is non branded so anyway. So that's the comment there.
Second pet inflation continues to come down in this quarter running at mid single digits.
Ultimately, we believe this will very quickly come down to low single digit levels and there will be no impact of pricing or no benefit from pricing as we get into next year, you might see a little bit of pricing benefit getting into Q1 based on kind of how the cost price increases came in through 'twenty two 'twenty three.
But he will not see any impact or any benefit of pricing as we move out of our Q1 quarter. So you know what does that mean it means that as the pricing environment continues to normalize our structural unit growth as a driver essentially drive the majority of the overall topline growth and we expect to get the remaining share gain position in 2024 as well.
Okay understood I do have a brief follow up so the.
The announcement around.
Some of the cost savings just to be clear do you expect those savings to flow to the bottom line or will you need to reinvest those savings and other initiatives.
Not need to we will choose to reinvest the answer is yes to both.
Yes, some of that will flow to the bottom line. So we will drive leverage as a result of these actions, which we will quantify more when we talk to you about 2020 for guidance and we will also prudently investing back in what we consider a list of priorities for the company that are poised for a new customer acquisition and growth in the future.
Okay. Thanks see you next week.
Thank you.
Our next question comes from Brian Fitzgerald with Wells Fargo. Please.
Please proceed.
Thanks.
Maybe two broader ones.
What are you seeing in the broader pet household market in the U S and Canada are there differences between the two what about shelters and rescue adoption levels bring backs any color on on the market for pet households, and then can you give us an update on your on your advertising initiatives and what you're seeing in doing there.
Thank you.
Iran Muscle question, we'll come back to them one by one.
Broader pet household markets in U S and Canada.
I talked about customer behavior through the holiday period, which is the most recent period that we were we were playing through.
Miller participation rates.
And customers love the brand the customer centricity of delivery experience overall proposition a.
Wow experience.
And to the sector are resonating very loudly there. So we're happy to see that differences that we're seeing slightly higher population of our mix of cat relative your dog or as a result, we're going to see obviously slightly lower AOS.
This is something that we knew going in studying the Canadian market.
We're happy to see the mix that is playing through right now as we ramp continue to ramp up premium assortment that pushes through from Q4 into Q1, we're going to see that premium mix jumped even more.
Also not a surprise.
So overall I would say broadly and just just so you know we haven't yet turned on marketing in Canada, we're playing through some basic a cold start.
Marketing as you would expect to start up to do.
So we're essentially actively learning the market.
As we as we do.
In our humble I'm curious manner.
But we're poised.
Poised to receive the signal then we liked the signals that we're seeing right now.
Number two.
Trends at options are down 16% year over year relinquishment are down 3% year over year. So what that tells you is that broader trends off.
Pet adoptions being down hasn't reversed at the same time fewer pets were returned back to shelters that to the tune of 3%. So overall the trend hasn't brought through the worst.
Uh huh.
Advertise update on advertising initiatives.
We're pleased with the ramp.
We have essentially relieved more supply our commitment was to start ramping this up in the back half of this year and we've ramped.
Ramped up credibility in fact, the gross margin strong performance.
What we're seeing.
We didnt actively put this in the script is the combination of a <unk>.
And from the team and execution.
The two line items that are playing through a contribution of fabs as well as Oh.
Work through supply chain and logistics.
What are you seeing a better benefit come through.
So overall, we're happy suppliers rather than from the suppliers now as we.
Got down into annual vendor negotiations.
Having good conversations I had nothing to do the right type of feedback and we're poised to ramp this up in 2024.
Got it. Thank you appreciate it.
No problem. Thank you.
Our next question comes from Steve Forbes with Guggenheim.
Please proceed.
Good morning Stacy.
So Matt I want I wanted to start on pharmacy sales, you mentioned, achieving $1 billion on an LTM basis, so sort of a two part question one what was the growth rate during the quarter.
Any context around gross margin benefit.
Benefit from that mix and isolation and then two I know we've talked in the past about share of pharmacy within your pharmacy customer customer base, what does that $1 billion represent in terms of share.
Yeah, Steve Nice to hear from you we will satisfy more of your curiosity next week when we see you at our Investor day.
In terms of.
Mix and gross margin, we obviously pharmacy delivers premium gross margins as we've said in the past and essentially.
And what we saw in Q3 years pharmacy over delivering through gross margin offsetting all of the decline that we saw from.
The higher margin hardgoods business fees, which are obviously slower given the discretionary pressures that we're seeing.
So for now I'll give you I'll leave you with that qualitative commentary in terms of presenting CAGR and growth rates.
And.
And share positions, we will talk about that more next week.
Okay, and then maybe just a quick follow up I think we noticed some shipping threshold changes during the quarter.
Don't know if you can maybe just help frame to the group here.
Why did you test slower lower threshold sort of what drove you to that decision.
And when it does learnings informed you about that part of the value proposition in the current backdrop.
Yes.
Oh.
I like your framing what did you learn because it is all part of our continuous test and learn and how to add more value from the platform into the customer and there are couple of ways, you can add value and we can price discount brands.
Transaction Lee.
And.
That to us.
Sometimes it comes around to new too and you don't really drive.
Record sort of behavior shifts the other one is testing or lowering barriers for our customers and so in this particular way you know were testing if shipping across certain categories or certain large classes or certain segments of customers.
Area, and how we essentially pass value directly back to the customer without while at the same time protecting.
Our vendor partner brands that we are still probably built on our platform. So you know this is something that you will continue to see from us.
If the signal any broad shifts we'll be transparent around that.
For the most part we're liking some of the elasticity that we're seeing around seasonal trends.
On others, you know we've always been proud of the fact that customers build really healthy baskets with us.
So you know what some other brands might realize as barriers are not only barriers that you interact with chewy.
It's a healthy set of learnings that we're thankful.
Thank you.
Our next question comes from Lee Horowitz with Deutsche Bank.
Please proceed.
Alright. Thanks for the question a couple if I could I guess with user pressures persisting longer than you guys would have thought entering the year, how do you get comfortable with the idea that shall we can in fact grow users. Even if pets household formation remains under pressure for a sustained period of time and then secondly, I know this is a topic that will dive deeper on next.
But can you comment at all on how care cost adoption or customer adoption rates have materialized in the back half of this year and perhaps how you guys think about driving greater adoption of chewy services broadly. Thanks, so much.
Sure. The second part of your question around care, plus and driving services adoption, we will answer more Holistically next week we.
We promise to bring you a really.
Engaging and comprehensive update there. So thank you for your patience on that on the first part of your question around how do we get comfortable with the idea that we can still grow active customers. So so I will say two things first of all you know.
We are a well.
Unclear right, where a 12 year old company. So we're obviously learning through a lot of this these trends, but we have the benefit of having strategic relationships with our vendor partners, who have played through the pet category for decades.
And so when we sit with them and understand the historical data times of the pet industry has been pressured and breakdown the components of pet growth tonnage growth ESP growth et cetera et cetera.
Everything points to the fact that pet ultimately comes out resilient right now pet household formation is muted and it's muted because of the high kind of pressures that consumers are seeing seeing from every direction, but it is expected that this won the bid no reason to believe why this was not a bad in fact, you know in 2006 of the recession.
To aid when overall CPG spending was down 2% in Perth was actually up 6% during that time.
And you know there is this element of companionship that continues to play through if you look at the last 10 years premium amortization has had a big impact so the humanization and premium position trends are expected to continue the difference in six versus 2006 to eight versus now is that the level of inflation that are passed through the system have been unprecedented. So it's taking you know recovery that usually takes four months.
Six quarters has essentially taken a bit longer.
But ultimately is expected to retire.
Back to normal levels.
Sort of one industry context. The second reason why we feel confident is because the structural value proposition that is fueled both by new customer acquisition, but also a growing share of wallet is highly heidi.
Uh huh.
Sound at Chewy.
That we acquire and then build baskets with you. The complementarity of features that we put on top of.
Consumables and getting you into health care, and then telling you in insurance and building your share of wallets, which by the way we will provide more infusion into next next week when we see you for Investor day.
How's us to sit back and evaluate the long term trajectory of our consumer being highly recurring in nature and highly profit contributing to the bottom line.
So I think with the two flywheels the acquisition and the share of wallet growth that provides us.
A defensible moat.
Around models that primarily have either fixed or fixed fixed subscription service on one side or that must acquire customers to continue delivering topline and bottom growth.
Helpful. Thank you so much.
Sure.
Our last question today comes from from Fastbreak with Oppenheimer. Please.
Please proceed good up good afternoon. Thanks for taking my question. So just going back to Canada. Your commentary there was very upbeat.
Any surprises thus far in terms of how that launch is going.
So very good question.
Our surprises are always around how could it be moved faster. So no. No particular surprises. It's just you know learnings that would be sort of internally ramp up to ourselves.
How can we move faster expanding region, how do we double down on ramping more assortment off how do we understand consumer behavior better. So its just all of those areas that we're focused on I would say all the right things per se, but it's a good one I'll give the surprise a little more time than perhaps we can talk next week when we see each other.
Great. Thank you.
Yes.
Thank you for your question.
We really appreciate your time and we hope to see you all next week. Thank you.
Okay.
That will conclude today's conference call. Thank you all for your participation you may now disconnect your line.
Yeah.