Q1 2024 Chewy Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to you that you read fast cool top 2020 bolt on its call all lines have been placed on mute during the presentation portion of the Coke with an opportunity for a question and answer the end if you'd like to ask a question. Please press star followed by one on your telephone keep.
Jennifer: I would now like to turn this conference call I bought two all host Jennifer do.
Jennifer: V P of Investor Relations. Please go ahead. Thank you for joining us on the call today to discuss our first quarter results for fiscal year 2020 for joining me today are CEO Sumit Singh and CFO, David Reader, our earnings release, which was filed with the SEC earlier today have been posted to the Investor Relations section of our website. In addition to that.
Unknown Executive: Thank you for joining us on the call today to discuss our first quarter results for fiscal year 2024. Joining me today are Chewy's CEO, Sumit Singh, and CFO, David Reeder.
Unknown Executive: Our earnings release, which was filed with the SEC earlier today, has been posted to the investor relations section of our website. In addition to the earnings release, a presentation summarizing our results is also available on our website at investor.chewy.com. On our call today, we will be making forward-looking statements, including statements concerning Chewy's financial results and performance, industry trends, strategic initiatives, share repurchase program, and the environment that we operate in. 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 quarterly report on Form 10-Q filed earlier. Re Also note that the forward-looking statements on this call are based on information available to us as of today's date, and we disclaim any obligation to update any forward-looking statements except as required by law.
Jennifer: Earnings release presentation summarizing our results is also available on our website at Investor Chewy Dot com.
Speaker Change: Our call today, we will be making forward looking statements, including statements concerning financial results and performance industry trends strategic initiatives share repurchase program and the environment that we operate in such statements are considered forward looking statements under the private Securities Litigation Reform Act of 1995 and are subject to certain risks uncertainties.
Speaker Change: These and other factors described in the section titled Risk factors in our quarterly report on Form 10-Q filed earlier today and in our other filings with the SEC, which could cause actual results to differ materially from those contemplated by our forward looking statements.
Speaker Change: 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.
Unknown Executive: 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, which was filed with the SEC today. These non-GAAP measures are not intended as a substitute for GAAP results.
Speaker Change: 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, which was filed with the SEC. Today. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise.
Unknown Executive: Additionally, unless otherwise stated, all comparisons discussed on today's call will be against the comparable period of fiscal year 2023. Finally, this call in its entirety is being webcast on our Investor Relations website. A replay of the audio webcast will also be made available on our Investor Relations website shortly.
Speaker Change: Weighted all comparisons discussed on today's call will be against the comparable period of fiscal year 2023. Finally this call in its entirety is being webcast on our Investor Relations website, a replay of the audio webcast will also be made available on our Investor Relations website. Shortly I would now like to turn the call over to Sumit. Thank.
Sumit Singh: Thank you, Jen, and thank you all for joining us on today's call. We kicked off the year with strong performance, achieving solid top-line results, record-breaking profitability, and robust free cash flow. First quarter success is a testament to the unwavering dedication and hard work of every Chewy team member, collectively delivering on our mission to be the most trusted and convenient destination for pet parents and partners everywhere. With that introduction, let's dive in to our first quarter results.
Jim: Thank you Jim and thank you all for joining us on today's call.
Sumit Singh: We kicked off the year with strong performance, achieving solid topline results record breaking profitability and robust free cash flow.
Sumit Singh: First quarter success is a testament to the unwavering dedication and hard work of every chewy team member collectively delivering on our mission to be the most trusted and convenient destination for pet parents and partners that'd be better.
Sumit Singh: With that introduction, let's dive into first quarter results.
Sumit Singh: Q1 Net Sales exceeded the high end of our guidance range, increasing by approximately 3% to $2.88 billion. Two key factors contributed to this performance. First, our customers' loyalty in non-discretionary categories, such as consumables and health, remains strong, accounting for approximately 85% of our Q1 2024 net sales. Second, Autoship customer sales achieved record levels, totaling $2.2 billion and representing 77.6% of net sales.
Sumit Singh: Q1, net sales exceeded the high end of our guidance range, increasing by approximately 3% to $2 $81 billion.
Sumit Singh: Two key factors contributed to this performance first our customers' loyalty and non discretionary categories, such as consumables and health remains strong accounting for approximately 85% of our Q1 2024 net sales.
Sumit Singh: Second auto ship customer sales achieved record levels totaling $2 $2 billion, and representing 77, 6% of net sales.
Sumit Singh: The convenience and value of our autoship program continues to resonate with customers, and autoship customer sales growth outpaced our enterprise average, yet again, increasing 6.4%. Our ownership customer base remains healthy and is continuing to grow. Further, on the topic of customers, this quarter we saw some encouraging customer trends. The work we have been doing to sharpen our already strong value proposition, for example, through peptide personalization, began to pay off this quarter.
The convenience and value of our auto ship program continues to resonate with customers and Ultrashape customer sales growth outpaced our enterprise average yet again, increasing six 4%.
Sumit Singh: Colorado is your customer base remains healthy and is continuing to grow.
Sumit Singh: Further on the topic of customers. This quarter, we saw some encouraging customer trends. The work we have been doing to sharpen our already strong value proposition for example through peptide personalization began to pay off this quarter.
Sumit Singh: Our efforts are driving higher response rates and had a positive effect on net new customers as well as reactivated customers, which were particularly strong in the quarter and up mid-teens relative to the prior year period. Notably, for the first time since 2022, both new customer acquisition and reactivation modestly exceeded our internal expectations in Q1. Progressing through the P&L, we set new records for the company across our profitability metric. Gross margin for the quarter of 29.7% exceeded expectations as we benefited from the continued strength of our growing sponsored ads business, a higher shift into healthcare, and a rational promotional environment.
Efforts are driving higher response rates and had a positive effect on net new customers as well as reactivated customers, which were particularly strong in the quarter and up mid teens relative to the prior year period.
Sumit Singh: Notably for the first time since 2022, both new customer acquisition and reactivation modestly exceeded our internal expectations in Q1.
Sumit Singh: Progressing through the P&L, we set new records for the company across other profitability metrics.
Sumit Singh: Gross margin for the quarter of 29, 7% exceeded expectations as we benefited from the continued strength of our growing sponsored ads business, a higher mix shift into health care at a rational promotional environment.
Sumit Singh: Additionally, there were some one-time items that benefited our P&L this quarter, which they will elaborate upon later in this call. We generated $163 million of adjusted EBITDA, representing a 5.7% margin, supported by our strong gross margin performance and rigorous OPEX management. Across the company, teams at Chewy are executing methodically on all the controllable elements of our business in a highly disciplined manner. Finally, we generated more than $50 million of free cash flow in the quarter.
Speaker Change: Actually there were some onetime items that benefited our P&L this quarter, which Dave will elaborate upon later in this call.
Speaker Change: We generated $163 million of adjusted EBITDA, representing a five 7% margin supported by our strong gross margin performance and rigorous Opex management.
Speaker Change: Across the company teams at chewy or executing methodically on all the controllable elements of our business in a highly disciplined manner.
Speaker Change: Finally, we generated more than $50 million of free cash flow in the quarter from both a profitability and cash generation perspective, we believe that we have reached an exciting inflection point in our business.
Sumit Singh: From both a profitability and cash generation perspective, we believe that we have reached an exciting inflection point in our business. Significant free cash flow generation, coupled with our strong balance sheet, enables us to have the financial flexibility to deploy our capital in a variety of areas. As we have always done, we will continue to invest in strategic initiatives across our business that support our long-term growth and margin objectives. Additionally, as Dave will describe in more detail, we believe we have the cash generation and surplus to begin returning a meaningful portion of our cash to our shareholders.
Speaker Change: Significant free cash flow generation, coupled with our strong balance sheet enables us the financial flexibility to deploy our capital in a variety of areas as.
Speaker Change: As we have always done we will continue to invest in strategic initiatives across our business that support our long term growth and margin objectives.
Speaker Change: Additionally, as Dave will describe in more detail. We believe we have the cash generation and surplus to begin returning a meaningful portion of our cash to our shareholders.
Sumit Singh: Now, I'd like to provide an update on some of Chewy's strategic initiatives and innovations. I'm excited to share that earlier this month we launched a compelling paid membership program called Chewy Plus. Chewy Plus offers a range of benefits, including free shipping, cash accrual rewards, and exclusive member perks.
Speaker Change: Now I'd like to provide an update on somewhat chewy strategic initiatives and innovations.
Speaker Change: Im excited to share that earlier this month, we launched a compelling paid membership program, which we're calling <unk> plus.
Speaker Change: So and plus offers a range of benefits, including free shipping cash accrual rewards and exclusive member perks.
Sumit Singh: The program is currently in its beta state, and throughout the year, we will explore different test and learn approaches to understand how it impacts discovery of our growing products and services, wallet consolidation, and nest pack acceleration, all while maintaining economic sensibility. We are excited about the program and look forward to sharing more over the coming quarters. Turning to Chewy Health, we are excited to share that since our last earnings call, where we announced the launch of our first Chewy VetCare clinic, located near our company headquarters in Plantation, Florida, we have opened three additional Chewy VetCare clinics, two locations in the greater Atlanta, Georgia area, and one in Denver, Colorado.
Speaker Change: The program is currently in a debate on state and throughout the year, we will explore different test and learn approaches to understand how it impacts a discovery of our growing products and services, while it consolidation and netback acceleration all while maintaining economic sensibility.
Speaker Change: We are excited about the program and look forward to sharing more over the coming quarters.
Sumit Singh: With four locations open today, we are excited to bring several more clinics to market later this year, reaching the high end of our stated range of four to eight clinic openings in 2024. We remain focused on our ability to attract talent and our capacity to generate strong demand for our veterinary services. And although it is early days, we are pleased with the performance across both areas. Clinic staffing and VET NPS scores remain strong, suggesting to us that our unique value proposition is resonating with VET.
Speaker Change: Turning to TUI health, we are excited to share that since our last earning calls where we announced the launch of our first chewy vet care clinic located near our company headquarters in plantation, Florida. We have opened three additional chewy Red character next two locations in the greater Atlanta, Georgia area and one in Denver, Colorado.
Speaker Change: With four locations open today, we are excited to bring to market. Several more clinics later this year, reaching the high end of our stated range of four to eight clinic openings in 2024.
Speaker Change: We remain focused on our ability to attract talent and our capacity to generate strong demand for other veterinary services.
Speaker Change: And although it is early days, we are pleased with the performance across both areas.
Speaker Change: Clinic staffing and NPS scores remain strong suggesting to us that our unique value proposition is resonating with vet.
Sumit Singh: As it relates to demand generation, we are encouraged by the early signs of success we are observing. Net new customers to Chewy and appointment utilization are both trending better than our modeled expectation. Moving to our sponsored ad bill. Our ads business continues to ramp well, delivering on the planned product roadmap of new digital products while offering our partners a compelling and high ROI channel to deploy their marketing dollars. As we articulated at our investor day, long term, we see our sponsored ads business scaling to approximately 1 to 3% of net sales with an attractive flow through to the bottom line.
Speaker Change: As it relates to demand generation, we are encouraged by the early signs of success we are observing.
Net new customers to chewy and appointment utilization are both trending better than our modeled expectations moving to our sponsored ads business.
Speaker Change: The business continues to ramp well delivering on the plan product roadmap of new digital products, while offering our partners are compelling and high ROI channel to deploy their marketing dollars.
Speaker Change: As we articulated at our Investor day long term, we see our sponsored ads business scaling to approximately 1% to 3% of net sales at attractive flow through to the bottom line.
Sumit Singh: Lastly, our expansion into Canada continues to ramp in line with our expectations. We rolled out customer-facing features, such as the mobile app and additional payment options, as planned this quarter. Additionally, we continue to expand our assortment, particularly in categories such as premium consumables. Customer awareness and demand continue to gradually build. Customer NPS remains high, and we remain focused on scaling a quality business underpinned by programs such as ownership and personalized customer care.
Speaker Change: Lastly, our expansion into Canada continues to ramp in line with our expectations, we rolled out customer facing features such as mobile app and additional payment options as planned this quarter.
Speaker Change: Additionally, we continue to expand our assortment, particularly in categories such as premium consumables.
Speaker Change: Customer awareness and demand continues to gradually build customer NPS remains high and we remain focused on scaling our quality business underpinned by programs, such as auto ship and personalized customer care.
Sumit Singh: With the pet category continuing its migration online, we believe we are well positioned to become a meaningful player in the Canadian market over time. In closing, our Q1 outperformance underscores our ability to successfully navigate this period of normalization for the pet industry. Moreover, we are cautiously optimistic that pet household formation trends are progressing in the right direction. Based on data from our shelter and rescue partners, we saw healthy growth rates in Q1 adoption on a year-over-year basis, and for the first time since 2022, we observed a positive balance between adoptions and relinquishment.
Speaker Change: The pet category continuing its migration online. We believe we are well positioned to become a meaningful player in the Canadian market overtime.
Speaker Change: In closing our Q1 outperformance underscores our ability to successfully navigate this period of normalization for the pet industry.
Speaker Change: We are cautiously optimistic that that household formation trends are progressing in the right direction.
Speaker Change: Based on data from our shelter and rescue partners, we saw healthy growth rates in Q1 adoption on a year over year basis and for the first time since 2022, we observed a positive balance between adoption and relinquishing while it is premature to declare an industry turnaround we maintain our perspective that the pet industry.
Sumit Singh: While it is premature to declare an industry turnaround, we maintain our perspective that the pet industry is on track towards normalization. Meanwhile, we remain confident in our ability to execute against our strategic roadmap and to deliver compelling results for our shareholders. With that, I will turn the call over to Dave. Thank you.
Speaker Change: <unk> is on track towards normalization.
Speaker Change: While we remain confident in our ability to execute against our strategic roadmap and to deliver compelling results for our shareholders.
Speaker Change: I will turn the call over to Dave. Thank.
David W. Reeder: Thank you, Sumit. To start, I will take us through our Q1 financial results and then turn to our capital allocation strategy and outlook for the balance of the year. First quarter net sales grew 3.1% to $2.88 billion, exceeding the high end of our guidance range. Broadly in line with expectations, active customers declined marginally on a sequential basis to approximately 20 million, modestly exceeding our internal expectations. Importantly, to note... We believe that we are seeing early but positive signals with respect to macro pet household formation.
Dave: Thank you submit to start I'll take us through our Q1 financial results and then turn to our capital allocation strategy and outlook for the balance of the year.
Dave: First quarter net sales grew three 1% to $2 88 billion exceeding the high end of our guidance range.
Broadly in line with expectations active customers declined marginally on a sequential basis to approximately $20 million modestly exceeding our internal expectations.
Dave: Importantly to note.
Dave: We believe that we are seeing early but positive signals with respect to macro pet household formation and we believe that our enhanced CRM initiatives are beginning to bear fruit net.
David W. Reeder: And we believe that our enhanced CRM initiatives are beginning to bear fruit. Net sales per active customer in NESPAC reached $562, reflecting an increase of 9.6%. NESPAC growth meaningfully outpaced our overall top line growth, driven by our ability to increase wallet share as customer cohorts mature and continued strong engagement, particularly in programs like auto ship and expansion into new categories, namely within Chewy Health. Our scaled auto ship business continues to be a pillar of strength and differentiation for Chewy, driving predictable subscription-like revenue.
Dave: Net sales per active customer at NASDAQ reached $562, reflecting an increase of nine 6%.
Dave: That growth meaningfully outpaced our overall top line growth driven by our ability to increase wallet share as customer cohorts mature and continued strong engagement, particularly in programs like auto ship and expansion into new categories, namely, We then should be held.
Dave: Our scaled auto ship business continues to be a pillar of strength and differentiation for chewy driving predictable subscription like revenue.
David W. Reeder: Autoship customer sales came in at $2.2 billion in Q1, representing 77.6% of our total net sales in the quarter, up 240 basis points on a year-over-year basis. We reported a Q1 gross margin of 29.7%, representing a 130 basis point increase year-over-year and a 150 basis point increase sequentially. As Sumit previewed, Q1 gross margin benefited from certain one-time items, such as the timing of vendor reimbursements, lower fuel costs, and lower-than-expected promotional activity. Adjusted for one-time items, Q1 gross margin would have landed at approximately 29%, reflecting approximately 60 and 80 basis points of year-over-year and sequential improvement, respectively.
Dave: Auto ship customer sales came in at $2 2 billion in Q1, representing 77, 6% of our total net sales in the quarter up 240 basis points on a year over year basis.
Dave: We reported Q1 gross margin of 29, 7%, representing a 130 basis point increase year over year.
Dave: At 150 basis point increase sequentially.
Dave: Cement previewed.
Dave: Q1 gross margin benefited from certain one time items, such as the timing of vendor reimbursements, lower fuel costs and lower than expected promotion ality.
Dave: Adjusted for one time items Q1 gross margin would have landed at approximately 29%, reflecting approximately 60 and 80 basis points of year over year and sequential improvement respectively.
David W. Reeder: On a year over year basis, our sponsored ads program was the largest driver of our gross margin improvement, followed by product mix as Chewy Health and premium consumables net sales penetration expanded. These benefits were partially offset by a normalized discounting environment.
Dave: On a year over year basis, our sponsored ads program was the largest driver of our gross margin improvement followed by product mix as shall we health and premium consumables net sales penetration expanded.
Dave: These benefits were partially offset by a normalized discounting environment.
David W. Reeder: It is worth a reminder that in Q1 2023, the promotional environment was operating below historical levels. Moving to OpEx, please note that my discussion of SG&A excludes share-based compensation, expense, and related taxes. OPEX in the quarter continued to scale nicely with revenue. First quarter SG&A totaled $533.1 million, or 18.5% of net sales, representing 50 basis points of improvement on a year-over-year basis and 150 basis points of improvement sequentially. This leverage was driven by our continued disciplined management of payroll, with headcount across both our corporate and fulfillment network team members moderating favorably throughout the quarter and ending Q1 lower than planned. Additionally, we drove greater efficiency from our personnel in areas such as customer service and delivered improved cost management of G&A expenditures. First quarter advertising and marketing expense was $186.8 million, or 6.5% of net sales.
Dave: It is worth a reminder, that in Q1 2023, the promotional environment was operating below historical levels.
Dave: Moving to Opex. Please note that my discussion of SG&A, excluding share based compensation expense and related taxes.
Dave: Opex in the quarter continued to scale nicely with revenue first quarter SG&A totaled $533 1 million or 18, 5% of net sales representing 50 basis points of improvement on a year over year basis, and 150 basis points of improvement sequentially.
Dave: This leverage was driven by our continued disciplined management of payroll with head count across both our corporate and fulfillment network team members moderating favorably throughout the quarter and ending Q1 lower than planned.
Dave: Additionally, we drove greater efficiency from our personnel in areas such as customer service and delivered improved cost management of G&A expenditures.
Dave: First quarter advertising and marketing expense was $186 8 million or six 5% of net sales I would note that we expect our advertising and marketing expense to run closer to the high end of our stated 6% to 7% target throughout the balance of the year due to the timing of certain marketing campaigns.
David W. Reeder: I would note that we expect our advertising and marketing expense to run closer to the high end of our stated 6-7% target throughout the balance of the year due to the timing of certain marketing campaigns. First Quarter Adjusted Net Income was $137.1 million, representing a 56% increase year-over-year and a 71% increase sequentially. Finally, we reported an adjusted EBITDA margin of 5.7% for the quarter, or 170 basis points of margin expansion relative to Q1 2023 and 260 basis points of margin expansion sequentially.
First quarter adjusted net income was $137 1 million, representing a 56% increase year over year, and a 71% increase sequentially.
Dave: Finally, we reported an adjusted EBITDA margin of five 7% for the quarter or 170 basis points of margin expansion relative to Q1, 2023, and 260 basis points of margin expansion sequentially.
David W. Reeder: Adjusted EBITDA margin for the quarter exceeded our expectations due to better than expected gross margin and lower OPEX in the quarter, as I described earlier. Overall, we are incredibly encouraged by the operating leverage we are unlocking in the business, which demonstrates the scalability of our cost structure. In turn, this leverage enables us to invest in accretive growth and profit initiatives. In the first quarter, we reported free cash flow of $52.6 million, reflecting $81.9 million of net cash provided by operating activities and $29.3 million of capital expenditures.
Dave: Adjusted EBITDA margin for the quarter exceeded our expectations due to better than expected gross margin and lower opex in the quarter as I described earlier.
Dave: Overall, we are incredibly encouraged by the operating leverage we are unlocking in the business, which demonstrates the scalability of our cost structure and turned this leverage enables us to invest in accretive growth and profit initiatives.
Dave: In the first quarter, we reported free cash flow of $52 6 million, reflecting $81 9 million of net cash provided by operating activities and $29 3 million of capital expenditures.
David W. Reeder: We ended the quarter with more than $1.1 billion in cash, cash equivalents, and marketable securities, and we remain debt-free with a strong liquidity position of $1.9 billion. In light of our expanding free cash flow generation, I would like to share an update with you regarding our capital allocation strategy. Reinvesting back into the business towards high ROI opportunities remains our first priority. Our strong balance sheet further provides us with sufficient firepower to pursue value-accretive acquisitions and strategic investments if and when such opportunities arise.
We ended the quarter with more than $1 $1 billion in cash cash equivalents and marketable securities and we remain debt free with a strong liquidity position of $1 9 billion.
Dave: In light of our expanding free cash flow generation I would like to share an update with you regarding our capital allocation strategy.
Dave: Reinvesting back into the business towards high ROI opportunities remains our first priority.
Dave: Our strong balance sheet further provides us with sufficient firepower to pursue value accretive acquisitions and strategic investments, if and when such opportunities arise.
David W. Reeder: Having taken all of this into account, we believe our growing cash position affords us the ability to further enhance shareholder returns by way of implementing a share repurchase program. Today, I am excited to share that our Board of Directors has authorized Chewy's first-ever share repurchase program of up to $500 million.
Dave: Having taken all of this into account, we believe our growing cash position affords us the ability to further enhance shareholder returns by way of implementing a share repurchase program.
Dave: Today I am excited to share that our board of directors has authorized <unk> first ever share repurchase program of up to $500 million.
David W. Reeder: In light of our strong balance sheet, track record of margin expansion, and long-term strategy, which we expect will continue to deliver incremental profitability, we believe share repurchases offer a compelling and accretive use of capital while also enabling us to mitigate the dilutive impact related to share-based compensation. We intend to commence repurchasing shares this quarter and look forward to providing you with updates as we progress through the program. Now I'd like to turn to our second quarter and updated full year 2024 guidance. While we are seeing certain green shoots and demand trends, we believe it is premature to revise our view on the pet industry's overall outlook for the balance of the year.
Dave: In light of our strong balance sheet track record of margin expansion and long term strategy, which we expect will continue to deliver incremental profitability. We believe share repurchases offer a compelling and accretive use of capital while also enabling us to mitigate the dilutive impact related to share based compensation.
Dave: We intend to commence repurchasing shares this quarter and look forward to providing you with updates as we progress through the program.
David W. Reeder: We are, however, incredibly pleased with our team's execution, irrespective of the environment, and our ability to exceed expectations with respect to profitability. With that, we anticipate second quarter net sales of between $2.84 and $2.86 billion, or approximately 2% to 3% year-over-year growth. And we are maintaining our full year 2024 net sales outlook of between 11.6 and 11.8 billion, or approximately four to 6% year over year growth. As noted last quarter. This range includes the impact of a 53rd week in the 2024 fiscal year, and the 53rd week will be fully reflected in the fourth quarter of 2024.
Speaker Change: Now I'd like to turn to our second quarter and updated full year 2024 guidance.
Speaker Change: While we are seeing certain green shoots in demand trends. We believe it is premature to revise our view on the pet industries overall outlook for the balance of the year.
Speaker Change: We are however, incredibly pleased with our team's execution irrespective of the environment and our ability to exceed expectations with respect to profitability.
Speaker Change: With that we anticipate second quarter net sales of between $2 84, and $2 86 billion.
Speaker Change: We're approximately 2% to 3% year over year growth and.
Speaker Change: And we are maintaining our full year 2024, net sales outlook of between 11, six and $11 8 billion or approximately 4% to 6% year over year growth.
Speaker Change: As noted last quarter.
Speaker Change: This range includes the impact of a 53 week 2020 for fiscal year and the 50 <unk> week will be fully reflected in the fourth quarter of 2024.
Moving to profitability guidance, we are raising our full year 2024, adjusted EBITDA margin guidance to a range of $4 one to four 3%.
David W. Reeder: Moving to profitability guidance, we are raising our full-year 2024 adjusted EBITDA margin guidance to a range of 4.1 to 4.3%. This reflects 20% plus adjusted EBITDA flow-through at the midpoint of our guidance ranges, notably above the average of 15% flow-through that we expected to deliver on a per annum basis. Similar to the 2023 quarterly profile, we expect first quarter results to represent the high point of 2024 adjusted EBITDA margin, and we expect margin to decline sequentially throughout the year, averaging to the aforementioned guidance rank. We continue to expect full-year capital expenditures in the range of 1.5 to 2% of net sales and free cash flow conversion to remain above 80%.
Speaker Change: This reflects 20% plus adjusted EBITDA flow through at the midpoint of our guidance ranges, notably above the average of 15% flow through that we expected to deliver on a per annum basis.
Speaker Change: Similar to the 2023 quarterly profile, we expect first quarter results to represent the high point of 2024, adjusted EBITDA margin and we expect margin to decline sequentially throughout the year, averaging to the aforementioned guidance range.
Speaker Change: We continue to expect full year capital expenditures in the range of one 5% to 2% of net sales and free cash flow conversion to remain above 80%.
David W. Reeder: Before we open the call to questions, I'd like to reiterate that we are incredibly proud of our strong start to the year. We continue to believe that Chewy is exceptionally well-equipped to execute against our strategic roadmap, deliver compelling results, and drive shareholder value. I'd like to thank all of our dedicated Chewy team members for their collective efforts and execution in the quarter, as we advance our enduring mission of being the most trusted and convenient destination for pet parents and partners everywhere. With that, I will turn the call over to the operator for questions.
Speaker Change: Before we open the call to questions I'd like to reiterate that we are incredibly proud of our strong start to the year. We continue to believe that <unk> is exceptionally well equipped to execute against our strategic roadmap.
Speaker Change: Our compelling results and drive shareholder value.
Speaker Change: I'd like to thank all of our dedicated <unk> team members for their collective efforts and execution in the quarter as we advance our enduring mission of being the most trusted and convenient destination for pet parents and partners everywhere.
Speaker Change: With that I will turn the call over to the operator for questions.
Operator: Thank you. If you would like to register a question, please press star followed by one on your telephone keypad, ensuring that your line is unmuted locally. If you'd like to withdraw your question at any time, you can do so by pressing star followed by two. In the interest of time, we ask that you limit yourself to one question and one follow-up, please. Our first question comes from the line of Trevor Young of Barclays. Your line is now open, please go ahead.
Speaker Change: Thank you if you'd like to register a question. Please press star followed by one on your telephone keypad, ensuring your line is on mute.
Speaker Change: If you'd like to withdraw your question with any time, you can do to take my questions Thoughtfulness and the interest of time, we ask that you limit yourself to one question and one final piece.
Speaker Change: Last question comes from the line trying to young Barclays. Your line is now open please.
Speaker Change: Please go ahead.
Speaker Change: Great. Thanks first one on the net adds improving a bit Q on Q versus the prior trends and I. Appreciate some of the commentary on the improving macro should we still contemplate kind of a softer two one H and a back half inflection and does that really have kind of a two H uptick or is it more so a <unk> store.
Trevor Vincent Young: Great, thanks. First one on the net ads, improving a bit in queue versus the prior trends, and appreciate some of the commentary on the improving macro. Should we still contemplate kind of a softer to 1H and a back half inflection? And is that really a kind of a 2H uptick? Or is it more so a 4Q story? That's my first question. Good morning.
Speaker Change: That's my first question.
Good morning, Trevor Yes, similar to the guidance are consistent with the guidance that we provided last quarter.
David W. Reeder: Morning Trevor, yes, similar to or consistent with the guidance that we provided last quarter. Year over year, we expect active customers to be pretty flat, slightly down in the first half with some recovery in the second half, but very consistent with what we said last quarter.
Trevor: Year over year, we expect that active customers to be pretty flat a slight.
Trevor: Slightly down in the first half with some recovery in the second half, but very consistent with what we said last quarter.
Speaker Change: Did you have a follow up.
Speaker Change: Yeah and on the the launch of the four event centers, how should we think about measuring progress there what sort of guideposts are you going to give us in the coming quarters to kind of track that ramp.
Sumit Singh: Yeah, and on the launch of the four event centers, how should we think about measuring progress there? What sort of guideposts are you going to give us in the coming quarters to kind of track that ramp? And how many quarters do you expect a typical center to get to EBITDA breakeven?
Speaker Change: And how many quarters do you expect a typical center to get to EBITDA breakeven.
Sumit Singh: Hey, Trevor, this is Sumit. I'll start, and Dave might add something here. So, as we've articulated in the past, there are a few dimensions that we are viewing success from. You know, the inputs that we will be highly focused on are customer satisfaction scores, both across sort of key customers to Chewy or customers to Chewy and for the veterinarian community. Number two is our ability to recruit staff and retain veterinarians. So it's demand generation, vet retention, and recruitment.
Speaker Change: Pedro with their system, it I'll start and Dave My Dad here so.
Speaker Change: We've articulated in the pause there are a few dimensions that'd be our viewing success for all.
Speaker Change: The inputs that we will be highly focused on our customer satisfaction scores both across sort of key customers to chewy or customers are two years into it and feel good veterinarian community number two is our ability to recruit our stuff and retained veterinarians.
Speaker Change: So it's demand generation better retention and recruitment and the third one is operational execution throughout these clinics and so far what we're seeing we're actually happy with our clinics are fully staffed we have a good building pipeline for future of clinics that we're contemplating at this point and so you know as we roll these through the initial.
Sumit Singh: And the third one is operational execution throughout these clinics. And so far, what we're seeing, we're actually happy with our clinics being fully staffed. We have a good pipeline for future clinics that we're contemplating at this point. And so, you know, as we roll these through the initial returns, as we've sort of mentioned in the earning script around net new customer acquisition traffic or demand generation trends or recruitment trends are all trending positive.
Sumit Singh: In terms of returns, you know, this is not a multi-year observation period; this is likely a few quarters observation period. And we'll be back with more data. Yeah, I'd reiterate what Sumit said and I would just add
Speaker Change: Returns as we sort of mentioned in the earnings script around.
Speaker Change: Net new customer acquisition and traffic or demand generation trends or recruitment trends are all trending positive.
Speaker Change: In terms of returns.
Speaker Change: This is not a multi your.
Speaker Change: Observation period. This is likely a few quarter observation period.
Speaker Change: I'll be back with more.
David W. Reeder: Yeah, I'd reiterate what Sumit said, and I would just add that, you know, we're currently running ahead of our internal models, and we do still expect, you know, towards the end of this year to release some type of white paper after we get a little bit more learning through the testing process here. But, But I would say cautiously optimistic about the initial clinics that we've launched. Great, thank you both.
Speaker Change: Yes, I'd reiterate what what Sumit said and I would just add that.
Speaker Change: We're currently running ahead of our internal models and we do still expect towards the end of this year to release some type of white paper after we get a little bit more learning through the <unk>.
Speaker Change: Is it testing process here, but but I would say cautiously optimistic on the initial clinics that we've launched.
Great. Thank you both.
Speaker Change: Thank you.
Rupesh Dhinoj Parikh: The next question comes from Rupesh Parikh of Oppenheimer. Your line is now open, please go ahead. Good morning, and thanks for taking the question. So first, just on the share buyback program. I'm just curious.
The next question comes from my Perch, Alright.
Speaker Change: Your line is now open. Please go ahead.
Speaker Change: Good morning, and thanks for taking my question. So first is just on the share buyback program. I was just curious how you approach. Your buybacks is it more of an opportunistic strategy or more of a consistent cadence to offset dilution.
Speaker Change: Sure. Good morning refresh from a share repurchase perspective, I think I'd start with.
David W. Reeder: Sure. Good morning, Rupesh. From a share repurchase perspective, I think I'd start with, you know, we're going to be in the market this quarter, here in the second quarter. We're very, very pleased with our cash generation. Last year, we delivered well over 80% of EBITDA to cash. We've guided again for this year to do the same, and I'm very happy with our current balance sheet position of cash, $1.1 billion, and our future cash generation.
Speaker Change: We're going to be in the market this quarter here in here in the second quarter.
Speaker Change: We're very very pleased with our cash generation.
Speaker Change: Last year, we delivered well over 80% conversion of EBITDA to cash we've guided again for this year to do the same so very happy with our with our current balance sheet position of cash $1 1 billion and our future cash generation with respect to how we will be in the market and we think this is an attractive valuation.
David W. Reeder: With respect to how we'll be in the market, we think this is an attractive valuation at this stage, so we have plenty of capital. We have the approval from the board. We have the willingness to enter the market, and I think you'll see us enter the market on the share repurchase side, both opportunistically as well as somewhat consistently and methodically, so we'll do both. Did you have a follow-up question, Rupesh? Yeah, yeah, just one follow-up question. So as we look at the hard goods category,
Speaker Change: At this stage.
Speaker Change: So we have plenty of capital we have the authorization from the board we have the the willingness to enter the market and I think you'll see us enter the market on the share repurchase side.
Speaker Change: Both opportunistically as well as somewhat consistently and methodically so we'll do both.
Speaker Change: Did you have a follow up refresh.
Speaker Change: Yeah, Yeah, just one follow up question. So as we look at the hard goods categories declined this quarter. If you look at the category or are you guys seeing any green shoots in hard goods at this point or is it or do you.
Speaker Change: It's about challenges to continue in the near term.
Sumit Singh: Hey, Rupesh, this is Sumit. So, yes, your observation is correct about us being able to arrest the sort of declining trends that we've been seeing. So we saw a couple of things. From an industry point of view, you know, this is sort of the encouragement that we pushed through in the script as well. You know, search volume for hard goods was up, intent was up, and after a long period, we saw, you know, consumers returning with specific categories that they're declaring intent for. This is likely tied to the adoption and relinquishment trend that was mentioned in the script, so these inputs kind of move together.
Speaker Change: Pedro basis Smith.
Speaker Change: Yes, your observation is correct about.
Speaker Change: US being able to arrest sort of declining trends that we've been seeing so we saw a couple of things from an industry point of view this as sort of the encouragement that we pushed through in the script as well you know search volume for hard goods was up intent was up and after a long period, we saw consumers.
Speaker Change: You know return with specific categories that they are declaring intent for this is likely tied to the adoption on relinquishment trend that was mentioned in the script. So these inputs kind of move together.
Sumit Singh: On our side, you know, we saw traffic, you know, our traffic has continued to increase in the low to mid-single digits every period this year, and year-to-date, we're up about mid-single digits as well. You know, secondly, we saw the rate of hard goods decline, you know, arresting inside the company. We've actually cut it by to the tune of the high teens, you know, and to the low 30% start from where we started the year.
Speaker Change: Our side you know we saw traffic.
Speaker Change: Our traffic has continued to increase in the low to mid single digit every period this year.
Speaker Change: And year to date, we're up about mid single digits as well.
Speaker Change: B, we saw the rate of hard goods declined.
Speaker Change: <unk> inside the company, we've actually cut it by to the tune of high teens.
Speaker Change: Due to the low 30% start from where we started the year.
Douglas Till Anmuth: So it's encouraging, and, you know, we're not sort of resting. We know the environment will take a little bit of time to normalize here, so everything that is controllable on our side, we've put, you know, our best talent on this type of stuff. We are looking at, you know, turning all the knobs and levers while being economically sensible about how we both generate demand as well as maximize demand conversion for our categories.
Speaker Change: So it's encouraging.
Speaker Change: We're not sort of resting we know the environment will take a little bit of time to normalize here. So everything that is controllable on our side you know we've put.
Speaker Change: You know all of our best talent on this type of stuff. We are looking at you know turning all the knobs and levers while being economically sensible about how we both generated demand as well as maximize demand conversion for our categories. That's a general comment for the way that we're going to play through 2024, and especially throughput hard goods.
Douglas Till Anmuth: That's a general comment for the way that we're going to play through 2024 and especially true for our, Great, thank you for all the color. Sure. The next question comes from Doug Anmuth of J.P. Morgan. Your line is now open. Please go ahead.
Speaker Change: Great. Thank you for all the color.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: Next question comes from Doug Anmuth.
Speaker Change: J P. Morgan Your line is now open. Please go ahead.
Speaker Change: Yeah.
Douglas Till Anmuth: Thanks so much for taking the questions.
Douglas Till Anmuth: Thanks, so much for taking the questions.
Speaker Change: So sponsored ads being the biggest driver of gross margin upside that you can just talk a little bit about the early feedback that you're hearing from marketers and you have any thoughts on quantifying the impact to your early on and then second just on chewy plus anything you can add on.
Speaker Change: How the rollout might proceed going forward and how that kind of interacts with our with auto ship.
Speaker Change: Sure I'll make the gross margin question a bit longer Doug. So just kind of a fair warning, but let's start with the question that you asked so sponsored ads. We're seeing good response curve last quarter, I mentioned us, bringing forward, even more products to life such as branded.
Sumit Singh: Sure. I'll make the gross margin question a bit longer, Doug, so just kind of a fair warning. But let's start with the question that you asked. So sponsored ads, you know, we're seeing a good response rate. Last quarter, I mentioned us bringing forward even more products to life, such as branded search ads on the platform. We've done that now.
Speaker Change: Branded.
Speaker Change: Such ads on the platform and we've done that now.
Sumit Singh: We've improved and increased the inventory as well as improved on the efficacy of return that we're seeing internally. And the demand that flowed through in the first quarter was stronger than our forecast. And so, you know, all of that is positive. We're on track to exit the year at the low end of the 1 percent to 3 percent range that we've guided for, which is consistent with what we communicated a few months ago.
Speaker Change: <unk> that increase the inventory as well as improved on the efficacy of returns that we're seeing internally and the demand.
Flow through in fourth quarter were stronger than our forecast and so you know all of that is positive. We're on track to exit the year with the low end of the 1% went to 3% range that we've guided for which is consistent with what we communicated a few months ago. So all is good on this slide.
Sumit Singh: So all's good on this side. In terms of just if you back out and sort of look at the forest from the trees, so to say, you know, improvement has been a journey over the last few years.
Speaker Change: In terms of just if you back out and sort of look at the forest from the trees here. So to say gross margin improvement has been a journey over the last few years right and we've consistently talked about the building blocks of gross margin starting from strong netback development premium rising the business.
Sumit Singh: And we've consistently talked about the building blocks of gross margins, starting from, you know, strong NASPAC development, you know, premiumizing the business, achieving stability in the economies of scale, improving freight and logistics. All of that, you know, the work that we've been working through sort of the last three, four years is starting to come together. And then there are these newer green shoots, such as sponsored ads, which are now starting to compound the yield that you're seeing, you know, pass through.
Speaker Change: She brings stability in the economies of scale, improving freight and logistics all of that the work that we've been working through sort of the last three or four years is starting to culminate and then there are these newer green shoots such as sponsored ads, which are now starting to compound the yields that youre seeing a pass through.
Sumit Singh: So overall, we remain bullish on the gross margin story. We haven't yet started talking about our private brands business credibly, which is something that we're excited about. You know, our other components of our health businesses are native or nascent. They're both native, and they're nascent.
Speaker Change: So overall, we remain bullish on the gross margin story, if you haven't yet started talking about our private brands business credit body, which is something that we're excited about.
Speaker Change: Our other components of our health business. These are our native or nascent dwell, they're both native and they're nascent and and you know we're excited about the potential that they might contribute in the future. So there's a there's a lot of irons in the fire and we're excited about the gross margin during the year.
Sumit Singh: And, you know, we're excited about the potential that they might contribute in the future. So there's a lot of fire in the fire, and we're excited about the gross margin journey here. Number two, the Chewy rollout and how it interacts. Is that a partnership? Okay.
Speaker Change: Number two <unk> rollout and how it interacts.
Speaker Change: Is that ownership.
Sumit Singh: So that's a great question and a very insightful one. We believe, first of all, we're being very thoughtful. We've invited in beta a cohort of customers, which is well represented across their buying kind of behavior and their pet type. And we've also sort of diversified the thinking across ownership and non-ownership customers. We see these two are really nested and complementary to each other. I mean, think of, why wouldn't you be attracted to a message that says, hey, here's a paid membership program that gives you all of these perks? And oh, by the way, if you want even greater savings and convenience, subscribe to ownership. The whole thing just compounds on itself. And vice versa.
Speaker Change: Okay.
Speaker Change: That's a great question and a very insightful one we believe first of all we're being very thoughtful we've invited in beta a cohort of customers, which is better represented across.
Speaker Change: Their buying behavior and their peptide.
Speaker Change: And we've also sort of diversified the thinking around gross auto ship and non ownership customers. We see these two really nested complementary to each other I mean think of or I mean, why wouldn't you be attracted to a message that says hey, Here's a paid membership program that gives you all of these parks and Oh by the way if you want even greater savings and convenience.
Speaker Change: Scribed water ship and the whole thing just compounds on itself and why is the worst of the auto ship can be an attractive funnel of country, which it currently is and then you essentially roads progress you know customers would say looked like the price of the program is less than what you pay for a lot too and you know for all of this you've got you've got all these great benefits. So we believe you know the behaviors that we want to sort of incent and observe.
Sumit Singh: Ownership can be an attractive funnel of entry, which it currently is. And then you essentially approach customers by saying, look, the price of the program is less than what you pay for a latte. And, you know, for all of this, you get all these great benefits. So we believe, you know, the behaviors that we want to sort of incent and observe are consistent in terms of repeat purchase rate, nest pack, basket building engagement, so forth, and so on. Lots to learn in front of us, but so far, we're thinking of these as complementary programs.
Speaker Change: Our consistent in terms of repeat purchases and that's back basket building engagement and so forth and so on.
Speaker Change: Lots to learn in front of us, but so far where we're thinking of these as complementary programs.
Speaker Change: Thank you Sumit.
Sure.
Speaker Change: The next question comes from the line of Eric Sheridan Goldman Sachs. Your line is now open. Please go ahead.
Eric James Sheridan: The next question comes from the line of Eric Sheridan of Goldman Sachs. Your line is now open, please go ahead.
Eric James Sheridan: Thank you so much and maybe if I could just ask a two parter.
Sumit Singh: Thank you so much. Maybe if I could just ask a two-part question: when you see the environment you're characterizing with respect to customer dynamics, can you give us a little bit better sense of what your priorities are on the marketing side when you think about the skew of either acquisition of new net customers versus retention or incentivizing behavior among existing customers that might maximize ROI against those marketing investments? And then the second part would be, you talked about marketing being towards the upper band of what you've historically talked about in terms of a range.
Eric James Sheridan: Do you see the environment Youre characterizing with respect to customer dynamics could you give us a little bit better sense of what your priorities are on the marketing side. When you think about the skew of either acquisition of new net customers versus retention or incentivizing.
Eric James Sheridan: Behavior, among existing customers that might maximize ROI against those marketing investments and then the second part would be you talked about marketing being towards the upper band of what you've historically talked about a range is.
Sumit Singh: Is that brand spend? Is that lined up against plus follow-up on Doug's question? Or how would you characterize what's pushing the upper band of that spend as we go through this year just so we know what that's sort of aimed at? Thank you so much.
Speaker Change: Is that brand spend does that lined up against plus following up on doug's question or how would you characterize what's pushing the upper band of that spend as we go through this year. Just so we know what that sort of aimed at thank you so much.
Speaker Change: Sure the system, if I I'll start and Dave might that that's putting in so a good question on the on the current dynamic and marketing priorities think of it this way.
Sumit Singh: Sure, Eric, this is Sumit. I'll start, and Dave might add as pertinent. So, good question on the current dynamic and marketing priorities. Think of it this way. We're focused on, first of all, these are two independent efforts around new customer acquisition as well as the CRM reactivation or retention of cohorts. They're led by two teams.
Speaker Change: We're focused on first of all these are two independent efforts around new customer acquisition as well as.
Speaker Change: The the the CRM reactivation of our retention of school. They are led by two teams and the the redundancies or avoided when we make sure that we're not passing the same customer back and forth. Each other right. So we're being careful about that.
Sumit Singh: And redundancies are avoided when we make sure that we're not passing the same customer back and forth between each other. So we're being careful about that. So now, when you look at, you know, the marketing efforts, you could essentially think of this as a full funnel marketing effort. So we are building awareness up in the upper funnel, and our awareness and our familiarity levels have increased, you know, several hundred basis points, particularly as it comes to Gen Z and the millennial segment, which is something that we were internally focused on and something that we're happy about.
Speaker Change: So now when you look at the marketing efforts you could essentially think of this as a full front end market. Our marketing effort. So we are building awareness up in the in the upper funnel and our awareness at our familiarity levels have increased.
Speaker Change: Several hundred basis points, particularly as it comes through density and the millennial segment, which is something that we were internally focused on and something that we're happy about.
Sumit Singh: So, you know, as a result of that, we want to capture incremental traffic that comes to the website, so we are spending money to capture that incremental traffic. And once you come to the website, or when customers declare, you know, kind of intent at the lower funnel, then they're primed for Conversion, which, you know, the efforts that we're putting across our site allow you to sort of say, what type of conversion do we want?
Speaker Change: As a result of that we want to capture incremental traffic that comes through the website. So we are spending to capture that incremental traffic and once you come to the website or when customers declared kind.
Speaker Change: Our intent at the lower funnel than their prime for conversion, which you know the efforts that we're putting across our other sites.
Speaker Change: Site, then allows you to sort of say what type of conversion do we want isn't a net new conversion or is it an existing customer that wants to convert to a highly lucrative or a high LTV type of category. So it's the full formula folks that were essentially spending money across.
Sumit Singh: Is it a net new conversion, or is it an existing customer that wants to convert to a highly lucrative or high LTV type of category? So it's the full funnel effort that we're essentially spending money on. You recall a couple quarters ago, perhaps two quarters ago, I mentioned to you that we now have the ability to segment and target, you know, our cohorts because we rebuilt the entire content platform internally inside the company.
Speaker Change: You recall, a couple of quarters ago, perhaps two quarters ago I've mentioned to you that we now have the ability to segment and target.
Speaker Change: The cohorts because we rebuilt the entire platform internally inside the company and so that allows us more precise targeting once we identify the customer even with the loss of kind of targeting because we have fingerprinting idea that we can sort of associate the customer back to an account.
Sumit Singh: And so that allows us, you know, more precise targeting once we identify a customer, even with the loss of some kind of targeting because we have fingerprinting ID that we can sort of associate the customer back to an account, you know, or back to their browsing behavior per se. So this type of work is exciting to us for the future, and as the market kind of recuperates or shows signs of recovery, you know, we hope and we believe that this will compound and generate a greater return.
Speaker Change: Or the fact that browse behavior per se. So this type of work is exciting to us in the future and as the market kind of recuperate. So shows signs of recovery, we hope and we believe that this will compound.
Speaker Change: And generate greater returns.
Sumit Singh: In terms of marketing spend, you know, look, I mean, it's a tight range, six to seven percent. And so the variance is not that much. There's a lot of fear to play through. And we want to retain the option value, you know, of A, making sure that all of the nascent efforts that we've got going on, if we see the need to invest, we can essentially lean in and do that. Or if we see the market change in one direction or the other, then we can... Yeah, and perhaps just for clarification of the guidance, you know.
Speaker Change: In terms of the marketing spend.
Speaker Change: Look I mean, it's a tight range, 6% to 7% and so the variance is not that much there's a lot of year to play through and we want to retain the option value.
Speaker Change: You know of making sure that all of the nascent efforts that we've got going on if we see the need to invest we can essentially lean in and do that or if we see the market change in one direction or the other then we can respond to that.
David W. Reeder: Yeah, and perhaps just for clarification of the guidance, you know, in 2023, advertising and marketing was about 6.7% of sales. We've historically guided from 6 to 7% of net sales. The first quarter, just due to the timing of some marketing campaigns, was a little bit lower. It was about 6.5%. And so for the remainder of the year, what we articulated in our prepared commentary was that we would be towards the higher end of the 6 to 7% range for the rest of the year, landing ultimately probably in a spot that's somewhat similar to 2020. Great, thank you. The next question comes from the line of,
Speaker Change: And perhaps just for clarification of the guidance in 2023 advertising and marketing was about six 7% of sales. We've historically guided from 6% to 7% of net sales first quarter, just due to some timing of some marketing campaigns, there's a little bit lower it was about six 5% and so for the remainder of the.
Speaker Change: A year, what we articulated in our prepared commentary.
Speaker Change: That we would be towards the higher end of the 6% to 7% range for the rest of the year landing ultimately probably in us in a spot that is somewhat similar to 2023.
Speaker Change: Great. Thank you.
Speaker Change: The next question comes from the line.
Operator: The next question comes from the line of Nathan Feather of Morgan Stanley. Your line is now open, please go ahead. Hey, everyone. Thanks for the question. So in one cue still came in a bit above your guidance. Where did you go?
That's all of Morgan Stanley. Your line is now open. Please go ahead.
Speaker Change: Hi, everyone and thanks for the question.
Speaker Change: And when do you still came in above your guidance I guess, where do you see that outside strength anything you can share on how that evolved over the quarter given the green shoots you called out or along with your quarter to date.
Speaker Change: Sure Let me start and then Sumit if there's anything you want to you want to highlight three.
David W. Reeder: Sure, let me start and then, Sumit, if there's anything you want to highlight, feel free. First quarter, as you highlighted, we ended up, you know, from an EBITDA margin perspective at 5.7%, and a gross margin percentage of 29.7%. So, due to some one-time items, primarily in gross margin, if you excluded those items, we would have ended at about 29%, and that's what we articulate When you think about the underlying drivers that are driving the gross margin increase from Q1 of last year to, let's call it, a normalized Q1 of this year, it's really our improvement in product mix, which we expect to continue as we work through time here. We are mixing up our business, being led by sponsored ads, also being led by healthcare, and within healthcare pharmacy.
Speaker Change: The first quarter and as you as you highlighted we ended up.
Speaker Change: From an EBITDA margin perspective at five 7%.
Speaker Change: Gross margin percentage of 29, 7% so due to some one time items and primarily in gross margin and if you excluded those items. We would have ended at about 29% and that's what we articulated in the prepared commentary.
Speaker Change: When you think about the underlying drivers.
Speaker Change: That's driving the gross margin increase from Q1 of last year to really let's call. It a normalized Q1 of this year, it's really our improvement in product mix, which we expect to continue as we work through time here, we are mixing up our business being led by sponsored ads.
Speaker Change: Also being led by health care and within health care pharmacy.
David W. Reeder: So we do continue to improve product margin and product mix, which is averaging up our business, which, of course, gives us that confidence that we presented at Capital Markets Day in December of last year to ultimately, over time, get to that 10% EBITDA margin marker that we placed out there. So improving product mix, scaling infrastructure, increasing margin, and profitability. Did you have a follow-up, Nathan? Yeah, just as we think about the top line guidance, what would exceed it there for one cue, and then anything you can share to kind of coordinate and teach you how those green shoots are kind of flowing into your progress. Sure.
Speaker Change: So we do continue to to.
Speaker Change: <unk> to accrete product margin and product mix, which is averaging up our business, which of course gives us that confidence that that we presented at capital markets day in December of last year to ultimately over time get to that 10% EBITDA margin marker that we placed out there.
Speaker Change: And so on a go forward basis.
Speaker Change: Really I would summarize by saying continued improvement in product mix continued scaling of the business and the scaling of the business is really associated one with our fixed cost infrastructure, which is at scale.
Speaker Change: More of a kind of run maintain mode at this stage, although with ongoing productivity improvements and our digital infrastructure, which is also at scale, albeit with continued improvements and rollouts and capabilities and feature so improving product mix scaling infrastructure, increasing margin and and.
And profitability did you have a follow up Nathan.
Nathan: Yeah, just as we think about the top line guidance.
Speaker Change: What would have exceeded their for one Q and then anything you can share kind of quarter. They include heel how would those green shoots are kind of swelling into your progress.
Speaker Change: Sure so from a from a top line perspective, I would say broadly in line with our guidance obviously at the high end of the range or slightly above the high end of the range.
David W. Reeder: So from a top line perspective, I would say broadly in line with our guidance, although obviously at the high end of the range or slightly above the high end of the range. As we look across the outlook for this year, I would say that our sentiment is pretty much very much in line with what we communicated last quarter for the full year, which is why we held our guidance for the year of $11.6 to $11.8 billion.
Speaker Change: As we look across the the outlook for this year I would say that our sentiment is pretty much very much in line with what we communicated last quarter for the full year, which is why we held our guidance for the year of 11, 6% to $11 8 billion.
Speaker Change: And as we take a step back and we say.
David W. Reeder: And as we take a step back and we say, Well, what did we see that leads to the commentary that we think the industry is continuing to normalize, and maybe there's, you know, a precursor to green shoots that we're seeing in the market? Number one, for the first time since 2022, we had more adoptions versus relinquishments in our pet shelter data that we received from the many pet shelters around the US that we collect data from.
Speaker Change: Well what did we see that leads to the commentary that we think the industry's continued continuing to normalize and maybe there is.
Speaker Change: Precursor to green shoots that we're seeing in the market.
Speaker Change: Number one for the first time since 2022, we had more adoptions versus relinquishment.
Speaker Change: And our pet shelter data that we received from the many pet shelters around the U S that we collect data from so that was a positive signal and then also internally specific to chewy.
David W. Reeder: So that was a positive signal. And then also, internally, specific to Chewy, for the first time since 2022, we actually exceeded our own internal models and forecasts for active customers. And that was really driven by net new customers as well as by reactivations of prior customers. So those are the two metrics that we're kind of looking at that we're seeing, I would say, some signs of normalization in the industry. It's probably premature to determine that the industry is going to be fully normalized this year, but certainly, we're seeing what we think are signs of life.
Speaker Change: For the first time since since 2022 as well, we actually exceeded our own internal models and forecasts for active customers and that was really driven by net new customers as well as by reactivation.
Speaker Change: Prior customers. So those are the two metrics that we're kind of looking at that we're seeing I would say some some signs of normalization in the industry, it's probably premature to to determine that the industry is going to be fully normalized this year.
Speaker Change: But certainly we're seeing what we think are signs of green shoots.
Operator: The next question comes from the line of Steven Forbes of Guggenheim Partners. Your line is now open, please go ahead.
Speaker Change: Our next question comes from the line Steven.
Speaker Change: Good time partners. Your line. Please go ahead.
Steven: Good morning, David.
Steven Paul Forbes: Good morning, Sumit, and David. Sumit, I realize it's probably early, but you sound pretty optimistic about the vet care clinics. So I was curious if you could maybe speak to what you're seeing in regards to the customer journey for new versus existing Chewy.com account members, repeat trends, transfer rate right over to other product categories. I mean, what sort of underpinning the excitement and the optimism around maybe a more accelerated
Steven: Realizing it's probably early but you sound pretty optimistic about the back or clinics. So I was curious if you could maybe speak to what youre seeing in regards to the customer journey.
David W. Reeder: New versus existing QE dot com account members repeat trends transfer rate right over to other product categories, I mean, what sort of.
Speaker Change: <unk>, the excitement and the optimism around around maybe it works already rollout.
Sumit Singh: Hey, Steve. I'll try to satisfy your curiosity. I might not be able to get into it in too much detail, but let's take a look at it. So, you know, why I sound optimistic is because we believe the inputs are thoughtfully planned and designed, and the outputs are responding, you know, as expected or better than our plan. So what are these inputs?
Steve: Hey, Steve.
Speaker Change: I'll try to satisfy your curiosity might not be able to get into it in too much detail.
Speaker Change: Let's look at it.
Speaker Change: Do you know why I sound optimistic is.
Speaker Change: Because we believe the inputs are thoughtfully planned and designed and the outputs are responding.
Speaker Change: As expected or better than our plan. So what are these inputs.
Sumit Singh: You know, as you know, we've very thoughtfully designed the clinic, both the infrastructure as well as the experience that we're, you know, providing to the customer. It's modern, it's, you know, customer-forward, it's veterinarian-forward. And so, you know, it's just a... We expect to, you know, be able to, you know, cash in on that tailwind. And you're seeing that right response rates have been really good. Customer NPS is really strong, that NPS is really, Number two, you know, what plagues the industry is really vet recruiting.
Speaker Change: As you know, we very thoughtfully designed the clinic, both the sort of the infrastructure as well as the experience that we're.
Speaker Change: Providing to the customer it's modern it's a customer forward, it's veterinarian forward and so it's just a.
We expect to.
Speaker Change: Would be able to oh.
Speaker Change: Cashing on that tailwind.
Speaker Change: And youre seeing that rate response rates have been really good customer NPS is really strong is that that would be is really strong.
Sumit Singh: And in parallel, or very next to it, is vet retention. You know, vets are stressed; capacity is going to continue to outrun, or underrun, vet demand. And, and, and so from that standpoint, you know, getting a team that is motivated is very important, and we believe we have the right, you know, attractive value proposition to be able to attract. And then three, when we look at demand generation trends, when we look at, you know, the sell-through rate of the membership plans in the clinic, when we look at new customer versus existing customer mix, when we look at the repeat purchase rate of appointments So it's a bit of a long winded answer, but hopefully you understand sort of how we're evaluating the inputs and then what is expected.
Speaker Change: Number two what plagued the industry is really retro routing.
And in parallel or very next to it is about retention.
Speaker Change: That's our stressed our capacity is going to continue to outrun.
Speaker Change: Or under under that demand.
Speaker Change: And so from that standpoint, you know getting the team that is motivated as very important and we believe we have the right attractive value proposition to be able to attract.
Speaker Change: And then three when we look at demand generation trends when we look at the sell through rate of the membership plans in the clinic when we look at new customer versus existing customer mix. When we look at the the repeat purchase rate of appointments that have been signed up.
Speaker Change: Are all indicative of kind of metrics that suggest.
Our future AR.
Speaker Change: Larger buildings and more profitable business.
Speaker Change: It's a bit of a long winded answer, but hopefully you understand sort of the.
Speaker Change: Our evaluating the inputs and then what our expectations are.
Speaker Change: No that's great to hear and then maybe just a quick follow up for David.
David W. Reeder: That's great to hear. And maybe just a quick follow-up for David. I was just maybe if you could maybe expand on the expectation, I think your comments for margins to decline sequentially throughout the year. If I heard you correctly, I get to step up in advertising expenses that you guys have called out very specifically, but maybe just help us understand what would be the incremental pressure on margins, 3Q over 4Q, 4Q over 3Q.
Speaker Change: I was just maybe if you could maybe expand on the expectation I think your comments for margins to decline sequentially throughout the year, if I heard you correctly.
Speaker Change: The step up in advertising expenses that you guys have called out very specifically, but maybe just help us on what would be the incremental pressure on margins <unk> over <unk> <unk> over <unk>.
Speaker Change: Sure.
David W. Reeder: Sure, and for clarification, you're referring to EBITDA margin, or at least I was referring to EBITDA margin in the prepared commentary. So, first, let me kind of start at a high level.
Speaker Change: And for clarity are you, referring to EBITDA margin or at least I was referring to EBITDA margin in the prepared prepared commentary.
Speaker Change: So first let me kind of start at a high level.
David W. Reeder: You know, we're just incredibly excited about our ability to drive continued auto-ship penetration, as well as continuing to provide product differentiation into areas such as sponsored ads and healthcare. And if we continue to perform and execute as we did in the first quarter, then we're going to have a very good year, and we would expect to be aligned more towards the high end of our range versus the lower end of our range.
Speaker Change: We're just incredibly excited about our ability to drive continued auto ship penetration.
Speaker Change: As well as continuing to provide product mix shift into areas such as sponsored ads in health care.
Speaker Change: And if we continue to perform and execute as we did in the first quarter.
Speaker Change: Then we're going to have a very good year, and we would expect to be aligned more towards the high end of our range versus the lower end of our range.
David W. Reeder: And from a seasonality perspective, if you look at 2023, we did guide that the profile this year would look similar to that. So I think kind of a step down in EBITDA margin from kind of the first part of the year all the way through the fourth quarter of the year would be somewhat normal and customary in a normalized market. And so that's what we've kind of indicated.
Speaker Change: From a seasonality perspective, if you look at 2023, we did guide that the profile this year with like similar to that so I think kind of a step down in EBITDA margin from kind of the first part of the year all the way through the fourth quarter of the year would be somewhat normal and customary of a normalized market and so that is.
Speaker Change: What we've kind of indicated.
David W. Reeder: And then finally, you know, talking about the lower part of the range, the lower end of the range would really require something significant, such as a softening of either the macroeconomic environment or the pet industry or, you know, perhaps a more aggressive promotional environment, which are all things that we're not currently seeing. And so we feel good about what we delivered in the first quarter. We feel good about the long-term trends for us to continue to product mix up our business, both in sponsored ads into health care and pharmacy, and ultimately into vet clinics as well. And we think the year from a profile perspective looks pretty similar in 2024 to what it looked like in 2023. Thank you. The next question comes from the line of Michael Lasser of UBS.
And then finally, you know talking about the lower part of the range.
The lower or low end of the range.
Speaker Change: Would really require something significant softening in either macroeconomic environment or the or the pet industry or.
Perhaps a more aggressive promotional environment, which are all things that are that we're not currently seen in so we feel good about what we delivered in first quarter. We feel good about the long term trends for us to continue to product mix up our business both in sponsored ads into health care and pharmacy ultimately into that.
Speaker Change: Clinics as well.
Speaker Change: And we think the year from a profile perspective looks pretty similar in 2024 to what it looked like in 2023.
Speaker Change: Thank you.
Speaker Change: Okay.
Operator: The next question comes from the line of Michael Lasser of UBS. Your line is now open; please go ahead.
Speaker Change: Our next question comes from the line of Michael Lasser.
Speaker Change: Your line is Allison. Please go ahead.
Speaker Change: Thank you for taking the question. This is such an Burma on behalf of Michael Lasser.
Speaker Change: Question is when do you expect your year over year and customer counts turned positive and longer term what would drive higher e-commerce penetration in the category given the growth that is seen in the last few years.
Speaker Change: Maybe maybe I'll start on a year over year customer counts and Instinet. Please please chime in if you have anything to add.
Michael Lasser: Maybe, maybe I'll start on year-over-year customer accounts. And, and Smith, please, please chime in if you have anything to add.
Speaker Change: And so as we mentioned last quarter, we did expect this year to be relatively flat.
Speaker Change: And active customer account with a little bit.
Speaker Change: A little bit weaker kind of flat to slightly down maybe in the first half flat to slightly up in the second half, but ultimately for the full year period.
Speaker Change: Looking pretty flat 2024 to 2023.
David W. Reeder: And so, as we mentioned last quarter, we did expect this year to be relatively flat from an active customer account, a little bit weaker, kind of flat slightly down maybe in the first half, flat slightly up in the second half, but ultimately for the full year period, looking pretty flat from 2024 to 2023. In terms of what we saw in the first quarter, we saw kind of exactly what we expected, albeit with one slight difference, and that was that we actually exceeded our internal forecast with respect to active customer accounts driven by both new customer ads as well as an increase in reactivations.
Speaker Change: In terms of what we saw in the fourth and the first quarter, we saw kind of exactly what we expected, albeit with one slight difference and that was that we actually exceeded our internal forecasts with respect to active customer account driven by both new customer adds as well as an increase in <unk>.
Speaker Change: Activations and then in addition to that as I mentioned it feels like that.
David W. Reeder: And in addition to that, as I mentioned, it feels like we're starting to see normalization in the industry from an adoption versus relinquishment perspective. That's certainly the data that we saw from the shelters, so positive on that front as well.
We're starting to see normalization in the industry from adoption versus relinquishment of pet perspective that certainly the data that we saw.
From the shelter, so so positive on that front as well.
David W. Reeder: So, from, you know, what would turn customer accounts positive versus maybe the trends that we've seen over the last couple of years, you know, we have mentioned a couple of times over the last several calls that really, we needed inflation to normalize and that inflation in the market normalizing would free up kind of discretionary income for consumers, would give them the ability to then become additional pet parents in the future, and then as more of the market moves online, we And so, when we talk about normalization of the market, what we're really referring to is normalization of pet households, normalization of inflationary pressures that are putting discretionary spending by the consumer under pressure, so normalization of that.
Speaker Change: So from.
Speaker Change: What would turn customer accounts.
Speaker Change: Positive versus maybe the trends that we've seen over the last couple of years. We have mentioned a couple of times over the last several calls that really we needed inflation to normalize and that inflation in the market.
Speaker Change: Normalizing would free up kind of discretionary income for consumers.
Speaker Change: Give them the ability to then become additional pet parents in the future and then as more of the market moves online we would be.
Disproportionately favored in that scenario and so when we talk about normalization of the market. What we're really referring to is normalization of that households, normalization of inflationary pressures that are putting discretionary spending with the consumer under pressure some normalization of that and I would say.
David W. Reeder: And I would say that we're currently seeing, I think what we're seeing is some green shoots with respect to that normalization that we've been talking about. Sumit, anything you'd add? On the question of why would higher e-commerce penetration continue, well, look, I mean, you know, the...
Speaker Change: We're currently seeing I think what we're saying is some green shoots with respect to that normalization that we've been talking about submit anything anything you'd add.
Sumit Singh: On the question of why higher e-commerce penetration will continue, well, look, I mean, you know, the core insights around customers not wanting to lug heavy products back from retail stores. You know, dog food bags are heavy, cat litter pails are heavy, and inconvenient. And so the convenience of transacting through the online channel remains a value proposition that continues to propel the migratory trends from retail to online.
Speaker Change: On the question on the.
Speaker Change: Why would our ecommerce penetration continue well look I mean, you know the.
Speaker Change: Core insights around customers not wanting to log heavy product back from retail stores dog food bags or have you gotten that or pills are heavier than convenient and so the convenience of transacting through the online channel remains the value proposition that continues to propel.
Speaker Change: Propel is the migratory trends from retail to online online expect it too.
Sumit Singh: Online is expected to, you know, reach 45% or more to 45% over the next few years. And the second thing is when you look at delivering personalized experiences, the way that you can deliver personalized experiences via digital sort of touch points, technology is much better, and we do it much better in the way that we understand customers, put them through the high-touch ecosystem that we have, and, you know, keep them and retain their trust and develop and nurture their interests over So overall, you know, we're bullish on the comp penetration trends continuing from. Thank you. And my follow-up question is, how do you plan on growing revenue without increasing your customers this year? Is growing NSPAC a sustainable strategy?
Speaker Change: As expected to reach 45% or north of 45% over the next few years and the second thing is when you look at delivering personalized experiences.
Speaker Change: That you can deliver a personalized experience via digital sort of touch points.
Acknowledging it was much better than we do a much better in the way of the way that we understand customers put them through the high touch ecosystem that we have and keep them and retain their trust and develop and nurture their.
Speaker Change: Their interests over time etcetera, etcetera. So overall, we're bullish on E comm penetration trends continuing from this portfolio.
Speaker Change: Thank you and my follow up is how do you plan on growing revenue without increasing your customers. This year is growing and fact that sustainable strategy.
Speaker Change: Okay.
Sumit Singh: You know, this is something that we've talked about in the past, as well. Look like, unlike a fixed subscription model, right, where you must have customers to continue your growth at Chewy, you know, share a wallet. It has been a bit of an underappreciated strength of the ecosystem. So first, and the second point is we're not shifting our focus away from, you know, customer addition to share of wallet. We believe in combining the power of customer addition with share of wallet, right? A pet lives for 12, 14, 15, 18 years.
Speaker Change: This is something that we've talked about in the past as well looked like unlike a fixed subscription model right. There you must have customers to continue your growth at chewy share of wallet. It has been a bit of an underappreciated strength of the ecosystem.
Sumit Singh: During that time, you know, and a pet and a pet parent spend anywhere from, you know, 1200 to $2,500 with an average of 16 to $1,800 in LTV. And, you know, we've shown the power of growing that nest pack; it grew over nine and a half percent this quarter, reaching $562, which means that right now we're capturing about a third of the nest pack in the market. Roughly about 20% of our customers are health customers, you know, and they continue to mix in into the overall pool of customer bases, right?
Speaker Change: First of all and second point is we're not shifting our focus away from customer.
Speaker Change: Customer in addition to the share of wallet.
Speaker Change: Believe in combining the power of customer addition to share of wallet right. A pet lives for 12, 14, 15 18 years during that time.
Speaker Change: As a pet.
Speaker Change: Pet parents spend anywhere from 200 to $2500 with an average of 16 to $1800 of M. T V.
Speaker Change: And we.
Sumit Singh: So our other businesses are fairly nascent, so we are bullish and expectant about growing our net sales per active customer number. And at the same time, when you look at net ads, you know, that's comprised of three different components, acquisition, retention, and reactivation.
Speaker Change: We've shown the power of growing that NES pack it grew over 95% this.
Speaker Change: This quarter, reaching $562, which means that right now we're capturing about a third often that's back in the market.
Speaker Change: About 20% of our customers or help the customers.
Speaker Change: And they continue to do.
Speaker Change: <unk> makes it into the overall.
Speaker Change: Of course, everybody says rights or other business. He's a fairly nascent. So we are bullish and expectant of growing our net sales per active customer number and at the same time when you look at net adds.
Sumit Singh: So our reactivation engine is firing on all cylinders, so we're happy about that. On terms of retention, we're seeing better retention in cohort behavior; we saw lower churn, you know, come into the quarter from an earlier point of view. So we were pleased with that. And then finally, on acquisition, as Dave was explaining, you know, right now, you essentially have a shallower pool of customers that are not declaring intent to buy in the market.
Speaker Change: That's comprised of three different components acquisition retention and reactivation reactivation engine is firing on all cylinders. So we're happy about that.
Speaker Change: In terms of retention, we're seeing better retention in cohort behavior, we saw lower churn.
Speaker Change: Come into the quarter from any or where your point of view. So we were pleased with that and then finally on acquisition as Dave was explaining you know right now you essentially have a shallower pool of customers that are not declaring intent given inflation still a pretty high food and treats are suppressed and discretionary categories haven't yet sort of recovered. So broadly speaking the value proposition of chewy continues to.
Sumit Singh: So the price selection is still pretty high, the price compensation is still pretty high, food and treats are suppressed, and discretionary categories haven't yet sort of recovered. So broadly speaking, the value proposition of Chewy continues to resonate really loudly, whether it's price selection and convenience or whether it's overall personalization and customer intent capture. So we remain bullish.
Speaker Change: Our resonate really loudly, whether it's price selection and convenience or whether its overall personalization.
Speaker Change: And and.
Speaker Change: And customer and third capture.
We remain bullish.
Speaker Change: Thank you.
Speaker Change: Sure.
Operator: The next question comes from the line of Seth Basham of Wedbush. Your line is now open. Please go ahead.
Speaker Change: The next question comes from the line of Sam.
Speaker Change: Hmm.
Speaker Change: Your line is now with some please go ahead.
Matt McCartney: Hi, this is Matt McCartney on behalf of Seth. I was hoping you'd give some more color on behavior for existing cohorts, just specifically the recent cohorts, just how they're trending relative to historic levels in terms of retention and their nest pack maturation.
Speaker Change: Hi, This is Matt Mccartney on process.
Speaker Change: Was hoping you could give some more color on behavior for existing cohorts just specifically on the recent cohorts just how they are trending relative to historic levels in terms of retention and their netback maturation.
Sumit Singh: Sure, you know, not much deviation from the trends that we've seen, we continue to, you know, see customers lean into health related categories, we continue to see customers lean into condition based and premiumized categories, you know, treats and toys continues to be, you know, sort of muted given, given the pressure, but, you know, we're seeing kind of strong performance across other categories, in terms of, you know, when you take a look at our cohorts from back half of 2022, and project cohort membership, you know, retention for 12, 15, 18 month timeframe, you know, each of these cohorts is in the positive in the low single digit percentage point range, you know, relative to past cohorts, or relative to pandemic cohorts. So, you know, so that is definitely encouraging. So broadly speaking, Matt, you know, not much more to comment relative to what we've already said on the call. Yeah, I would
Speaker Change: Sure.
Speaker Change: Not much deviation from the trends that we've seen we continue to see customers lean into health related categories. We continue to see customers lean into condition based on premium I just got degrees.
Speaker Change: Treats and toys continues to be you know sort of muted given.
Speaker Change: Given the pressure, but you know we're seeing strong performance across other categories. In terms of you know when you take a look at our cohorts from the back half of 2022 and project cohort membership.
Speaker Change: Our retention for 12, 15, 18 month timeframe each.
Speaker Change: Each of these cohorts is.
Speaker Change: The positive in the low single digit percentage point range, you know relative to past cohorts or relative to pandemic cohort.
Speaker Change: So that is definitely encouraging so broadly speaking.
Speaker Change: But you know not much more to Goldman relative to what we've already set up a call today.
Sumit Singh: Yeah, I would just build on that and say that one very positive trend that we're also seeing is that new customers signing up for auto ship are some of the highest that we've seen in the company. So that's another positive signal for us with respect to the new cohort. Did you have a follow-up, Seth?
Speaker Change: Yeah, I would just build on that and say that one is very positive trend and we're also seeing is.
Speaker Change: New customers signing up for auto ship is some of the highest that we've seen in the company. So that's another another positive signal for us with respect to the new cohorts.
Speaker Change: Did you have a follow up Seth.
Speaker Change: Right.
Seth Mckain Basham: Yes, just I was wondering specifically about your ability to target specific cohorts with your new CRM. I know it's pretty early, but are you seeing benefits from that program yet in terms of retention? Or, you know, when might those sorts of benefits materialize here? We are. We are seeing benefits both in terms
Seth: Yes, just I was wondering specifically on your ability to target specific cohorts with your new CRM I know, it's pretty early but are you seeing benefits from that program yet in terms of retention or.
Seth: When might those sorts of benefits.
Seth: Materialize here.
Sumit Singh: We are seeing benefit. We're seeing benefit both in terms of improvement in second purchase rate as well as in reactivation. Both programs are run out of our CRM teams. We're also seeing greater participation in the Chewy app business, which is up multi-fold on a year-over-year basis.
Speaker Change #100: We are we are seeing benefit we're seeing benefits both in terms of improvement in second purchase rate as well as in reactivation. Both the programs are run out of our CRM teams. We're also seeing a greater participation on the TUI app.
Speaker Change #100: Business, which is multi fold on a year over year basis.
Speaker Change #101: Great. Thank you.
Speaker Change #101: Okay.
Speaker Change #101: Okay.
Sumit Singh: The last question comes from the line of Lee Horowitz of Deutsche Bank. Your line is now open. Please go ahead.
Speaker Change #102: The last question comes from the line of Lee Horowitz.
Lee Horowitz: Great. Thanks for fitting me in.
Speaker Change #103: Deutsche Bank. Your line is now open Pease go ahead.
Speaker Change #103: Okay.
Sumit Singh: Maybe one on share and then just to follow up on users. I guess on share, it strikes us that given the success you guys are seeing in healthcare, you're most certainly taking share in that vertical. Discretion and hard goods, you seem to have decided not to, you know, chase bad share in that vertical and perhaps exceed some there. Then I guess that leaves consumables, which grew about 2% in the quarter, but that number is likely a bit higher given some contribution from health in that line of your business. Can you help us better understand how you think Chewy share in the consumable category is progressing at the moment and how you expect that to evolve through the course of the year?
Lee Horowitz: Great. Thanks for fitting me in.
Lee Horowitz: Maybe one on share and then just a follow up on users I guess not sure. It strikes us that given the success you guys are seeing in health care you, most certainly taking share in that vertical.
Lee Horowitz: Discretion on hard goods, you seem to have decided to not chase that share in that vertical and perhaps even some there.
Speaker Change #105: That leaves consumables, which grew about 2% in the quarter would that likely that number likely a bit higher given some contribution from housing in that line of your business can you help us better understand how you think your share is the consumable category is progressing at the moment and how you expect that to evolve through the course of the year.
Sumit Singh: Sure. I'll start with a higher level commentary.
Lee Horowitz: Sure.
Speaker Change #106: I'll start with the with a higher level commentary if you look at the market growth in Q1, it ranged from negative 2% to positive 222% to 3% that's sort of the range in the market relative to the players that we're observing and we generally have a fairly good read of demand in the marketplace.
Sumit Singh: If you look at market growth in Q1, it ranged from negative 2% to positive 2 to 3%. That's sort of the range in the market relative to the players that we're observing. And we generally have a fairly good read of demand in the marketplace. You know, we're obviously sitting on the high end of that. And therefore, the share story, you know, is consistent, right?
Speaker Change #106: We're obviously sitting on the high end of that and therefore the share story.
Sumit Singh: We will take a share this year. Now, when you break that down, I would reframe the way you positioned our intent and discretionary and hard goods. It's not that we're not chasing. In fact, you know, we remain competitive as a team. And, you know, we're seeing positive green shoots in that category relative to where the industry performed in at least half of the categories, right? The other half, we're still focused on making sure that, you know, as I mentioned in the past, there are certain categories that we just need to make sure that our assortment and proposition resonates loudly within our goods and discretion.
Speaker Change #106: Consistent right, we will take care of this year now when you break that down I would reframe the way you view your position our intent in discretionary and hard goods, it's not that we're not chasing in fact.
Speaker Change #106: You know competitive as a team and you know.
Speaker Change #106: We are seeing positive green shoots in that category relative to where the industrial performed.
Speaker Change #106: And in at least half of the categories right. The other half were still focused on making sure that you know.
Speaker Change #106: As I mentioned in the past there are certain categories that we just need to make sure that our assortment and proposition resonates loudly within hard goods and discretion. So we're absolutely focused on it and then in consumables, we held share in the kind of the value segment, you could say Oh, and then began share across all premium or premium.
Sumit Singh: So we're absolutely focused. And then consumables, you know, we held share in the kind of the value segment, you could say, you know, and then we gained share across all premium or premium segments. So that's, it's a bit of a positive story overall, but there's a bit of a range depending upon the customer segmentation and the cohorts that you see.
Speaker Change #106: Segments and consumables. So that's so it's a bit of a it's a positive story overall, but theres a bit of a range depending upon the customer segmentation in the cohorts that you see.
Lee Horowitz: Did you have a follow-up, Lee?
Speaker Change #107: Did you have a follow up Lee.
Sumit Singh: Very helpful. And maybe, yeah, maybe one follow-up on users. You know, we've talked a lot about reactivation and new acquisition exceeding your expectations with green shoots in terms of household formation. But I guess overall customer declines steepened in the quarter. Can we maybe just talk a bit more about how churn is progressing at this point? And, you know, I think, Sumit, you talked about churn down, churn improving year on year.
Speaker Change #108: Very helpful and then maybe yes.
Speaker Change #109: Maybe one follow up on users, we've talked a lot about reactivation and new acquisition exceeding your expectations with green shoots in terms of household formation.
Speaker Change #110: But I guess overall customer declines I guess steepened in the quarter can you maybe just talk a bit more on how churn is progressing at this point.
Speaker Change #111: You know I think maybe you talked about churn down.
Speaker Change #111: Current improving year on year, but I guess, how does that foot relative to reactivation.
Sumit Singh: But I guess, you know, how does that foot relative to, you know, reactivations and new acquisitions being the bigger outperformers in the quarter? And I guess how do you think churn should progress through the balance of the year?
Speaker Change #112: But you shouldn't be in the bigger outperformer in the quarter and I guess, how you think churn should progress through the balance of the year any more color I'm sure helpful. Thanks, So much sure sure sure I can I can see kind of what are you trying to correlate here. So here here's the deal. So our our reactivation was up mid teens as we said year over year at the same time, our net new acquisitions.
Sumit Singh: Any more comments? Very helpful. Thanks so much.
Sumit Singh: Sure, sure, sure. I can see what you're trying to correlate here. So here's the deal.
Speaker Change #112: Was higher than the reactivation rate right. So I just want to be clear about that that reactivation arent, surpassing net new acquisition. Our acquisition is continuing to be held back by the amount of customer ship customers.
Sumit Singh: So our reactivations were off by mid-teens, as we said, year over year. But at the same time, our net new acquisition was higher than the reactivation rate, right? So I just want to be clear about that, that reactivations aren't surpassing net new acquisition, right? Our acquisition is continuing to be held back by the amount of customer intent declaration in the discretionary categories, right? And so that number hasn't reversed materially, given that we're still playing through those cohorts, but the green shoots that we are seeing are in the back half of 2022 cohorts, which are sort of more out of the pandemic cohorts per se. So year over year trending is better, but there's still a healthy base that we need to sort of arrest at the bottom, which continues to normalize alongside us.
Speaker Change #112: Declaration in the discretionary categories right. So there's a pool of customers that's missing there that'll add to the to the to the trend.
Speaker Change #112: We're seeing or connecting to industrial normalization, then you come to churn. So the statement is true that churn was down year over year, yet you know the.
If you recall.
Speaker Change #112: We had signaled that our cohorts in the last three years or so are churning right at rates that are low to mid single digit higher than our legacy cohorts right and so so that number hasn't reversed materially given that we're still playing through those cohort, but the green shoots that we're seeing is in the back half of 2022.
Speaker Change #112: Which are sort of more out of the pandemic.
Speaker Change #112: <unk> per se so year over year trending is better, but there's still a healthy base that we need to set up for the rest of the at the bottom of its continues to normalize.
David W. Reeder: Yeah, and perhaps just for some helpful color, churn and Q1 of 24, it's a decline in absolute numbers from the churn and percentage for that perspective, churn from Q1 of 23, and it's down from a churn of Q1 of 2022. And, of course, it's down sequentially from Q4 of 23. So all data points that kind of, again, kind of point to some of those early, early green shoots that we believe we're seeing in the normalization of Very helpful.
Speaker Change #113: Alongside US yeah, perhaps just for some helpful color churn in Q1 of 'twenty four it's a decline in absolute numbers from the churn and percentage for that perspective churn from Q1 of 'twenty three and it's down from a churn of Q1 of 2022 and it's of course, it's down sequentially from Q4 of 'twenty three.
So all data points that kind of again kind of point to some of those early early green shoots that are that we believe we are seeing in the normalization of the industry.
Speaker Change #114: Very helpful. Thank you.
Operator: Ladies and gentlemen, this now concludes today's call. I'd like to thank you all for joining us. Have a great rest of your day. You may now disconnect your lines. Thank you all for joining us. Have a great rest of your day. You may now disconnect your line.
Speaker Change #115: Ladies and gentlemen, this now concludes today's call I'd like to thank you all for joining and have a great rest of your day you may now disconnect your line.
Speaker Change #115: Okay.
Speaker Change #115: [music].
Speaker Change #115: Thank you all for joining and have a great rest of your day you may now disconnect your line.