Q3 2024 Chewy Inc Earnings Call

We ended the 3rd quarter with approximately 20.2 million active customers, up 160,000 sequentially.

We now expect to end fiscal 2024 with active customers up modestly over last year, a trend which we expect to continue to strengthen in 2025.

Turning to profitability, we generated $138 million of adjusted Ibita in the quarter, representing a 4.8% margin, and approximately 180 basis points of margin expansion year over year.

Our Q3 adjusted Ebida results reflect a continuation of our strong growth margin performance, a disciplined approach to cost management and the ongoing benefits of fixed cost leverage as we scale.

Our increasing profitability has enabled us to continue to return meaningful capital to shareholders as reflected by the incremental $342 million we deployed to shareholders in the 3rd quarter.

Now let me provide an update on some of Chuy's strategic initiatives and innovations.

The sponsored ads business continues to perform well and as expected, we remain on track to reach the low end of our previously stated long term target range of 1 to 3% of net sales in fiscal 2024.

We remain on track with our 1P technology migration and look forward to starting the new fiscal year fully converted to our One Piece software platform.

Moving to Chuy's health care offerings.

I am proud of the progress our team has made this year across healthcare products and services, especially vet care or CBC.

With the launch of Chuy vet care clinics earlier this year. We not only unlocked the $25 billion vet services TAM opportunity, but we are also observing compelling complementarities across the entire chewy ecosystem.

We have 6 clinics open today and expect to reach the high end of our previously stated target range of 4 to 8 clinic openings in 2024 later this fiscal year.

Performance across our clinic footprint is promising, and I'm happy to share that the early signs of success we spoke about last quarter have continued through Q3.

The proportion of new to chewy customers acquired through Chuy VetCare continues to outperform relative to expectations.

Additionally, broader ecosystem benefits, including cross-category shopping and post clinic visit purchases on chewy.com have strengthened since last quarter, indicating that our ability to seamlessly connect care with commerce is resonating with pet parents.

I would also like to take a moment to talk about Chuy Plus, our paid membership program.

Recall that we launched in summer 2024 to a representative sample of customers since launching the program we have been carefully studying the shopping behavior of 3 plus members and our tracking several key indicators of success, including the program's potential to accelerate wallet share consolidation and drive stronger cross-category engagement.

Based on the data we have analyzed over the last several months we are seeing that Chuy plus members consistently place more orders.

Have higher cross category penetration and greater mobile app engagement relative to non-huy plus customers.

Furthermore, we are seeing higher auto ship adoption rates from this early cohort of customers signaling a potentially compelling flywheel effect of the chewy plus program.

While contribution to the overall enterprise remains immaterial. We are encouraged by these early results and look forward to introducing the program to our broader base of customers.

Touching on Canada where we completed a full year of operations in Q3. The Canadian business, while still relatively small and immaterial to the overall scale of Chuy continues to improve across key metrics, including auto ship penetration, net sales growth, and profitability.

Additionally, we remain focused on strengthening brand awareness in Canada and are excited by the brand partnership with recently signed with the Toronto Maple Leafs hockey team.

We believe Chuy's passion for pets perfectly aligned with Torontonians' passion for the Maple Leafs, and we are bringing this to life with dynamic advertising and interactive fan moments during games at Scotiabank Arena.

Lastly, I would like to acknowledge a notable milestone for Chuy with our recent inclusion in the S&P 400 index as of November 6th.

We view our inclusion in this index as an endorsement of our performance, our enduring business, and our compelling growth opportunities ahead.

In closing, I would like to thank all of our dedicated CUE team members for their hard work and strong execution in the 3rd quarter.

We are now focused on executing through our final quarter of 2024 and are excited about the customer engagement we have seen thus far through this holiday season and look forward to ending fiscal year 2024 on a high note.

With that, I will turn the call over to Dave.

Thank you, Sumit.

Third quarter net sales grew 4.8% year over year to 2.88 billion.

Exceeding the high end of the guidance range we provided last quarter.

The pricing promotion and discount environment remained stable throughout the quarter.

As such, year over year revenue growth was primarily driven by active customer growth and cross category product penetration resulting in continued customer wallet share gain.

We ended the quarter with 20.2 million active customers reflecting a sequential net increase of approximately 160,000 customers.

Gross additions exceeded pre-COVID levels and gross churn improved year over year.

Within gross additions, both new customers and reactivations grew year over year in the quarter.

We are encouraged by the positive momentum and active customers and expect these trends to continue through the balance of the year.

Against the backdrop of a modestly improving pet industry and strong chewy, specific execution we now expect to end fiscal year 2024 with modest year over year active customer growth.

3rd quarter auto ship customer sales increased by 8.7% to 2.3 billion.

Outpacing total net sales growth in the quarter by approximately 390 basis points.

Auto ship customer sales as a percentage of total net sales increased by 290 basis points to 80%, a new company record.

Additionally, we continued to grow share of wallet with Q3 net sales per active customer for Nest back reaching $567.

Moving to profitability, we reported 3rd quarter gross margin of 29.3%, representing 80 basis points of margin expansion year over year.

Our growing sponsored ads business was the largest driver of gross margin improvement in the quarter.

Followed by product mix shift into premium categories including consumables and pharmacy.

Additionally, promotional activity in the 3rd quarter was in line with our expectations and the promotional environment to date in the 4th quarter remains rational.

Shifting to operating expenses, please note that my discussion of SGNA excludes share-based compensation expense and related taxes.

Third quarter SGNA totaled 546 million or 19% of net sales representing 90 basis points of improvement on a year over year basis.

SGNA leverage was primarily driven by continued discipline and efficiency with respect to corporate payroll fulfillment and other at scale efficiency benefits.

3rd quarter advertising and marketing expense was 191.8 million or 6.7% of net sales.

I would note that we expect advertising and marketing expense to come in at the high end of our previously stated range of 6 to 7% of net sales for the full year.

This is primarily due to the timing of certain marketing campaigns in Q4.

Third quarter adjusted net income was 84.9 million representing a 34% increase year over year.

Net income for the quarter was 3.9 million, which translated into one sense earnings per share on both a basic and diluted basis.

Finally, we reported adjusted Ibida of 138.2 million, representing a 4.8% adjusted EBA margin and 180 basis points of year over year margin expansion driven by the improvements in gross margin and SDNA described earlier.

We reported free cash flow of 151.8 million in the third quarter reflecting 183.5 million of net cash provided by operating activities and 31.7 million of capital expenditures.

Our 3rd quarter trailing 12 month free cash flow was over 360 million and demonstrates our ability to generate increasing levels of free cash flow while continuing to invest in our growth initiatives and returning significant capital to shareholders.

I'd now like to provide an update on our share repurchase activity completed in the quarter.

In September, concurrently with a 500 million underwritten secondary offering of Class A common stock by BC Partners. We repurchased approximately 10.2 million shares of Class A common stock directly from BC Partners for an aggregate repurchase price of 300 million.

This repurchase transaction allowed us to continue to reduce the ownership position of our largest shareholder and was executed separately from our existing $500 million share repurchase program.

Additionally, during the quarter, we repurchased approximately 1.6 million shares of Class A common stock spending approximately 42.4 million under our 500 million share repurchase program.

At the end of the quarter we had approximately 424.8 million of remaining capacity under the program for future repurchases.

Collectively, the company has repurchased and retired a total of 30.7 million shares a year today.

Our ability to generate increasing levels of profitability and free cash flow will continue to enable us to invest in our business and return meaningful capital to shareholders.

We ended the quarter with approximately $508 million in cash cash equivalents, and marketable securities, and we remain debt free with an overall liquidity position of approximately 1.3 billion.

With that, I'd like to turn to our 4th quarter and updated full year 2024 guidance.

We anticipate 4th quarter net sales of between 3.18 and 3.20 billion or approximately 13% year over year growth.

which reflects the full impact of the 53rd week.

And we are narrowing and raising our full year 2024 net sales outlook.

To be between 11.79 and 11.81 billion or approximately 6% year over year growth.

This range includes the impact of a 53 week 2024 fiscal year and has previously noted the 53rd week will be fully reflected in the 4th quarter of 2024.

We are raising our full year 2024 adjusted that margin guidance to a range of 4.6 to 4.8%.

The midpoint of our full year adjusted EB that margin guidance range indicates approximately 140 basis points of year over year margin expansion.

And implies approximately 3.4% adjusted Ebida margin for the 4th quarter.

Consistent with our comments last quarter pertaining to the quarterly progression of 2024 adjusted but that margin.

We expect Q4 adjusted but that margin to decline sequentially.

Due to typical seasonality and the timing of certain investments primarily pertaining to marketing campaigns.

24 capital expenditures to come in at the low end of our previously stated range of 1.5 to 2% of net sales.

And we expect free cash flow conversion to remain above 80% for the full year.

Finally, we expect basic shares outstanding at fiscal 2024 year end to be approximately 415 million.

This incorporates the nearly 31 million shares that we have repurchased and retired year to date and does not incorporate any potential future share repurchases.

In closing our 3rd quarter results reflect another quarter of strong execution.

I want to thank our incredible chewy team members for their collective efforts as we continue to execute against our strategic priorities to deliver long term profitable growth.

With that, I will turn the call over to the operator for questions.

Thank you. We will now begin the question and answer session.

As a reminder, if you would like to ask a question today, you can do so now by pressing start followed by the number one on your telephone keypad.

If you change your mind or you feel like your question has already been answered, you can press start, followed by 2 to withdraw yourself from the queue.

Our first question today comes from the line of Nathan Feather with Morgan Stanley. Please go ahead.

Thanks for the question and congrats on the strong results, really encouraging to see the continued event um, um, active customer growth continues to accelerate. Can you double click on what you're seeing in overall pen ownership trends and how we should think about the relative contribution to customer growth as compared to some of the idiosyncratic initiatives you've been working on and then given the expectation for customer growth to improve further in 25, how should we think about the key puts and takes your're considering for growth here. Thank you.

In in the system I'll start and they uh we'll jump in.

Uh, wherever he sees appropriate. So in terms of household formation trends, uh, I think you started with that. We continue to see signs of industrial normalization, uh, pricing remains stable, inflation continues to move towards a more normalized level. In fact, we saw no benefit of pricing as we mentioned on the earnings call, uh, as we move through Q3, uh, regarding pet household formation, uh, of course there's no single truth source of truth for this data, uh, our triangulation, you know, uh, uh, continues to tell us.

The latest adoption and relinquishment trends are both trending in a better direction we believe year over year adoption growth was in the uh high single digit to low double digit ranges and relinquishments were down low single digits. So overall, we observed that we return to positive net adoptions in a cycle of Q3, uh, from an external point of view.

Uh, in terms of, uh, let me see, you have another question here, double click into that expectation for active customer growth in 25 and puts into takes so I mean there's a, there's a lot going on we ultimately we believe, you know, as I mentioned last quarter,

The active customer growth that we are driving now, you know, two times now it's a trend is largely due to our own efforts and the industry continues to normalize in the background, which is of course a stabilizing factor that is very good to see, um, on our side, you know, enhancing on site and mobile experiences expanding assortment performance and CRM strategy and all of that is sort of what's working in conjunction, uh, as we move into 25, what has really started to work for us is our focus on connecting the marketing funnel to.

standard audiences and driving that funnel exposure is enabling our teams to find both the right level of efficiency as well as the flexibility to move spend up and down the funnel to capture both share of voice and demand and when we bring them to the site, we are able to convert them effectively with the previous efforts that I've talked about around improvement of site experience customer choices, assortment other innovations, etc.

So our, our 25 strategy is very much in line with, you know, operating the playbook that we've uncovered, uh, and strengthened for ourselves in 24, uh, another data point that I just want to draw your attention to more of a recall from last quarter is we said, you know, we have an improved ability to identify and segment customers and target them, uh, you know, to drive improved second purchase rates, auto ship sign ups, mobile app engagement, etc. etc. And so on the background, you know,

We've now sort of uh played this playbook for uh at least 2 quarters, uh, we're going to rinse and repeat and queue 4 and 2025 strengthening our channels and share performance in the market.

Great. Thank you.

Thank you man.

The next question comes from Curtis Nagle with Bank of America Merrill Lynch.

Can I just please go ahead.

Alright, awesome, thanks very much for taking the question, um, so I want to focus a bit on the, the 4Q guidance and maybe specifically on the comments in terms of the advertising and marketing spend just in terms of context, you know, at the high end of the range, you know, around 7% for the year. It implies like a really big um.

dollar increase, right, certainly relative to the other quarters like no relative leverage from the extra week, um, so, uh, you know, I guess just kind of digging into that, you know, what is this spend pertain to looks to me it's like implied like 40 to $50 million year over year, is that correct? And you know other specific, you know, products or customers you're targeting is at one time just, you know, kind of dig into that and kind of how we should specifically, you know, think about that that increase um and whether you're justlies to conservatism or not.

Good morning and thank, thanks for the question. I'll, I'll take this one and then submit if you wanna build upon any of it, uh, let me know.

And I'll build upon submit's comments about active customers, so in the 3rd quarter when you think about the elements that go into gross editions, uh, you've got new customers added, you've got reactivations and then of course you have churn.

And we actually saw improvement across all three of those metrics in the 3rd quarter on a year over year basis and so we're entering the 4th quarter with some momentum on the activities that we're driving across those three elements I mentioned we're entering the 4th quarter with the continuation of what we believe is a normalizing in uh industry as we previously referenced with moderating inflation as well as the shelter shelter data that we've mentioned.

Uh, previously as well, which is continued in the 3rd quarter, so with that momentum going into the 4th quarter.

There's a couple of elements to consider, uh, number one, you typically have a little bit higher elevated advertising and marketing in the 4th quarter given the holiday season as well as the timing of certain campaigns and then building on that we see an opportunity in the industry, uh, in the 4th quarter where we believe that we wanna invest and lean in to the 4th quarter such that we can continue to build on what we believe is some improvement in the industry and then.

that of course into 2025.

So you know net net, you take a step back, um, you think about what we've told you for the year in terms of our guidance active customer growth, uh, flat to down in the first half flat to up in the second half, ending flat we've we've moved up that guidance, uh, we've pulled in that guidance and we see an opportunity to invest in the in the 4th quarter in advertising and marketing and and we're doing that for the full year we'll be at the the high end of the 6 to 7% range.

And as you mentioned, uh, to get to the high end of that 6 to 7% range for the year that would imply being above 7% specifically for the fourth quarter, so that, yeah, I would just like to add more of a reminder, uh, on the conversations that we've had on this call in the past which is, you know, we spend based on the ROI and the LTB potential that we're seeing in the current cohort of customers that we pick up from market and the existing customer base that we're developing share of wallet on. So in the past, as you know, we've

the, the, the marketing span all the way to the left, you know, down 7080 basis points from our average and now we're picking that back up. Why didn't we spend in the past and why are we spending now? Well, because we didn't see the ROI in the past and we are now. The, the cohorts that were acquiring the efficiencies that we're gaining based on the full funnel, uh, audience expansions that I talked about are really compelling and behooves us to be able to invest to continue this trend as well as solidified growth for year 2025.

and beyond. Uh, if you kind of, uh, see some, let me share some of the data points that we're seeing, yeah, the, the, you know, our orientation is 3/4 of the customers that we're picking up had at least one skew from a repeatable category. And that's an encouraging trend because it, you know, it promotes autoship growth and and and builds the layer cake that then sort of compels and, and, and, uh, you know, spin the flywheel in a more efficient manner. Uh, we're seeing, you know, these new customers reorder rates and settlement.

rates improving, uh, you know, as our engagements with these consumable type type uh type categories, you know, when you look at year to date 24 new customer cohorts, you know, in terms of your your reorder rates in the first few periods of post acquisition, you know, we're running roughly 300 to 500 basis points higher than the 3 month averages. So these are, these are just some data points on the background that allows us to sort of study and, you know, increase or decrease the values of propensity, uh, you know, modeling and therefore go out and

invest if we see the returns. That's what we're doing right now.

OK, and then just uh that makes total sense just a quick follow up, uh, the points you made, Anthony Nay's question on the adoptions were really interesting, I think you said, you know, up on a grosser basis high singles to low double relinquishment down those singles, so you know not a pretty good number, um, what, how did that compare to 2Q just trying to, um, you know, sort of, you know, size it in terms of relative improvement.

It's positive by I think the margins extended by uh low to mid single digit ranges relative to Q2.

OK, awesome, appreciate it, thank you.

Sure.

The next question comes from Doc and with JP Morgan.

Please go ahead.

Great, thanks for taking questions, um, too if I could, uh, first just on vet clinics looks like you're on track to the 8 locations by your end, um, can you talk more about what you've learned this year and how that informs your 25 expansion plans and the investments that may be required then.

And then, um, submit if you could also perhaps give us an update on automation, um, just kind of how you're tracking relative to the 70 to 80% kind of long term um percentage of volume that you've talked about over time. Thanks.

Yeah for something, yeah, so with respect to the vet clinics, um, you know, as we talked about.

We were planning to roll out 4 to 8 vet clinics this year, uh, we're gonna be at the high end of that range, um, the positive trends that we've seen on vet clinics have continued, uh, some of those positive metrics has been, you know, the operational utilization of those clinics it's been high the customer engagement from those clinics, uh, and the corresponding customer service levels, uh, have been high, uh, the net promoter kind of score around those clinics and the service level.

high um the new customer, uh, cross category penetration new customers too chewy that come in through vet clinics and then their propensity to go to chewy.com and then shop online at chewy.com. Also high, in fact, more than half of those new customers, uh, consistent with last quarter actually improvement from last quarter are leaving the vet clinic new customer to C Chewy and then going online and also.

shopping at chewy.com so.

So all the metrics across the vet clinics, uh, trending positive. I'll leave the 2025 guidance for 2025, uh, but I would just tell you that we've been very encouraged uh by our engagement with customers, uh, we're encouraged by the size of the tam roughly 25 billion that we've opened up through these vet clinics and we're excited about continuing to grow our presence in this space, submit anything that you would build on there on the automation, no, that, that's perfect. Uh, thank you.

On the automation uh side that we continue to trend upwards, uh, a little less than half of our volume is now shipping through our 2G fulfillment centers and uh you know touching some sort of automation uh in the network, and that combined with the improved, uh, you know, supply chain tooling that we have, you know, is allowing us to execute through a really strong peak, and we continue to gain those efficiencies and flow through the bottom line as you can see in the OE scaling that they've talked about uh in the uh.

Uh, on the, on the, on the script, uh, happy to dive deeper, uh, in any area if you like.

And, and just, just to build on that comment, uh, and using using some data points from the 3rd quarter, uh, given the efficiencies that you've mentioned we had an improvement on the variable fulfillment side we had improvement on the fixed this on the side. In other words, we got more fixed cost absorption through those fulfillment centers and orders every quarter this year year over year so Q1, Q2, Q3 on a year over year basis orders are up, um, across all those quarters and in total year to date, uh, in fact we have.

our, our highest order, uh, period during this most recent uh peak, uh, holiday peak cycle, uh, over the last week or so and so the the team is executing very well in the automation that's been referenced here is a is a big contributor to that both in terms of output as well as efficiency and productivity.

Did you have a follow up, Doug? That's great, thank you both I appreciate it.

Uh, no, all good, thank you, thanks.

The next question comes from David Bellinger with Mizuho.

David, please go ahead.

percentage could ramp up, yeah, how, how fast can we get to 30 or 40% and then secondly.

How should we think about the P&L impact of that can, can you simply bypass marketing spend and

And and sort of get more leverage on the ad expense line by by getting more, more volumes through your app.

And David would, uh, so we're, we're, this is a priority for us and we are essentially ramping up our efforts very quickly to be able to push this volume. I would, you know, consider this not a few quarters of effort but perhaps a couple of years of efforts to get to sort of market standard rates of, you know, about 40-45% of our so doubling kind of the volume that is moving through the app, uh, but the progress that we are making on a quarter over quarter basis is something that we like, uh, and of course, yes, we like it for the fact that

That's a close y ecosystem. It allows us to collect 1P data, mark it on a 1P basis, uh, you know, take advantage of the direct traffic, stay in touch with customers, uh, you know, who are really more engaged and capitalize on the trends that we see in the app which are highly encouraging from an overall conversion of revenue into profitability point of view, for example, you know, ownership engagement rates are higher in the app. AOBs are higher in the app. Retention rates in apps are several 100 base points higher than customers.

engage with us over the web or desktop, uh, you know, the cross category attachment that we see go through the app is higher. So all in all, it's just not only a more productive experience it's also more enjoyable and personalized experience that that allows us to build a quality of relationship that we believe will be even stronger, alongside the PNL benefits that come, come, come with it.

What size, we'll size the benefit side moved to 2025, so.

I'm, I'm taking that question to note and we'll come back in 2025 and size it up.

Right, perfect, we'll come back on that one and then uh just to follow up in, in your 10 2 filing it looked like there was some new language around uh a project on the finance IT side, not meaningful from a capital investment perspective, but can you elaborate on the SGNA portion, you know, how much will that?

To track in 2025 and there is there any deficiencies within the system that this is correcting.

No, no, there are no deficiencies in the system that this is correcting uh this is new capability for us so I think is you should think about this as, uh, you know, the migration of some of our planning engines, uh, to a to a more comprehensive online suite and by being able to do that, uh, which at no material impact really to the PNL by being able to do that we're able to you know get more granularity, uh, with respect to.

all of our operations, uh, and we're also going to be able to apply some AI to those same operations to get some automated intelligence and reporting out of the system and a more comprehensive way.

Perfect, thank you both.

Thanks David.

The next question comes from Steven Zone with Citigroup. Steven, please go ahead.

Great, good morning. Thanks very much for taking my question. First question I had was just on um pricing submit you said there was no benefit from pricing in the 3rd quarter. How do you see that playing out in 4Q and then any um preliminary views on 2025, it seems like uh the industry overall has been flattish for some time, so, uh, your thoughts on maybe what looks like next year would be helpful.

Yeah, so, hi Steve, uh, this is David. I'll, I'll, I'll take this one and then submit if you want to build on it, uh, chime in, uh, with respect to pricing and 3rd quarter, um, really no material benefit nor detriment in the 3rd quarter with respect to pricing um we had goodness on the gross margin line largely driven by sponsored ads and product mix and then of course that flowed all the way through through the P&L, uh, ultimately to give us, uh, pretty sizable ebi. beat for the.

order on a year over year basis, roughly half driven by gross margin and half driven by leverage through the remainder of the of of the P&L, um, but really no no impact either way from pricing, uh, with respect to 4th quarter, um.

You know, you typically do have some some pricing and discounting in the 4th quarter related to the holiday season, uh, we fully bake that into our guidance for the 4th quarter, uh, but again no material kind of impact uh from inflation or deflation, uh, which the inflation pieces obviously we had seen in uh in prior years, uh, and in prior periods, um, but really no meaningful impact, uh, really throughout 2024 we had a little bit in the first quarter, 2nd quarter moderated significantly 3rd quar.

relatively nonexistent, uh, 4th quarter expecting the same, uh, other than the, the traditional seasonality and that's how we're kind of expecting rolling into 2025 we're expecting those those trends to uh, to largely continue.

Yeah, the overall environment, even the market remains, uh, very rational with of course some seasonal spikes that you would expect as we played through the cyber week, uh, last week, uh, which was a very good week for us. Yeah, if you remember, uh, our comments from the beginning of this year, the composition of revenue has shifted from, you know, part pricing part, uh, uh, unit growth, uh, or structural growth coming into Q1 of this year to much more weighted towards structural growth as we exit this year, uh.

You know, we are not seeing deflation happen in the category. Uh, the category that of course is more elastic right now as we move to Q4, particularly cyber is more on the hard goods and discretionary side, but you would expect that, you know, as, as, as uh as the industry normalizes and and and we push volumes through this uh seasonal holiday peak season, but outside of that you should expect 25, uh, you know, if you recall our long term growth and growth and the

revenue is a function of active customer growth in the low to mid single digit and uh uh NASA Road in the mid to high single digit and there's a benefit of roughly 2 to 2.5% of pricing built in when the industry normalizes, and that long term growth over time we expect will come true as the industry continues to normalize and we move out of 24 into 25 and 26.

OK, that's very helpful. The, uh, follow up I had is just in the context of.

Raising the customer account Outlook and then the commentary about that strengthening in 2025. How much of that is driven by the, you know, the industry data points getting a little bit better like you mentioned pet adoptions versus your own idiosyncratic efforts, you know, talking about marketing and stuff of that nature.

Yeah, it's hard to put a ratio on it, but we believe more uh a majority of this change that we have seen is driven by internal efforts. And so we are uh bullish, you know, that we should get an incremental tailwind, you know, when the industry fully normalizes currently we are not taking that into account because we'd like to be, we'd like that to sit on top and so present or presently our comments around, you know, us growing active customer is on the back of efforts that we are internally driving and seeing success with.

Very helpful, thanks for the questions.

The next question comes from Rupesh Parik with Oppenheimer.

Please go ahead.

Good morning and thanks for taking my question. Also congrats on this quarter. Uh, so just going back to the hard goods category, we'd love to get more color in terms of what you saw during the quarter expectations going forward and then from a tower perspective does any exposure on the tower front.

Thank you.

Sure, I'll take the first part. They will chime in on the second one, so we're, as you can see, I mean, you know, hard goods continues to improve and, and it did in Q3 as well, uh, and, and so on the backdrop it's really good to kind of recognize the industry normalizing, you know, we are viewing the steady improvement in hard goods performance as a result of both our efforts that I've talked about and indicative of that industry stabilization, specific to our efforts, you know, it includes expanding assortment across several.

March classes we've been very focused on bringing in, uh, you know, high value added assortment, uh, onto the platform and our suppliers and vendors are very excited to partner with us there, uh, we're focused on upgrading site experience to improve padding, discovery, and conversion, uh, and we are marrying that up with thoughtful campaign execution and so the these these efforts, you know, the, so we believe the work done by our teams is paying off and I also want to uh note that we will

only fully benefit, uh, you know, from this when we start to see a more fulsome recovery in discretionary purchasing.

We're happy with the results so far.

And and building building on that like we're excited about our goods growing 2 quarters in a row now on a year over year basis, so both 2nd quarter, uh, this year and 3rd quarter of this year have now grown on a year over year basis, uh, we're, we're pretty excited about that growth and we're also excited about the early trends that we've seen here in 4th quarter, uh, so don't, don't wanna, you know, guide by a product category but certainly we feel good about our goods, uh, where we stand today and.

In the 4th quarter with respect to the, you know, the tariff question that you mentioned, uh, you know, we have a very small, uh, reliance and presence, uh, on China, uh, specifically, uh, we do source some hard goods from China primarily related to some of our hard goods, but the vast, vast majority of our net sales at Chuy are, you know, pretty much domestic, uh, domestically sourced, um, so our reliance on the region and our uh.

Alright, the impact of any potential tariffs, uh, relatively low on chewing.

Great thank you I'll pass it along.

The next question comes from Mark Mahaney with Evercore ISI. Please go ahead, Mark.

Thanks, uh, 2 questions please. So this active customer growth, can you tell how much of that is from um reactivated customers, uh, customers you've had in the past who turned off for whatever reasons and it and have come back and if so any color on what those reasons are and then secondly, it sounds like competitive intensity is relatively moderate given your comments on pricing, but other than pricing, is there anything else you're seeing, uh, uh, notable in the competitive landscape. Thank you.

Hi Mark, uh, a greater number of customers uh were from net new customers that we acquired, uh, but relative to the reactivated customers that we, uh, count towards gross ads, uh, the other encouraging factor that we saw this time was, uh, you know, the, uh, cohort stabilization that we've been talking about, so churn stabilized as we would expect, uh, which was Dave's earlier comment on all three indicators were positive, uh, net new reactivated as well as

or churn, but between the gross at the portion of net new customers, uh, on an absolute basis, absolutely exceeded reactivation, so we were happy to see that, of course, uh, and, and, and we would want that, uh, and then if you combine that with some of the results that I shared around how these cohorts are engaging in terms of second purchase rates, etc. that is encouraging to see on the retention side, you know, we're tracking settled orders, uh, which is a metric that we, you know, developed as we came out of the COVID time frame, so.

To be really able to see turn order settlement rates so that we're not calling early success or early, uh, you know, wins on these customer cohorts and we're seeing $3 customer settlement rates also improve from cohorts that we've, uh, that we've uh acquired from P5 of this year and, and, and, uh, before that, so all, all, all encouraging signs.

Competitive intensity, uh, you're right, it seems relatively moderate pricing environments rational, uh, and overall, you know, we're playing a pretty strong play continuing to differentiate ourselves both in terms of the basics of, uh, you know, the category on price and convenience and and assortment but also and bringing new innovations to life, uh, super excited about huy Plus, super excited about the app initiative, uh, Canada's rampant well, you know, sponsored ads are ramping well +00, nothing, nothing else.

OK. Thank you, Sammi.

Sure.

The next question comes from Sweta Galeria with Wolf Research. Please go ahead.

Thank you so much for taking my questions. Let me try too, please. 1 is, could you please talk to some of the marketing channels that are working really well for you we're a positive surprise, um, or have been a positive surprise for you over the past couple of quarters as you lean into different channels and seeing better returns.

That's one and then 2 is, could you please talk about trends you saw quarter to date, um, so through October November, December, and how, how the trend um did versus your uh internal expectations. Thanks a lot.

Sure, so, uh, I won't fully satisfy your curiosity on specific marketing channels working for us. I would, I would reorient us back to uh the comment I made at the start of the call, uh, which if you were trying to draw, hey, what's different? I would focus on, you know, the comment around really connecting the marketing funnel, uh, you know, to expanded audiences and driving that full funnel exposure, uh, that it has been the most significant change that we've made over the

last few quarters, uh, combine that with our ability to target those customers when they arrive on our platforms and drive to better conversion, uh, I, I believe is a powerful recipe, uh, which we are continuing to perfect. So more room to go there. Uh, but we're excited about what we are seeing so far. So I would, I would likely just stick with that. Uh, any color on quarter to day trends we're happy with quarter date performance, uh, you know, our, we just wrapped up, uh, our cyber.

Uh, we and by all measure of the word I would classify peak holiday event performance to be successful, uh, you know, we had a thoughtful and curated plan comprised of great assortment offers experience and marketing strategy and customers in return engage robustly with visits, uh, and, uh, spending exceeding our expectations, driving some of the biggest nutshells there in huy history, uh, so we're, you know, and as you heard from David in the prepared remarks uh we're increasing our net sales, uh.

range for the year and while we did not specifically call out the the the last few weeks that we've played through this increase as a result of the strength that we are currently seeing in the engine.

Anything to add, if I, if I could build on that, uh, with a few softer points here that don't necessarily show up in the P&L, um, but they certainly give us um a good brand umbrella, uh, number one, chewy claws. I'll call that out, especially this time of year and it's, it's, it's a program, uh, where pets submit their uh their Santa wish list.

And uh it's gotten quite a bit of traction in in uh prior years it's gotten even more traction this year. It's not part of a, you know, paid marketing program, but it is a program that's organic and it's trending and it's a program that when people associate pets, pet parents, the humanization of pets, um, and an emotive category like this, it is, it is, uh, an organic trend that uh that gets a lot of play this time of year and it's uh.

It's a program that we love to run and then uh finally I'd be remiss if I didn't just point out the wow experience that uh that our customer service provides every day and the brand uplift and a motive attachment uh to Chuy that that type of program does.

the CFO is talking about it, the 2 week class program must really be working then.

Thank you so much. Thanks, Dave.

Thanks.

We have time for one more question and so our final question today comes from Anna Andreva with Piper Sandler. Anna, please go ahead.

Uh

Great, thanks so much. uh, happy to have made it and congrats. Nice results. Uh, two questions from us. I wanted to follow up on Hard goods, uh, to me, just remind us what's the size of your own brands, uh, business within that. Are you starting to see growth there and should that continue into next year and its own brands still a higher margin category for chewy and secondly, I guess to Dave, uh, FC Automation has been a pretty big story here and you quantified that benefit in the 10.

you, uh, to Opex. Uh, can you remind us how many FCs are automated now, uh, what's the benefit and Apex savings you see per FC and how many do you still have to automate ahead into 25 or beyond. Thank you so much.

Sure, uh, let me, let me start perhaps uh with our goods.

And again, if you, if you go into the 10 queue, you'll see that uh that we report on hard goods as I mentioned earlier, uh, after several kind of quarters where we had experienced decline in the past, uh, we have had two consecutive quarters now with growth and hard goods, uh, year over year, uh, so the second quarter we grew year over year. The 3rd quarter we've grown year over year again and in fact we've grown faster uh than we did in the 2nd quarter and while we don't guide by uh.

you know, some a product line or or category um we did we have experienced some good trends and hard goods here in the 4th quarter, so we're quite pleased from that perspective, uh, with regards to our own private brands either within hard goods or other categories, you know, we don't, we don't comment extensively on that I would say in general, uh, private brands for us has been stable, uh, we have several initiatives that uh where we are in expanding uh assortment across.

Both consumables, uh, as well as hard goods, most of those initiatives, uh, our future benefits and not really reflected in the P&L, uh, that we've produced for 3rd quarter or that we're guiding for 4th quarter, uh, so those benefits are yet to come but uh hard hard goods in general up two consecutive quarters trending well for 4th quarter, uh, and then private brands with within hard goods uh continuing to improve assortment and selection.

Smith

And I would just say that uh even though uh you know, the relative stability is absolutely right, you know, if you recall, this is an area of opportunity that we recognize as a strategic pillar we want to get the net sales penetration up to mid-teens level and at that scale we expect private brands to contribute, uh, you know, up to 500 basis points of higher gross margin to the core business.

Uh

For, for, uh, hard goods, you know, we've mentioned in the past that penetration for our private brands is in the mid teens to high teens level it fluctuates, uh, you know, that range across the year and we, we are relatively stable in that penetration.

Uh, in terms of automation, 6 fulfillment centers are currently automated, uh, what I would recall, what I would draw your attention to is, you know, at capital markets today we said we can you know continue to automate, uh, you know, across our network and reach you or touch uh over 70% of volume in one way, shape or form, uh, you know, to push through these, these, uh, improved, uh, uh, uh processes and if you look at just the FC itself.

You know, we have said it drives, uh, you know, improvement to the tune of up to 50% in productivity, uh, 30% in uh uh uh volume per square foot, uh, and, uh, up to 60% improvements in ergonomics and safety, and those results are, are, uh, pretty, pretty true even now.

Those are all the questions we have time for today. And so this concludes today's call. Thank you everyone for your participation. You may now disconnect your lines.