Q4 2024 Chewy Inc Earnings Call
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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 available on our Investor Relations website shortly.
Sumit: And with that I'd like to turn the call over to Sumit.
Sumit: Thanks, Dave and thank you all for joining us on today's call.
Speaker Change: Our fourth quarter results, Mark a strong conclusion to the year.
Speaker Change: Our team's execution enabled us to successfully deliver on the strategic and financial goals that we outlined at the start of this year.
Speaker Change: Additionally, the durability and power of our highly predictable business model shined and led to another year of market share gains.
We innovate to that pace made smart investment decisions and maintained operating discipline throughout the year, allowing us to deliver both the results that exceeded expectations and compelling returns to our shareholders.
Speaker Change: Now, let's review, our Q4 and full year 2024 results.
Speaker Change: We ended the year on a high note topline growth exceeded the high end of our guidance ranges for both the fourth quarter and full year 2020 for Q4 net sales increased approximately 15% year over year to $3 to $5 billion, resulting in full year 2024 net sales of 11.
Speaker Change: 0.8, $6 billion, representing 6% year over year growth.
Speaker Change: Fourth quarter net sales performance was underpinned by strong active customer growth.
Speaker Change: It has returned to growth for all of our hard goods merchandize and compelling auto ship customer loyalty across consumables and health and wellness categories.
Speaker Change: Our auto ship program represented 86% of Q4 net sales delivering best in class service to our customers, while also providing predictable subscription like recurring revenue screens to chewy.
Speaker Change: Growth in auto ship customer sales meaningfully outpaced overall topline growth increasing by 21% in the fourth quarter and nearly 11% for the full year 2024.
Speaker Change: On the topic of active customers I am pleased to report that our active customer performance in the fourth quarter maintained the strong momentum from the previous quarter.
Speaker Change: We ended fiscal year 2024, with 25 million active customers, marking our first year over year growth in eight quarters.
Speaker Change: Our efforts to expand and refresh our assortment and hands on site and mobile app experiences and refine our marketing strategy continue to drive outperformance across all areas of the active customer equation.
Speaker Change: Looking ahead, we believe that we have reached an inflection point with respect to active customer growth and expect to deliver active customer growth in 2025.
Speaker Change: Regarding profitability, our adjusted EBITDA margin for fiscal year 2024 reached four 8% the upper end of the guidance range, we set last quarter.
Speaker Change: And reflecting year over year expansion of approximately 150 basis points. This margin improvement was driven by both strong gross margin and continued operating expense leverage as we scale.
Speaker Change: We converted approximately 80% of our adjusted EBITDA in the year to free cash flow, resulting in a record $452 $5 million of free cash flow in fiscal year 2024.
Speaker Change: Our increasing profitability and compelling free cash flow generation enabled us to not only invest in our strategic growth initiatives, but also return meaningful capital to shareholders as reflected by the $943 million that we deployed to shareholders in fiscal year 2024.
Speaker Change: Now I would like to share some updates on a few priorities at chewy.
Speaker Change: Our sponsored ads business scaled meaningfully this year, reaching approximately 1% of net sales for full year 2024 in line with our expectations and was the largest contributor to year over year gross margin improvement.
Speaker Change: As planned we completed our one P platform migration, which going forward will enable us to enhance the supplier experience expand our AD portfolio, including Offsite and explore additional content formats such as video.
Speaker Change: Looking ahead, we continue to believe that the upper limit of our long term entitlement for chewy sponsored ads business is up to 3% of total enterprise net sales over time.
Speaker Change: Turning to chewy vet care clinics or CVC, we successfully opened eight CVC locations, reaching the upper end of our target range for the year of four to eight openings.
Speaker Change: Our clinic network continues to exceed expectations in both utilization and overall ecosystem benefits, serving as both a strong customer acquisition channel and an engagement flywheel.
Speaker Change: As a result, both new and existing customers are deepening their engagement with chewy and.
Speaker Change: In fiscal year 2025, we plan to open eight to 10, new clinics further expanding our presence in the approximately $25 billion vet services market.
Speaker Change: We are excited about the opportunities ahead and look forward to sharing our progress.
Speaker Change: Let me wrap up my section with the following comments.
Speaker Change: We believe that 2024 was an extraordinary year for chewy and our strong performance underscores the team's ability to successfully navigate through a period of normalization for the industry.
Speaker Change: Our entire team at chewy, including and especially our fulfillment and customer care team members worked incredibly hard and I, thank them for their dedication and commitment as.
Speaker Change: As we move into 2025 the momentum in the business has remained strong.
Speaker Change: The team remains steadfast in executing <unk> strategic priorities and delivering yet another year of share gaining growth.
Speaker Change: Further on the dimension of profitability, we are increasingly confident in our ability to reach our long term adjusted EBITDA margin target of 10%.
Speaker Change: 2024 marks another year of strong progress towards this long term goal and looking ahead, we expect to expand adjusted EBITDA margin once again in 2025.
Dave: Overall, we remain optimistic about the opportunity ahead for chewy and look forward to a productive year ahead with that I will turn the call over to Dave.
Dave: Thank you Sumit and thank you all for joining us today are.
Speaker Change: Our strong year end results showcase the power of <unk> business model, and our ability to deliver increasing levels of profitability and free cash flow, while simultaneously investing in the business to deliver attractive returns for our shareholders.
Speaker Change: Fourth quarter net sales grew 14, 9% year over year to $3 to $5 billion, bringing our full year 2020 for net sales to 11.86 billion, representing six 4% growth year over year and exceeding the high end of the fiscal year guidance ranges, we provided last quarter.
Speaker Change: Fiscal year 2024 included a 50, <unk> week, which added approximately $227 million of net sales for the fourth quarter and the full year.
Speaker Change: Excluding the impact of the 50, <unk> week fourth quarter and full year 2024, net sales grew approximately six 9% and four 4% respectively.
Speaker Change: We returned to year over year active customer growth in fiscal year, 2024, with $20 5 million active customers, reflecting a year over year increase of approximately two 1%.
Speaker Change: We believe we have reached an inflection point in this area and once again outperformed across all elements of the active customer equation.
Speaker Change: New customers and reactivation grew year over year, while gross churn improved over the same period.
Speaker Change: Auto ship customer sales increased by 21, 2% to 262 billion in Q4, and 10, 6% to 939 billion for the year.
Speaker Change: Growth in auto ship customer sales outpaced overall topline growth by approximately 630 basis points in Q4, and by 420 basis points and full year 2024.
Speaker Change: Auto ship customer sales as a percentage of total net sales represented 86% and 79, 2% of our total net sales in Q4 and full year 2024, respectively.
Speaker Change: Netback reached $578 as of Q4 2024, representing an increase of four 1% year over year.
Speaker Change: Q4, 2024 included an extra week of operations, which added approximately $11 of benefit to netback in the quarter.
Speaker Change: As a reminder, net sales per active customer equals the aggregate net sales for the preceding four fiscal quarters.
Speaker Change: <unk> by the total number of active customers at the end of that period.
Speaker Change: As such you can expect our reported net back for the first three quarters of fiscal 2025 to include the benefit of the extra week in Q4 of 2024.
Speaker Change: Moving to profitability, we reported fourth quarter gross margin of 28, 5% and full year 2024 gross margin of 29, 2%.
Speaker Change: Representing 80 basis points of margin expansion for the year, which is double the.
Speaker Change: The amount of gross margin expansion, we delivered in 2023.
Speaker Change: Sponsored ads was the largest driver of gross margin improvement in the year, followed by a product mix shift into premium categories, including consumables and health and wellness.
Speaker Change: Shifting to operating expenses. Please note that my discussion of SG&A excludes share based compensation expense and related taxes.
Speaker Change: We continue to demonstrate operating expense leverage in the fourth quarter with SG&A of $601 million or 18, 5% of net sales, representing a 150 basis points of improvement on a year over year basis.
Speaker Change: For the full year of 2020 for SG&A represented 18, 7% of net sales, reflecting a 100 basis points of improvement year over year.
We continue to deliver SG&A leverage driven by at scale fixed cost infrastructure and ongoing discipline and efficiency with respect to corporate payroll.
Speaker Change: Fourth quarter advertising and marketing expense was 235 million, bringing full year 2024, A&M expense to $804 1 million or six 8% of 2024 net sales consistent with our previously stated expectation of coming in at the high end of our 6%.
Speaker Change: 7% of net sales target range.
Speaker Change: Fourth quarter adjusted net income was $120 million and full year 2024, adjusted net income came in at $446 $8 million, which translated into 28.
Speaker Change: And a $1 <unk> adjusted diluted earnings per share for the fourth quarter and full year of 2024, respectively.
Speaker Change: Fourth quarter adjusted EBITDA came in at $124 5 million, bringing full year 2024, adjusted EBITDA to $575 million, representing a four 8% adjusted EBITDA margin for the year, reflecting a 150 basis points of year over year margin expansion.
Speaker Change: We are proud of the meaningful margin expansion, we delivered this year driven by the improvements in gross margin and SG&A leverage described earlier.
Speaker Change: In the fourth quarter, we reported free cash flow of $156 6 million and in fiscal year 2024, we generated a record high $452 5 million of free cash flow.
Speaker Change: Our full year 2024 of free cash flow reflects $596 3 million of net cash provided by operating activities and $143 8 million of capital expenditures.
Speaker Change: In 2025, we continue to expect approximately 80% of adjusted EBITDA to convert into free cash flow and that capex will be between one 5% and 2% of net sales.
Speaker Change: Our.
Speaker Change: <unk> to generate increasing levels of free cash flow and our disciplined approach to capital spending have allowed us to not only reinvest back into the business, but also return meaningful capital to shareholders. This year.
Speaker Change: Recall in Q1, 2024, we announced the authorization of <unk> first ever share repurchase program of up to $500 million over.
Speaker Change: Over the course of the year, we executed a number of share repurchase transactions, including open market repurchases made under this program as well as repurchasing additional shares directly from BC partners, our largest shareholder.
Speaker Change: In 2024, we repurchased approximately $29 4 million shares directly from BC partners.
Speaker Change: Reducing their overall ownership position and chewy by approximately 16%.
Speaker Change: We also repurchased approximately three 4 million shares of class a common stock spending approximately $93 $3 million under our $500 million share repurchase program.
Speaker Change: At the end of the fourth quarter, we had approximately $406 $7 million of remaining capacity under our existing share repurchase program for future repurchases.
Speaker Change: Collectively the company repurchased and retired a total of 32 8 million shares in 2024.
Speaker Change: We ended the year with approximately $597 million in cash cash equivalents and marketable securities and we remain debt free with an overall liquidity position of approximately $1 4 billion.
Speaker Change: Now I'd like to discuss our first quarter and full year 2025 outlook.
Speaker Change: We have an increasingly high degree of confidence in our ability to deliver on our strategic roadmap and our long term financial model. The team outlined that you use capital markets day in December 2023.
Speaker Change: We made tremendous progress in 2024 towards those strategic and financial goals and believe against the backdrop of a normalizing pet industry. We are poised to continue to deliver share gaining growth and margin expansion in the coming years.
Speaker Change: Before we dive into our guidance details I would also like to acknowledge that the company is increasing profitability profile as resulted in growing interest from the investment community regarding earnings per share metrics for QE.
Speaker Change: As such we will be providing some supplemental information regarding adjusted diluted earnings per share expectations.
Speaker Change: With that let's discuss the specifics of our 2025 guidance.
Speaker Change: We anticipate first quarter 2025, net sales of between 3.6, and 3.09 billion or approximately 6% to 7% year over year growth and full year 2025, net sales of between $12, three and $12 $4 5 billion or approximately 6%.
Speaker Change: To 7% year over year growth when adjusted to exclude the impact of the 50 <unk> week in fiscal year 2024.
Speaker Change: We expect our net sales growth to be driven by a combination of active customer growth netback growth and minimal price inflation.
Speaker Change: Based on the current environment, we see today, we remain confident in our ability to deliver year over year active customer growth in the low single digit range with the level of net additions broadly consistent throughout the course of the year.
Moving to profitability guidance, we anticipate full year 2025, adjusted EBITDA margin in the range of $5 four to five 7%.
Speaker Change: Furthermore, we expect 2025 quarterly profile of adjusted EBITDA margin to broadly followed the same trend observed in 2024 with modest sequential declines throughout the year due to typical seasonality and the timing of investments.
Speaker Change: Additionally, we expect first quarter adjusted diluted earnings per share in the range of 30 to 35.
Speaker Change: For the full year 2025, we also anticipate share based compensation expense, including related taxes to be approximately $315 million.
Speaker Change: Weighted average diluted shares outstanding of approximately $430 million we.
Speaker Change: We expect 2025 net interest income of approximately $25 million to $30 million and our effective tax rate to be in the range of 20% to 22%.
Speaker Change: And finally embedded in our guidance is minimal expected impact from tariffs.
Speaker Change: In closing I'd like to thank all of our <unk> team members for their disciplined and record setting execution in 2024.
Speaker Change: I believe chewy is better equipped than ever to execute against our strategic roadmap delivering compelling financial results and increasing shareholder value.
Speaker Change: With that I will turn the call over to the operator for questions.
Speaker Change: Thank you we will now begin the question and answer session.
Speaker Change: As a reminder, if you would like to ask a question today <unk> said now by pressing star followed by the number one on your telephone keypad.
Speaker Change: If you change your mind or you feel like your question has already been answer you can press star followed by case with Julia So from Nicky.
Our first question today comes from David Bellinger with missing Hi, Keith.
Speaker Change: Please go ahead David.
Speaker Change: Hey, everyone. Good morning excellent results here.
Speaker Change: Two questions from Us I want to start on the net actives Big sequential jump Q3 to Q4 can you unpack, what's driving that change in a little more detail how much is a function of a better pet spending environment and how much is chewy specific and share gaining with all the initiatives in place like the app adjustments in vet care and I've got a follow up as well thanks.
Speaker Change: Yeah.
Speaker Change: Sure.
Speaker Change: Morning.
Speaker Change: I'll start with that one so.
Speaker Change: The short version is that the momentum that we've talked about from last quarter continued into Q4.
Speaker Change: Resulting in our return to year over year active customer growth for the first time in eight quarters.
Speaker Change: As we spoke about on the call the increases that we saw it happened across the board.
Speaker Change: The customer equation, new customers were up re activations were up and churn was better from a year over your point of view.
Speaker Change: And then finally, let me just reiterate that these results in our program.
Speaker Change: But we're looking through on and our belief system. These are predominantly driven by execution.
Speaker Change: And strengthen the model relative versus the market meaningfully changing and.
Speaker Change: In any particular direction.
Speaker Change: Let me elaborate.
Speaker Change: Some specifics that that's.
Speaker Change: That's kind of talk to the evolution of our marketing strategy and some of the tactics that we put in place that drove the results.
Speaker Change: As I mentioned last quarter in Q3, I talked about our focus on connecting the marketing funnel to give us an expanded reach so we continued that effort through Q4 and are now optimized and ready going into 2025.
Speaker Change: Last quarter I also talked about the ability, having a sharper ability to identify and target customers been on our platform to drive higher conversion right.
Speaker Change: In addition to that as we did through Q4.
Speaker Change: How the chance to comment.
Speaker Change: I would call completely rebuilt internal bidding model into perspective.
Speaker Change: So.
Speaker Change: What about this.
Speaker Change: Yes.
Speaker Change: These internal bidding models that we.
Speaker Change: Our further driving a higher lift on campaigns, but also optimizing for a cumulative contribution profit or CCP, which is the guardrails off the ROI that'd be kind of put in place to make sure that our campaigns are running optimally in the Rois nice. So all of this allowed us to lean into the strong stronger demand signals that we were picking and coming into Q3.
Speaker Change: Coming into and out of Q3 that we talked about in the previous earnings call and invest heavier in Q4, while simultaneously driving efficiencies across our investments and driving higher net adds as a result of that so if you if you're inferring from the numbers specifically.
Speaker Change: We invested approximately 15% higher than Q4 marketing spend and yet our cost per gross adds increased less than 2%.
Speaker Change: And we added right.
Speaker Change: Over 400000 customers in Q4.
Speaker Change: So we're pretty pleased with the way the marketing engine humming now I should also add to the fact that Q4 is generally a quarter, where there is incremental interest and the customer has a shopping intent.
Speaker Change: So while we expect the momentum to absolutely continue and these changes that we've put in place I haven't talked about the app and the improvement in experiences. So we can talk about that separately, but these experience. These improvements are durable yet theyre subject to normal seasonality.
Speaker Change: If that occurs in the marketplace. So from that point of view, we might have gotten the benefit of we leaned in and took benefit of Q4 seasonality, but we expect the returns to be durable and continue through 2025, which is why we said, we expect that from customer growth and 25.
Speaker Change: Did you got it that's very helpful.
Speaker Change: I just wanted to ask about gross margins in Q4, so up about 30 basis points year on year, but a little light versus expectations.
Speaker Change: Expectations in a sort of a slowdown versus the past several quarters can you help us understand the momentum on the gross margin side, just anything specific to call out for Q4 that held margins back in some way just how do we think about the expansion opportunity in 2025.
Speaker Change: Yeah.
Speaker Change: Thanks for the question, let me maybe broaden it out a bit and then specifically to your question.
Speaker Change: Expanded EBITDA margin 150 bps on a year over year basis, 24 versus 23 of that 150 bps about 60% of that was driven by improvements in gross margin.
Speaker Change: Underpinned by growth in sponsored ads product mix accretion as well as the normal efficiencies that you expected the gross margin line freight and packaging et cetera. So when you look at 2025 and in the context of fourth quarter I would say fourth quarter was very much.
Speaker Change: What we expected it to be not a lot of surprises for us with respect to either gross margin or EBITDA margin for fourth quarter.
Speaker Change: So from that perspective played out pretty much almost exactly as we expected it to.
Speaker Change: For 2025, as you kind of project that into the future. We expect again, the EBITDA margin growth in 2005 versus 24 75 bps at midpoint.
Speaker Change: And we expect a similar growth profile in terms of contribution from gross margin as well as as well as the other lines of Opex.
Speaker Change: So fourth quarter as expected and we expect the trends that we saw in 2004 to extend into 2005.
Speaker Change: Got it thank you very much.
Speaker Change: Yes.
Speaker Change: Thanks, David.
Speaker Change: Our next question comes from Doug Anmuth with J P. Morgan.
Speaker Change: Please go ahead.
Doug Anmuth: Hi, Thanks for taking my questions so be it.
Doug Anmuth: You could talk a little bit more about automation I think you are around 50% of volume currently can you just.
Doug Anmuth: Update us there and then perhaps talk about kind of the bridge to the 70% to 80% that's expected over time and then also just on gross margins the sponsored ads being the largest contributor to improvement.
Doug Anmuth: With the <unk> platform migration complete can you just help us understand some of the opportunities that that opens up for you in the past two 3% overtime. Thanks.
Doug Anmuth: Yes, so with respect to automation.
Doug Anmuth: If you were to kind of go back through time, you've seen us increase the amount of volume that is.
Doug Anmuth: Flow through the automated facilities or the more automated facilities from kind of 30% approaching 40% and as we sit today, we're north of 40% not yet quite at the number that.
That you've referenced.
Doug Anmuth: But north of 40% you didn't ask a question about utilization.
Doug Anmuth: But the utilization of the network does remain very similar to what we quoted in Q3, which is around that 70% 75%.
Doug Anmuth: Utilization range and with respect to the bridge to the future for ramping more volume through the automated facilities.
Doug Anmuth: We have started to ramp more volume for example through our Houston facility.
Doug Anmuth: Dallas facility still remains very important to us, particularly from a fulfillment perspective on the pharmacy side.
Doug Anmuth: But you have seen us start to ramp that Houston facility in a more meaningful way.
Doug Anmuth: In the fourth quarter and then throughout 2025.
Doug Anmuth: From a gross margin perspective, the second part of your question.
Doug Anmuth: One thing that you wanted to have on the automation. So the numbers that David mentioning are all purely to June numbers. If we consider overall automation that we've put in since the time, we've met that volume is over 50% of the volume. So you'll recall is correct there and we continue to make improvements as you can see reflected in the overall opex.
Doug Anmuth: But we're bringing forward so that plus the Houston enable mentioned should actually continue to make this stronger as we move forward and British closer to the 7% to 80% so.
Doug Anmuth: We're not talking years out, but we are talking over the near to medium term out.
Speaker Change: Dr <unk>, Dr. Dave on sponsor that think you can estimate.
Speaker Change: From a from a gross margin perspective sponsored ads was the largest contributor to gross margin in 2024.
Speaker Change: As you reference.
Speaker Change: We did talk about throughout 2020 for how we were on a third party software platform that didn't really give us all of the capabilities that we would like to bring to our offering on sponsored ads.
Speaker Change: We did rebuild or.
Speaker Change: We did our first kind of custom build of our first party software.
Speaker Change: Through 2024, we did not launch it in 2024, but it has subsequently been launched now. So we are on first party software today that first party software allows us to provide new media content. So we're able to provide.
Speaker Change: Video in a more meaningful way today, we're also able our vendors are able to onboard their content and much more self service.
Speaker Change: Fashion as well as utilize other content that they developed for other channels and be able to onboard that in a pretty seamless way to our platform now and then as well as the helping both the ease of use as well as providing new media content.
Speaker Change: We're also able.
Speaker Change: To take advantage of Offsite ads.
Speaker Change: In addition to our historical on site ads that we offered in 24, so very excited about the first party software stack.
Speaker Change: It has been launched it is operating largely as we expected it to and so so full speed ahead on the first party software sponsored ads does it opens up it opens up the funnel up top so long term entitlement, we would expect online to offline mix, our offsite and onsite to Offsite ads mix standard in the industry somewhere in the tune off.
Speaker Change: $730 65 to 35 range and the margin profile will be appropriately adjusted obviously off onsite as much higher flow through off site is slightly more diluted.
Speaker Change: So, but it opens up the Tamil upfront to be able to achieve up to the 3% and underneath of the capabilities that Dave was mentioning around video and branded campaigns and a higher and more precise measurement plus not paying.
Speaker Change: The commission that used to go through to the third party. So there's multiple benefits of owning this ecosystem for us.
Speaker Change: Got it. Thank you both I appreciate it.
Speaker Change: Thank you Doug.
Speaker Change: Our next question comes from Eric Sheridan with Goldman Sachs.
Speaker Change: Please go ahead Eric.
Eric Sheridan: Thank you so much maybe two if I can first in terms of thinking through the growth investments as a stimulant for 2025.
Speaker Change: Between what you see as the.
Speaker Change: Landscape for net new customer growth as opposed to potentially stimulating more levels of reactivation across the base potential.
Speaker Change: As a driver of growth and then in terms of the broader consumer landscape looking across either the ages of your cohorts are the income level of your cohorts are you seeing any differences in behavior either in the forms of strengths or weaknesses versus some expectations. Maybe you had 90 days ago. Thanks, so much.
Dave: Sure I can start Dave can do you can jump in so in terms of if you look if you think about net new investments.
Dave: CVC isn't that new investment that is a completely new channels, that's bringing in a much higher proportion of new customers than we forecasted. So we're very pleased with that obviously CVC use at a smaller scale and so that will take its time to ramp up when you look at existing strengths, but our focus improving in certain areas.
Dave: The specialty category is one that we're continuing to attract more and more customers. The mix is higher relative to where it was a year ago and we feel we have headroom to.
Dave: To continue to double down and grow.
Dave: This particular space, it's a highly attractive space that cuts across equine and farm and so forth and so on then you've got to consider programs like App and chewy, plus which are onsite products, but the cut across demographics and they cut across that they reach customers in a wider manner and they allow for conversion and all sorts of income levels.
Dave: So chewy plus for example.
Dave: The value that we're passing on to the chewy plus program and the convenience that customers are associating themselves attaching themselves red is allowing for a very high conversion of free remember the first program starts at a 30 day free trial period, and then goes to a paid membership of $49 a year, which is an introductory fee that we've introduced now.
Dave: Right. So the conversion from free trial to paid is very high higher than the expectations that we modeled been while keeping our overall costs in line, but it's driving a really healthy funnel of new customers that we perhaps wouldn't have attracted at first who perhaps would have caught that hey.
Dave: E Com platform must provide sort of free shipping and they're in they're in their value prop with two plus now you do get a free ship.
Dave: The final one I would say is the app right. So when you look at the App, our outperformance continues to strengthen.
Dave: Let me just kind of caught you a few numbers app installed in Q4.
Dave: Drew 20% year over year, and the number of customers, making their first purchase grew by 34%.
Dave: These are customers that we werent essentially see so these are customers that are.
Dave: Not the typical.
Dave: Leaned in E com customer, but is gravitating towards us due to the fact that were kind of the brand is expanding in multiple auctions chewy pluses expanding ownership provides the value that theyre looking for Oh by the way <unk>, plus an auto ship or acting as flywheels into each other.
Dave: So.
Dave: Both are supporting each other sort of growth, which was obviously a very healthy metric that we wanted to test out and were essentially starting to see that come through so I would say there is a lot of innovation internally that is customer facing.
Dave: Including some of the other ideas that are in the oven that we want to come out and talk about a year as we move through 2025.
Dave: Because you know, we're always looking for new and incremental ideas to to offer to our customers. So I would say that this is probably a good perspective on innovation that's happening inside the company.
Dave: And to build up to build on that and for the avoidance of doubt.
Dave: Other than perhaps a little bit of the mobile app and what Sumit mentioned with respect to CVC and chewy plus we're not any meaningful contributors to the performance in 2024, they are on a little bit longer timeline arc than perhaps even 25, but very encouraged by the result.
Dave: That we're seeing there and then with respect to you asked a question about some of the cohorts to users in those cohorts. When we look at the cohort trends and profiles. They are quite strong in fact, they look very similar to the cohort trends that we've seen since really the advent of chewy. So.
Dave: We're quite pleased with how cohorts are aging as they're aging theyre consolidating share of wallet with chewy.
<unk> if you look at some of the newer cohorts that are that we are capturing they're performing at or above even pre COVID-19 level. So co.
Dave: Cohort trends remained strong quite pleased with the with those trends and we're optimistic about these new growth initiatives and how they contribute in the latter half of 'twenty five 'twenty six and beyond.
Speaker Change: Thank you. Our next question comes from Steve next question with just great.
Speaker Change: Stephen. Please go ahead. Your line is now open.
Dave: Yeah.
Speaker Change: Great. Good morning, Thanks, very much for taking my question. Congrats on the strong results and then I was curious for your assessment of.
Speaker Change: At industry landscape I kind of asked two in one how are you thinking about adoption trends relative to the guidance you've provided and then on the comment about guidance for the year I think you mentioned minimal impact from pricing. So I'm just kind of curious what are you seeing from a promotional perspective out there in the pet landscape.
Speaker Change: Sure so.
Speaker Change: Let's start by let's start by just.
Speaker Change: Recalling so we believe we grew share.
Speaker Change: Premium to the overall industry in 2024.
Speaker Change: Supported by the growth rates that.
Speaker Change: Nielsen is reporting another reporting.
Speaker Change: Sites are sharing but the most indicative to us choose oral search performance was stronger than the market trend.
Speaker Change: Commerce grew.
Speaker Change: Uh huh.
Speaker Change: <unk> to retail and then within the E. Commerce Chewy grew at a premium rate. So we were happy about how Q4 performed as we've gotten into Q1 does not right now we're not seeing much different in terms of the.
Speaker Change: Hum.
Speaker Change: In terms of independent auction space.
Speaker Change: A nuanced it's a bit of a nuanced answer we haven't seen much change there netted options are still up relative of out of the shelters and rescue community dogs seems to be more flat.
Speaker Change: And cat seems to be up which is sort of what's driving slight premium, but overall netted auctions are still up so we'll see how these trends evolve as of right now I think it's a beautiful wait and watch approach, but regardless of how the market performs we expect to continue to take share in 'twenty five.
Speaker Change: I think you had one more question, yes. The second question was really with respect to pricing and inflation.
Speaker Change: I would say the promotional environment for fourth quarter was again very much as we expected. The team continues to do a really good job.
Speaker Change: To manage the promotional environment.
Speaker Change: As you know.
Speaker Change: A large portion of our portfolio is Matt protected are price protected.
Speaker Change: That does provide some benefit to us.
Speaker Change: As we kind of look at where pricing is and where pricing is going.
Speaker Change: We do have a large portion of the portfolio that is that is mapped protected.
Speaker Change: Specifically to kind of just inflationary trends in pet as we went through 2024, we had kind of mid single digit inflation in the first quarter. It moderated some more in the second quarter. It was essentially zero in the third quarter and it was very low single digits in the fourth quarter.
Speaker Change: And so as we look out into 2025.
Speaker Change: Included in our forecast as noted we're not seeing a lot of inflationary pressure at this point in time across pet into 2025 and on the flip side. The conversations that we've had with our strategic partners and suppliers were not also expecting at this particular time.
Speaker Change: Broad deflationary pressure.
Speaker Change: We might expect private branded portfolio is to start gaining some momentum.
Speaker Change: If the environment kind of remains a little bit.
Speaker Change: Uh huh.
Speaker Change: Emotional per se, but underneath of it the strong map protection across the segment or the demographics is pretty much holding and we haven't seen any elevation on any abuse, so far either an incremental promos or in terms of pricing deflation.
Speaker Change: So far so good and by the way are the ranges that <unk> provided the low end of our range incorporates these why these kind of widen scenarios that we're talking about.
Speaker Change: Okay. Thanks for all that detail best of luck to Schenk Steven.
Speaker Change: Sure. Thank you Steve.
Speaker Change: The next question comes from Curtis Nagle with Bank of America.
Speaker Change: Please go ahead.
Speaker Change: All right great. Thanks for taking the question one just in terms of 25 expectations for marketing as a percentage of revenue for the year, assuming there'll still be six seven.
Speaker Change: And should we expect any quarters through the year to be above 7% and then I'll have a quick follow up.
Speaker Change: Sure. Let me, let me address that one and submitted do you have any comments feel free to build on it.
Speaker Change: So for 2025, we're viewing and advertising and marketing.
Speaker Change: Very much within the range of 6% to 7%. If you were to look back at the last couple of years.
Speaker Change: 2023 was six 7% of net sales for the year of 2024 as noted was six 8%.
Speaker Change: Advertising and marketing, even if memory recalls I think 2022 was very much at the similar level as kind of a six 7% level.
Speaker Change: So as we roll into 2025.
Speaker Change: Very much viewing it as kind of a 6% to 7% in total and I would say very much in line with the trends that we saw in both 'twenty two 'twenty three 'twenty four with respect to any specific quarter or could we have a specific quarter.
Speaker Change: Above 7%.
Speaker Change: We really look at our advertising and marketing spend.
Speaker Change: From a return perspective, and so while we don't have any specific target for a quarter.
Speaker Change: We do feel like for the year, we will be in line with where we have historically done and then obviously just based on the timing of certain campaigns you may get a quarter, that's slightly more or less than others did you have a follow up.
Speaker Change: Yes, a quick one just looks like hard goods outperform consumables <unk>.
Speaker Change: Called it out.
Speaker Change: I guess, what is that relating to us anything in terms of people buying new credits or beds or stuff like that for perhaps or just what drove the outperformance from hard goods.
Speaker Change: Yes, it's the agenda a combination of factors, we've talked about investing in improving site experiences on the science, so as youre moving through the funnel our ability to convert has been a focus and hard goods of course is not exempt from that be the rise of App generally helps with attached driven categories like hard good.
Speaker Change: It's easier to attach.
Speaker Change: Our recommendations are tightened precise when you're in the sector. So that definitely helps number three the new customer file as increasing rates also has a propensity to attached towards hard goods.
Speaker Change: So we benefited from the Q4 quarter and the really.
Speaker Change: Really strong active customer file some portion of that.
Speaker Change: Came in to buy gifts and hard goods.
Speaker Change: Overall, we're seeing trends not the trends are still relatively similar to how we were.
Speaker Change: Perceiving to add some major surprises.
Speaker Change: Though we're happy with the traffic that were driving to the side, because we know that traffic into retail channels, including search intent is to remain down.
Speaker Change: So from that point of view, we're happy to take the traffic and convert them and they are on the platform.
Speaker Change: And in terms of was there any specific category that outperformed or underperformed.
Speaker Change: Underperform versus others. It was it was pretty broad based in the fourth quarter in terms of year over year improvement.
Speaker Change: <unk> collars tack beds toys, I mean, we had categories kind of across the board that were all up on a year over year basis, and so that.
Speaker Change: And that speaks to a lot of the hard work that the teams have been doing to increase selection assortment.
Speaker Change: Search and so so quite pleased with our performance and very broad based.
Speaker Change: Okay. Thank you.
Speaker Change: The next question comes from Trevor Young with Barclays. Please go ahead Trevor.
Trevor Young: Great. Thank you for the questions first one Dave just to your comments on net adds of low single digit growth in 'twenty five.
<unk>, maybe around 600000 ads throughout the course of the year. I also think you said fairly balanced throughout the year. So that would imply 150 K Q on Q each quarter is that the right way to think about it and then relatedly why wouldn't it be stronger <unk> given the compares and then maybe a little bit softer in <unk> given the number you just put up.
Trevor Young: Thanks for the question driver without getting into <unk>.
Trevor Young: Into a precedent where for guiding each quarter of the year.
Trevor Young: I would characterize it active customer growth in the low single digits quite quite pleased by that actually we.
Trevor Young: We do believe that we've inflicted that we're going to have.
Trevor Young: Net ads and active customer growth in 2025, we do think it'll be somewhat consistent in terms of absolute numbers kind of being added throughout the course of the year. So from that perspective, we see it as being kind of broad based and sustainable so quite pleased by that as well.
Trevor Young: And then with respect to any quarterly guidance on an active customer growth I'm going to I'm going to steer away a little bit from that did you have a follow up.
Speaker Change: Yes, a follow up to the earlier questions around kind of fulfillment utilization and so forth.
Speaker Change: The Capex guide of one 5% at the low end that would imply capex growth of upwards of 30% year on year after having a flattish year. This last year could you just help us understand what that incremental spend is going towards and how do you feel about FC capacity overall for the next call. It couple of years.
Speaker Change: So when we think about Capex, 152%, we kind of guided as we got into 2024, we kind of guided that we thought we would be at the lower end of that range. We were indeed at the low end of that range, we had capex of about $144 million for the year.
Speaker Change: If you were to break down that Capex and.
Speaker Change: The kind of normal fulfillment center Capex largely falls into the bucket of almost like maintenance and sustaining with some small automation projects that you would expect.
Speaker Change: Refresh automating a specific line not a whole facility, but a line.
Speaker Change: So so the lion's share is still related to fulfillment centers. The lion's share is still related to the automation and kind of productivity gains within those fulfillment centers, but I would characterize that as very stable and pretty flat.
Speaker Change: Incremental capex, which we did have incremental capex in 2024.
Speaker Change: That's really related to both.
Speaker Change: Improvements in health care.
Speaker Change: Specifically related to satisfying the pharmacy demand and then of course is related to the vet clinics and so as you think about kind of rolling that out are rolling it forward I should say into 2025, the low end of the range and roughly the number that you've quoted for 2025 that that level of growth.
Speaker Change: It would primarily be associated with the growth in health care, both any incremental spend that's needed to satisfy pharmacy as well as the continued expansion of the vet clinics.
Speaker Change: Very helpful. Thank you.
Chip: Thanks Chip.
Speaker Change: Thank you we have time for one more question and so our final question will come from Dylan Carden with William Blair.
Speaker Change: Please go ahead Darren.
Dylan Carden: Thanks, a lot.
Dylan Carden: Quick one here and a 23 you gave a number that about.
Dylan Carden: Third of the industry the pet industry was online.
Speaker Change: Have a sense of year and kind of where that number is and is it your understanding that that kind of migration at this point coming out of the pandemic is normalized.
Dylan Carden: Yes.
Dylan Carden: Yes, you are right I think the number I quoted was 20% to 33% and took out buy online pick up in store, which was a trend.
Dylan Carden: That was really shaping up so our read of the industry was somewhere in that 20, 20% to 30% on a normalized basis was online.
Pharmacy was looking at or health categories were sort of mid teens level penetrated.
Dylan Carden: Then.
Dylan Carden: And supplies were sort of in that 30% to 35% penetrated to sort of make up the number that we're talking about so with that sort of composition breakdown.
Speaker Change: Yes, the migration has fully normalized in fact.
Dylan Carden: We believe.
Dylan Carden: The secular trend that was moving towards e-commerce.
Dylan Carden: We certainly saw it pick up in Q4, and we're not forecasting at this point, we're hoping that it continues in 2025, so as the airplanes through perhaps we can have another conversation on this topic.
Dylan Carden: And then where this metric is we believe we.
Dylan Carden: We're still capturing roughly 40 to 50 cents of every dollar that is moving online.
Which is a metric that we kind of monitor internally, which we're happy about.
Speaker Change: Did you have a follow up thank you very much.
Dylan Carden: Not particularly I mean.
Dylan Carden: Yes.
Speaker Change: Expectations at this point I know, there's been some chatter that people are focused on sort of adoptions and pet growth broadly but.
Dylan Carden: Does it stand in your view that.
Dylan Carden: As online migration normalizes that you kind of will continue to capture share beyond kind of what the general category.
Dylan Carden: Our assumption is that yes, if we actually if we look in two.
Dylan Carden: 2025, right. The market is expected to grow at roughly three five to four 5% and based on our guide of 6% to 7% as you can tell we're growing two times what the market expectation is.
Dylan Carden: So we are capturing incremental portion of share. The second thing is as 2024 has normalized in our read.
Dylan Carden: Not all channels, where consumers shop, so E comm independent retail so for the drug and mass et cetera, not all channels of normalized equally great E. Comm has picked up a bigger share of that normalization and conversion relative to the other channels, which we believe will continue to strengthen as we move forward from here independently given the.
Dylan Carden: Secular trend, but chewy should benefit more given the investment the focus.
Dylan Carden: And the differentiation that we bring to the platform.
Dylan Carden: Thank you.
Speaker Change: Thank you Don.
Speaker Change: Thank you those are all the questions. We have time for today and this concludes our call. Thank you everyone for joining US you may now disconnect your lines.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Yes.