Q1 2025 Chewy Inc Earnings Call
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Emily: Good morning, everyone and a warm welcome to <unk> first quarter 'twenty 25 earnings call. My name is Emily and I'll be coordinating Yoko today.
Emily: After the presentation, you'll have the opportunity to ask any questions, which you can do so at any time by pressing star followed by the number one on your telephone keypad.
Natalie: I will now hand over to our host nationally known <unk> director of Investor Relations to begin Natalie. Please go ahead.
Natalie: Thank you for joining us on the call today to discuss our first quarter results for fiscal year 2025, joining.
Speaker Change: Joining me today are chewy, CEO, Sumit Singh and CFO David reader.
Speaker Change: Our earnings release, which was filed with the SEC earlier today has been posted to the Investor Relations section of our website.
Speaker Change: In addition to the earnings really a presentation summarizing our results is also available on our website at Investor Chewy Dotcom.
Speaker Change: On our call today, we will be making forward looking statements.
Speaker Change: <unk> statements concerning trees financial results and performance industry trends strategic initiatives share repurchase program and the environment in which we operate.
Speaker Change: Such statements are considered forward looking statements under the private Securities Litigation Reform Act of 1995.
Speaker Change: These statements involve certain risks uncertainties and other factors that could cause actual results to differ materially from our forward looking statements.
Speaker Change: We encourage you to review, our SEC filings, including the section titled Risk factors in our most recent Form 10-K for a discussion of these risks.
Speaker Change: Reported results should not be considered an indication of future performance.
Speaker Change: Also note that the forward looking statements on this call are based on information available to us as of today's date.
Speaker Change: We assume no obligation to update any forward looking statements, except as required by law.
Speaker Change: Also during this call we will discuss certain non-GAAP financial measures.
Speaker Change: Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided on our Investor Relations website and in our earnings release.
Speaker Change: These non-GAAP measures are not intended as a substitute for GAAP results.
Speaker Change: Additionally, unless otherwise stated all comparisons discussed on today's call will be against the comparable period of fiscal year 2024.
Speaker Change: Finally, this call in its entirety is being webcast on our Investor Relations website.
Speaker Change: A replay of the audio webcast will also be available on our Investor Relations website shortly and.
Speaker Change: With that I'd like to turn the call over to submit.
Speaker Change: Thanks, Natalie and good morning, everyone.
Speaker Change: The momentum at Chewy continues our team delivered a strong start to 2025, achieving topline results exceeding expectations continued growth in active customers and solid profitability and free cash flow generation.
Speaker Change: Our Q1 results are a testament to the hard work and dedication of every two week team member and <unk> ability to continue to take market share amidst a resilient category.
Speaker Change: Now lets review the specifics.
Speaker Change: Q1, net sales exceeded the high end of our guidance range, increasing by over 8% to $3 one $2 billion net.
Speaker Change: Net sales performance was underpinned by strong participation from new and existing customers across a variety of <unk> offerings, and our favorable mix of core consumables and health and wellness categories.
Speaker Change: Also notable this quarter was the 12, 3% year over year growth, we delivered within hard goods.
Speaker Change: Over the last several quarters you have heard me talk about our ongoing efforts to refresh our assortment and improve overall experience and we believe that customers appreciate the new offerings available in this category.
Speaker Change: Further our Ultrashape subscription program continues to be a pillar of strength and differentiation for TUI, enabling high visibility and predictability in our business, while also enhancing customer loyalty.
Speaker Change: Fourth quarter auto ship customer sales of $2 $56 billion represented approximately 82% of Q1 net sales, reaching a record high for the company.
Speaker Change: Growth in auto ship customer sales once again outpaced overall topline growth increasing by nearly 15% in the first quarter.
Speaker Change: Moving on to the topic of active customers. The momentum we spoke about last quarter continued through Q1, and we ended the quarter with $20 8 million active customers, reflecting three 8% year over year growth and an increase of approximately 240000 customers sequentially.
Speaker Change: Active customer growth was driven by continued strength in gross additions along with improvement in gross churn.
Speaker Change: Moving down the P&L gross margin came in at 29, 6% for the quarter.
Speaker Change: Recall that last year, we highlighted approximately 70 basis points of one time items that benefited our Q1 fiscal 2020 for P&L.
Speaker Change: Adjusting for these one time benefits in the comparable prior year period, we expanded gross margin by approximately 60 basis points year over year, David will provide additional color on our gross margin performance.
David: We generated $192 $7 million of adjusted EBITDA in the quarter, representing a six 2% adjusted EBITDA margin and a year over year increase of approximately 50 basis points.
David: Accounting for the previously mentioned, one time items, which positively impacted first quarter 2024.
David: Adjusted EBITDA margin increased approximately 120 basis points year over year.
David: Our adjusted EBITDA performance in Q1 reflects our strong gross margin performance continued opex discipline and the timing of certain marketing campaigns, resulting in modest advertising and marketing leverage inside the quarter.
David: And finally, we generated nearly $50 million of free cash flow and deployed $23 $2 million towards share repurchases in the quarter in line with our internal expectations.
David: Now I would like to provide an update on some of <unk> strategic initiatives.
David: With chewy vet care or CVC.
David: Since our last earnings call. We have opened three additional chewy vet care practices, bringing our current CVC count to 11 locations across four states.
David: The encouraging signs of success, we have spoken about over the last several quarters remained strong through Q1.
David: Our current footprint continues to outperformed relative to expectations in terms of demand generation and driving broader ecosystem benefits as customers deepen their commitment to chewy.
David: Additionally, we continue to gain valuable insight and learnings from each of our C. B C locations as they ramp, allowing us to apply those learnings to our recently opened and future clinics as we drive more efficient unit economics.
David: We remain on track to open eight to 10, new clinics in fiscal year 2025, and we look forward to keeping you updated on our progress as we continue to build this business.
David: Our sponsored ads business continues to perform well and grew sequentially quarter over quarter.
David: The successful migration to our one P platform that I spoke about last quarter has enabled us to broaden our suite of AD products and content capabilities, including the expansion of Offsite ads.
David: We are taught fully ramping off site across search and social with demand exceeding internal expectations. We continue to be excited about our sponsored ads business.
David: Elsewhere I'm excited to share that we have transitioned the chewy plus membership program out of beta phase following a successful testing period.
David: While still in its Nascency, we are excited about our ability to drive even stronger loyalty as we expand access and engagement with the chewy plus paid membership program.
David: Before I wrap up I would like to briefly share my perspective on <unk> long term outlook.
David: We have a strong and growing confidence in our ability to deliver on the strategic roadmap and long term financial model that we outlined at capital markets day in December 2023.
David: That confidence is grounded in our execution to date and the meaningful progress we are making towards those goals.
David: To illustrate achieve.
David: It's even the midpoint of our FY 2025, adjusted EBITDA margin guidance range would represent over 220 basis points of margin expansion from three 3% to approximately five 6% in just two years.
David: Importantly, consistent with last year, approximately 80% of that profitability is expected to convert into free cash flow translating to approximately $550 million all while continuing to fund our strategic growth initiative through the P&L.
Speaker Change: He worked at Gold's like health sponsored ads and private brands remain early in their lifecycle and programs such as auto ship, our retail business and broader competitive moats continue to scale.
Speaker Change: These developments support our path to achieving our long term adjusted EBITDA margin target of 10%.
Speaker Change: Lastly, as you know earlier this month, we announced that Dave Reeder, our CFO will be leaving <unk> to pursue a CEO role in the semiconductor industry.
Speaker Change: They will remain in his role for the next several weeks to ensure a smooth transition. We thank him for his contributions and wish him continued success with strong internal talent, a differentiated strategy and solid momentum we remain confident in our ability to deliver a share gaining FY 2025.
Dave Reeder: And sustained long term value for our shareholders with that I will turn the call over to Dave.
Dave Reeder: Thank you Sumit and thank you all for joining us today.
Dave Reeder: Our strong first quarter results showcase the resilience of the pet industry. The durability of <unk> business model and continued momentum in the business.
Dave Reeder: First quarter net sales grew eight 3% year over year to 312 billion exceeding the high end of the Q1 guidance range, we provided last quarter.
Dave Reeder: We saw continued momentum in active customer growth and ended Q1 with $20 8 million active customers, reflecting a year over year increase of approximately three 8%.
Dave Reeder: Once again, we outperformed our internal expectations and delivered year over year improvement across all elements of the active customer equation.
Dave Reeder: New customers and reactivation grew year over year, while gross churn improved over the same period.
Dave Reeder: Auto ship customer sales increased by 14, 8% to $256 billion in the first quarter.
Dave Reeder: With growth in auto ship customer sales outpacing overall top line growth by approximately 650 basis points.
Dave Reeder: Additionally, auto ship customer sales represented 82, 2% of our total net sales in Q1, a new high for the business.
Dave Reeder: And that's back reached $583 as of Q1, representing an increase of three 7% year over year.
Speaker Change: Moving to profitability, we reported first quarter gross margin of 29, 6% as Sumit mentioned last year in our first quarter 2024 earnings script, we identified approximately 70 basis points of one time items that benefited Q1 fiscal 2024 P&L, resulting in.
Speaker Change: Normalized gross margin of approximately 29% in the first quarter 'twenty to 'twenty four.
Dave Reeder: Adjusting for these one time benefits in the comparable prior year period.
Dave Reeder: We expanded first quarter 2025 gross margin by approximately 60 basis points year over year.
Dave Reeder: Sponsored ads continues to be the largest driver of gross margin improvement year over year combined with strong auto ship baseload and products mix shift into margin accretive categories.
Dave Reeder: Shifting to operating expenses. Please note that my discussion of SG&A exclude share based compensation expense and related taxes.
Dave Reeder: In the first quarter SG&A was $575 1 million or 18, 5% of net sales.
Dave Reeder: For fiscal year 2025, we expect to deliver modest SG&A leverage driven by at scale fixed cost infrastructure and ongoing discipline and efficiency with respect to corporate payroll.
Dave Reeder: First quarter advertising and marketing expense was $193 8 million or six 2% of net sales.
Dave Reeder: Based on the timing of certain marketing campaigns. This expense category delivered modest leverage benefit in the first quarter.
Dave Reeder: For the year, we continue to expect advertising and marketing expense to be largely in line with the results. We've delivered in the last two years or approximately six 7% to six 8% of net sales in fiscal year, 'twenty, three and fiscal year 'twenty four respectively.
Dave Reeder: This remains consistent with our previously stated long term target range of 6% to 7% of net sales.
Dave Reeder: First quarter adjusted net income was $148 9 million, representing an eight 6% increase year over year we.
Dave Reeder: We delivered 35 of adjusted diluted earnings per share the high end of our guidance range.
Dave Reeder: First quarter adjusted EBITDA came in at $192 7 million, representing a six 2% adjusted EBITDA margin, which equated to approximately 50 basis points of year over year margin expansion.
Dave Reeder: Excluding the 70 basis points of one time benefit in first quarter 2020 for gross margin our adjusted EBITDA flow through for Q1 2025 was approximately 21%.
Dave Reeder: In the first quarter, we reported free cash flow of $48 7 million, which reflects $86 4 million of net cash provided by operating activities and $37 7 million of capital expenditures.
Dave Reeder: For full year 2025, we expect approximately 80% of adjusted EBITDA to convert into free cash flow and that Capex will be at the low end of our previously stated range of one five and 2% of net sales.
Dave Reeder: We continue to reinvest back into the business using our free cash flow, while also returning capital to shareholders.
Dave Reeder: We continue to periodically execute open market repurchases pursuant to the $500 million share repurchase authorization, we announced at this time last year.
Dave Reeder: In the first quarter, we repurchased approximately 665000 shares for a total of $23 $2 million under our existing program.
Dave Reeder: At the end of the first quarter, we had approximately $383 $5 million of remaining capacity under our existing program for future repurchases.
Dave Reeder: We ended the quarter with approximately $616 million in cash and cash equivalents and we remain debt free with an overall liquidity position of approximately $1 4 billion.
Dave Reeder: Now I'd like to discuss our second quarter and full year 2025 outlook.
Dave Reeder: We expect second quarter 2025, net sales of between 3.06, and 3.09 billion or approximately 7% to 8% year over year growth.
Dave Reeder: And we are maintaining our full year 2025, net sales outlook of between $12, three and 12.45 billion or approximately 6% to 7% year over year growth when adjusted to exclude the impact of the 50 <unk> week in fiscal year 2024.
Dave Reeder: My first quarter results and second quarter net sales guidance indicate we are trending towards the upper half of our full year net sales guidance range.
Dave Reeder: Given we still have much of the year ahead of US we are reserving the flexibility to adjust the range upward as we continue to progress throughout the year.
Dave Reeder: Moving to profitability guidance.
Dave Reeder: We are maintaining our full year 2025, adjusted EBITDA margin outlook of $5 four to five 7%.
Dave Reeder: The midpoint of our guidance range indicates approximately 75 basis points of year over year margin expansion and consistent with our comments last quarter and what we delivered in fiscal year 2024, we expect approximately 60% of our adjusted EBITDA margin expansion to be driven by improvements in gross margin.
Dave Reeder: As such and given our Q1 results, we expect to deliver sequential improvement in gross margin in the second quarter.
Dave Reeder: Additionally, consistent with our comments last quarter pertaining to the 2025 quarterly progression of adjusted EBITDA margin. We expect first quarter results to represent the high point and expect modest sequential declines throughout the year due to typical seasonality and the timing of investments.
Dave Reeder: We also expect second quarter adjusted diluted earnings per share in the range of 30 to 35.
Dave Reeder: For the full year 2025, we also anticipate share based compensation expense, including relating taxes to be approximately $315 million.
Dave Reeder: And weighted average diluted shares outstanding of approximately $430 million.
Dave Reeder: We expect 2025 net interest income of approximately $25 million to $30 million.
Dave Reeder: And we expect our effective tax rate to be in the range of 20% to 22% for the year.
Dave Reeder: And finally, as we discussed on our earnings call last quarter, we continue to embed in our guidance minimal expected impact from tariffs.
Speaker Change: In closing I Echo cements perspective on Shui as long term outlook.
Speaker Change: Company has a clear differentiated strategy and a strong leadership team focused on delivering exceptional customer experiences.
Dave Reeder: These strengths position shui well to execute this roadmap drive strong financial performance and continue to enhance shareholder value.
Speaker Change: Leaving shui as a bittersweet decision I'm grateful for the opportunity to work alongside submit and the talented team here.
Dave Reeder: To all the chewy team members for all your dedication and discipline I wish the company continued success in the years ahead.
Dave Reeder: 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: Mind that he would like to ask a question today. Please do so now by pressing star followed by the number one on your telephone keypad.
Speaker Change: If you change your mind or do you feel like your question has already been answered.
Speaker Change: First off I would like to withdraw yourself from Nicky.
Speaker Change: Our first question today comes from Curtis Nagle with Bank of America.
Speaker Change: Please go ahead.
Speaker Change: Great maybe just sort of first one.
Speaker Change: I'm just thinking too.
Speaker Change: Customer ads suited.
Speaker Change: This potential is pretty nicely in <unk>.
Speaker Change: It was low single low single digit growth still the right framework.
Speaker Change: For customer count growth for the full year.
Speaker Change: Hey, good.
Speaker Change: Good morning, Yeah, So where we were super pleased with the rate and the momentum.
Speaker Change: That has continued from last quarter through Q1.
Speaker Change: Importantly, these results as I've talked about in the previous quarter, we believe our predominantly due to the strength of execution on our own efforts and so as the market continues to normalize in the background that should only serve as a tailwind the tailwind is not incorporated in our guidance and so everything that we're delivering and what's incorporated in guidance.
Speaker Change: Our execution in the records and so I think it's a pretty good baseline.
Speaker Change: Baseline to take that low single digit rate, although obviously, we're starting to operate at the higher end of that.
Speaker Change: And the reasons are the reasons are pretty clear you know, we're adding more customers on the gross outside Denver.
Speaker Change: Driving retention up and so therefore gross churn churn is down and the algorithm is essentially spitting out a nice cohort of customers, which are higher quality.
Speaker Change: Relative to.
Speaker Change: You know relative to kind of what we've seen coming out of the pandemic. So.
Speaker Change: With both the rate of acquisition of customers, our radar fabs as well as the quality of ads driven.
Speaker Change: Driven the efforts that we've done even the Boston for three quarters.
Speaker Change: Got it understood.
Speaker Change: Just a quick update in terms of how you're thinking about growth for the industry. This year I think you pointed to still especially a normalization.
Speaker Change: But in terms of growth.
Speaker Change: Growth in how to think about.
Speaker Change: The information.
Speaker Change: An update on kind of where that sits now from last quarter would be would be awesome.
Speaker Change: Yeah sure sure sure. So you know.
Speaker Change: There's a couple of different couple of different data points that we're triangulating first of all when you look at growth of the industry is primarily from adoption then relinquishment point of views in that household formation has been flat. So it hasn't gone backwards relative to where we were in.
Speaker Change: Or how we came into the year, it's trending fairly slots, which as you know.
Speaker Change: A continued kind of encouraging sign number two overall when we look at the topline growth of the industry. We are estimating you know based on the sources that we have in front of us roughly a 3% to 4% growth off the market and clearly our guidance that we provided is a share gaining plan growing at roughly two times the growth of the market.
Speaker Change: From a pricing standpoint, we're not really baking in any sort of inflation throughout the year, although it may not be surprising to hear that as sort of you know tariffs continue to rollout the industrial might actually react by adjusting some pricing and hard goods or categories that are discretionary.
Speaker Change: And if thats the case, we stand ready to respond to that but right now what you are seeing in our guidance a structural growth driven primarily by growth of effective ads as well as share of wallet increases.
David: David anything to add.
Speaker Change: Some of them are us thank you Karen.
Speaker Change: Yes.
Speaker Change: Thank you. Our next question comes from Eric Sheridan with Goldman Sachs. Please go ahead.
Speaker Change: Yeah.
Speaker Change: Thanks, So much for taking the question just wanted to build on some of the comments in the prepared remarks on the advertising opportunity or would you guys thinking about the investments that need to be made especially you can see off site advertising opportunity as we look not only at close to 225, but out on a multi year view and how can you maybe you can give us a little bit more character.
Speaker Change: So you shouldn't have how the conversations with advertisers continue to evolve.
Speaker Change: Both on and off site and what that might mean for adds as a percentage of the business over the longer term and whether you have any updated views on that thank you.
Speaker Change: Yeah, maybe I'll start with the first part of that Eric and submit and maybe you can come in later and talk a little bit about some of the conversations with our with our suppliers. We feel great about the progress that we've made with respect to sponsored ads both in 2024 as well as entering 2025.
Speaker Change: We're particularly excited as we've talked about previously about the first party platform migration that we executed at the beginning of this year to remind you. That's our first party software stack that really kind of completes although we're always updating and it kind of completes the portfolio and suite of products.
Speaker Change: We wanted to be able to offer to our suppliers specifically it gives us the ability to support new content content formats, such as video.
Speaker Change: We're able to do more self service and enables us to do both onsite like we did primarily last year as well as off site, which we're increasingly doing this year given the pent up demand there and it just really enables us to kind of more fully offer to our partners. The sponsored ads experience that they expect so we're quite pleased with how it.
Speaker Change: <unk> performed the momentum from fourth quarter last year and really all of 2024 has continued into 2025 and it looks like a good year for us and sponsor that Sumit you want any comments on the yeah Eric.
Sumit: The framework that I would I would put it in your mind just building on what Dave said as you know we're thinking of this as a demand side demand side and supply side House. Obviously, so last year, we focused on the onside product ramp and opening up supply primarily in let's say the consumables category and so you know.
Sumit: This year.
Sumit: Expanding the suite of products as Dave mentioned into social and off site and we're going to expand this into other categories. So what youre seeing us as well.
Sumit: Rapidly opening up supply and our teams internally are very closely aligned with our partners.
Sumit: <unk> activating more partners as well as more dollars from bucket to be able to apply to these to the supply that we're opening up on the website to drive higher utilization rates, but we're super pleased with the utilization and between our partners and US we're super transparent and having a really good high quality conversation on the ROI expected and so.
Sumit: Far we've continued to exceed our ROI expectation, therefore pretty nicely balancing the demand and supply side and then on top of that you want to put the one P platform that essentially allows us to flow through a greater portion to our bottom line.
Sumit: And improve experience for our suppliers, including greater analytic capability that we didn't have or may not have had the same level than in the past and so.
Sumit: We're fairly pleased with the bespoke product that we're building in the early stages, but we've quickly ramped up to getting to the 1% a little bit beyond that we are true to the 1% to 3% ranges that we've provided.
Sumit: The only integration you need to think about it as you know as we move from onsite to Offsite.
Sumit: We're still going to flow through a pretty high margins, albeit slightly lower than just the onsite product.
Sumit: Thank you.
Speaker Change: Thank you. Our next question comes from Mark Mahaney with Evercore ISI.
Speaker Change: Please go ahead Marc.
Speaker Change: Okay. Thank you you talk about.
Speaker Change: Could you talk about the sustainability of the active customer growth.
Speaker Change: By drilling down a little bit into what's causing the what's enabling you to drive retention up for existing customers and are there.
Speaker Change: New sources of gross adds that you are able to tap into now that you've worked in the past. So just talking about both sides of that equation and the sustainability going forward. Thank you.
Speaker Change: Yeah Mark.
Mark: I'll start and Dave will add so we feel pretty good about the sustainability, we're bullish and we feel we're in the early stages of gaining momentum and momentum we continued to gain as you've sort of seen from the last three quarters of combined results.
Mark: Internal efforts, primarily point to the work that we've done.
Mark: And taking a broader marketing funnel and strategy to the market internally they point to a better product, whether it's the storefront or whether it's the app.
Mark: And you know internally.
Mark: The quality of customer is what kind of drives confidence in.
Mark: The retention in the future sort of revenue Flywheels off these type of customers. So just to give you some data points. When you look at new customer NES pack for the Q1, 'twenty five cohort and is trending low single digits higher right now I'm just taking the simple averages. So bear with me because the data is still early but it is trending low single digits percentage higher.
Mark: On a year over year basis relative to Q1, 2024 cohort and you would and so what are the inputs of that the inputs of that are as Dave talked about and I talked about earlier is the increasing mix of watershed baseload.
Mark: Mixed towards repeatable categories like consumables and helped drive about 85% of our revenue and so you would expect.
Mark: Then leading to improved reorder rates well then you would go over and see well did reorder rates actually improve so when you look at new customer reorder rates, new customer reorder rates also showed a steady improvement year over year.
Mark: Right.
Mark: And relative to the cohorts.
Mark: The author of the previous two.
Mark: <unk> 2024, reorder rates are also up by about low single digit percentage points and so the combined tells you both sort of the gross adds tactics are working as well as you know.
Mark: Our.
Mark: I guess our efforts to retain these customers are driven by more structural initiatives and actions that are more controlling mode, rather than kind of taking advantage of any sort of industrial trending that may or may not happen.
Mark: That's how we're looking at that.
Mark: At the rest of the year.
Mark: Okay. Thank you so much.
Mark: Yeah.
Nathan: Thank you. Our next question comes from Nathan <unk> with Morgan Stanley. Please go ahead.
Speaker Change: Hey, everyone. Congrats on the really strong quarter here.
Speaker Change: Essentially pluses that program wound model data any way to kind of think about the adoption during Q received on that here and.
Speaker Change: How should we kind of contextualize the changes in both unit economics and wallet share once people join that program. Thank you.
Speaker Change: Okay.
Speaker Change: Nathan we had difficulty understanding your question would you mind, perhaps repeating it for us.
Nathan: Hey, yeah, sorry about that.
Speaker Change: Wanted to talk about Shui plus potentially here are the adoption rates you've received on that program and any way to think about the changes in unit economics or wallet share once people onboard. Thank you.
Dave Reeder: Yeah, Nathan I'll start and Dave will give a lot of as you see this person and so.
Speaker Change: Let's talk about sort of cheap. So we had just to refresh on Fox we had a successful data in 2024 from May June of 'twenty four all the way through January February of this year.
Speaker Change: And now we've chosen to expand the <unk>, plus which is a paid program to all of our customers starting sort of.
Speaker Change: Late February early March, though it's early stages.
Speaker Change: So to recap chewy plus offers members free shipping 5% rewards that are aggregated into.
Speaker Change: Into the in their accounts and then limited time exclusive offers members enjoy a free 30 day trial, and then pay an introductory fee of $49 for the year for the membership so here's our results since expanding two plus has continued to show strong membership growth and positive customer feedback.
Speaker Change: Measuring active sessions for members that are higher.
Speaker Change: Active sessions are higher orders and frequency is higher cross category penetration is higher which was one of the hypotheses are learning interest in the program to be able to see how it does it promote discover ability and does it promote attach rate and we're seeing that relative to the cross category penetration of a non chewy plus.
Speaker Change: <unk> versus <unk>, plus number right and these numbers are up both on a year over year basis, as well as compared to a similar cohort of non members.
Speaker Change: So what you're essentially seeing is lines should be plus continues to show strong net sales growth given the netback is expanding and expanding faster than our non <unk> plus member.
Speaker Change: Costs have stayed in line with expectations and these members are now driving incremental contribution profit.
Speaker Change: We're going to stay away from providing specific details today, but to give you early reads.
Speaker Change: The rate of membership sign ups is now we've now.
Speaker Change: Now expanded the program and you can essentially see it on the website at crossover shopping funnel, we're still ramping up so it's not fully ramped yet and you should expect us to continue to ramp up and on the background, we're going to keep it very disciplined on contribution profit and drive member growth on the front end, Dave anything to add yes, Nathan if I could just broaden out the commentary just for a moment.
Speaker Change: And talk a little bit more about.
Dave Reeder: Not all of our loyalty programs and not just chewy plus you saw auto ship have a tremendous quarter.
Dave Reeder: 460 bps on a year over year basis.
Dave Reeder: Continued engagement with that that cohort of customers that have decided that they like the value proposition as well as the convenience of auto ship. So when you kind of put this together in a constellation you've got growing brand awareness for Joey you got more conversion of that brand awareness to active.
Dave Reeder: <unk> you have got that active customer growth that is.
Speaker Change: More likely than not to be <unk> to move into categories, such as auto ship or chewy, plus you've got reduce then engagement reduced or excuse me increased engagement reduce churn and then you've got customers that have left realizing that they liked that you're experiencing coming back all of.
Speaker Change: This is coming together in the active customer growth that youre seeing as well as the NASDAQ that youre seeing.
Speaker Change: Quite pleased with the first quarter quite pleased with the momentum that we're carrying into the second quarter and optimistic, albeit early optimistic for the implications for the year.
Speaker Change: Great. Thank you.
Speaker Change: Thank you. Our next question comes from Doug Anmuth with J P. Morgan.
Speaker Change: Please go ahead.
Speaker Change: Yeah.
Speaker Change: Good morning, Thanks for taking my questions.
Speaker Change: Wanted to follow up on the auto ship.
Speaker Change: Comments, David and submit in particular, we've seen ownership customer sales, we think improved from about 66% of the total several years ago at the IPO to 82% today. So hoping you could just talk about the past new customers are taking to becoming auto ship customers and how that's evolved over the years.
Speaker Change: And then second can you just talk about hard good.
Speaker Change: A little bit the drivers of the 12% growth that youre seeing there and some of the changes you're making in terms of the assortment and experience how that's improving.
Speaker Change: Sure I'll start and Dave will be available to it so ultrashape when you.
Speaker Change: Deconstruct it as a business in itself the fundamental principles that we're applying our retention into auto ship acquisition into Ultrashape, followed by supplement and therefore retention into ownership right and so in terms of acquisition into auto ship the roadmap follows.
Speaker Change: Some some concepts that you would call a brilliance in the basics of retail which is.
Speaker Change: Assortment high in stock and essentially paired with what you would consider is chewy as moat and differentiation, which is a super convenient and high powered personalized digital experience that allows customers discover ability and therefore, a higher rate of conversion than what <unk>.
Speaker Change: You would expect or see in the rest of the industry. So broadly that's been the template on how we've continued to grow the program and kudos to our partners. We're continuing to believe in support given how good a program designed to drive loyalty for a specific supplier brand and therefore generate life.
Speaker Change: Time value for long periods of time now on the retention side, we followed a similar playbook, allowing our personalized approach and one on one connection with customers to be able to really get them to feel like they're getting value out of the program there.
Speaker Change: We talk about loyalty and Dave said as well when you talk about customer loyalty right.
Speaker Change: It's we think about the model that is built in concentric circles. It starts with the way that we go to market with our high touch service then builds around programs like auto ship at Danville, introducing newer programs like chewy plus that are now complementary to ownership and we're seeing both play off of each other.
Speaker Change: Ecosystem essentially keeps customers more engaged and therefore highly prevents two more discover ability and growth of share of wallet. So anyway I'll get back to the point on auction. So thats. So I think over the last few years, you've seen us add assortment improve experience, both purchased and post purchase and Thats the path from 66%.
Speaker Change: To 82.
Speaker Change: Your second question was.
Speaker Change: Our good growth.
Speaker Change: This one I would say is.
Speaker Change: Again brilliance in the basics and the team.
Speaker Change: The teams with units and the quality of execution being driven from the team. So you've heard us talk about freshness and newness of assortment you heard us talk about better lifecycle management of inventory you heard us talk about discovery ability and then you've heard us talk about a personalized approach that drives a better experience on the website. So it's all sort of a combination of that demand.
Speaker Change: Well.
Speaker Change: Yes, I mean, while you were speaking I was just.
Speaker Change: Refreshing my memory across all of the subcategories within hard goods and Doug as I look at the data here.
Speaker Change: On a year over year basis, all of almost all of the categories that I have been kind of spot checking are up year over year in hard goods.
Speaker Change: Think that speaks both to all of the things that we've discussed with respect to active customer growth.
Speaker Change: Continued penetration with respect to share of wallet as well as refresh of assortment that the team has done an excellent job on getting that refreshed assortment not only into our fulfillment centers not only with our third party shippers as well as first party fulfillment, but also getting those products in front of customer.
Speaker Change: <unk> at the point of time in which they are willing and able to make a discretionary purchase all of those things came together for us in first quarter, and then momentum looks quite positive.
Speaker Change: To give you to give you a few data points I mean, we've added over 150 brands new brands on the portfolio of the last two quarters, we've reduced time to onboarding skus by about 40% to 50% and so what you're essentially if you put them together you were saying, Okay. You guys have more choices for customers and Youll go to market your go to market as <unk>.
Speaker Change: It's faster than where it was last year I mean, all of this translates to time and then you put the upward of discovered ability and post purchase experience that we deliver.
Speaker Change: It drives a flywheel a bit more efficiently and that's what you were saying.
Speaker Change: Great. Thank you both.
Speaker Change: Thank you. Our next question comes from <unk> Parikh with Oppenheimer. Please.
Speaker Change: Please go ahead.
Parikh: Good morning, good morning, and thanks for taking my question. So I guess I just wanted to go back to the top line very strong very strong momentum broad based category move onto as well from a share perspective, where do you guys believe you're gaining market share in any changes versus recent quarters.
Speaker Change: Yeah.
Speaker Change: Oh, yes, no no doubt about it I mean, whether you've commented from the industry growth of 3% to 4% and our guidance or you come at it from if you break that down mathematically what you would find it so let's say, let's say some kind of real time maps, let's say, 3% of the industry at about 140 billion.
Speaker Change: That means the industry will add roughly $4 billion this year.
Speaker Change: On a year over year basis, if you consider it a penetration of somewhere in the 30% to 35% online and do the amount of <unk> revenue. What you would find is that we're picking up roughly 50 cents of every dollar of that is moving online which is.
Speaker Change: Which is.
Speaker Change: Higher than in the past we've talked about 40 to 42 cents of every dollar that's that's moving online. So there is clearly a share game plan built in.
Speaker Change: And.
Speaker Change: And we're pleased with the way the teams are executing.
Dave Best: Great. Thank you and Dave Best of luck.
Speaker Change: Thanks for your question.
Speaker Change: Thank you. Our next question comes from David Bellinger with Mizuho.
Speaker Change: Please go ahead David.
Speaker Change: Hey, good morning, Thanks for the questions and thanks to Dave as well.
Speaker Change: Two questions for me first one just on gross margins within the core.
Speaker Change: And understanding the 70 basis point onetime benefit you had last year.
Speaker Change: It seems like something might be changing within the gross margin line. So could you just help us understand the moving pieces there.
Speaker Change: Excluding the sponsored ads and that being the largest driver of margin expansion or are you seeing something or promotions or something else within the core chewy retail business, where the gross margins that are weakening in some way and then just a second question on the operating expense line not much leverage despite the automation efforts.
Speaker Change: And anything that stood out in Q1, and what's leading to the stronger leverage that's planned through the rest of the year. Thank you.
Speaker Change: Thank you. Thanks, David a couple of items to note with respect to gross margin. We were internally we were pleased with our gross margin. It came in largely as we expected.
Speaker Change: Two on a normalized basis expanded more than 60 bps year over year. If you recall in our first quarter of 2024 are that script, which you referenced we did identify roughly 70 bps of onetime items that benefited us in gross margin last year.
Speaker Change: That resulted in our first quarter 'twenty four gross margin of 29%. So you normalize for that on a year over year basis up 60 bps.
Speaker Change: Three and this call's prepared commentary, we indicated that we expect gross margin to increase increased sequentially from Q1 to Q2.
Speaker Change: We also reiterated that we expect our year over year EBITDA increase.
Speaker Change: To be majority driven roughly 60% by gross margin so.
Speaker Change: Kind of a lot to like about our first quarter results the market share gaining revenue active customer growth normalize year over year gross margin expansion and record EBITDA margin.
Speaker Change: Continued momentum in the second quarter.
Speaker Change: Lots of like on the puts and takes for gross margin.
Speaker Change: Obviously gross margin on a year over year basis normalized as I mentioned.
Speaker Change: The single biggest contributor sponsored ads followed by product mix accretion followed by of course, the normal turn of fixed cost absorption that you get in those lines. So we expect that playbook to continue in a very similar vein as what we saw last year.
Speaker Change: Moving to the operating expenses.
Speaker Change: We were we were pretty happy with the operating expenses.
Speaker Change: For Q1, obviously, you can't get to that EBITDA margin of six 2%.
Speaker Change: Without being happy with a lot of the lines in the P&L, we expect to get a little bit more contribution from gross margin in the second quarter as well as the latter half of the year I'm talking about on a year over year basis, and we expect to continue to get leverage from from the Opex lines. We did have as we called out lower advertise.
Speaker Change: The marketing expense in the first quarter that was largely just a result of the timing of certain campaigns, you've kind of seen that number on any specific quarter kind of bounce around between that 6% to 7% range, but we think for the year advertising and marketing will be very consistent with what we've posted in prior years, so roughly six 7%.
Speaker Change: Six 8% of net sales so no real surprise on that line for the year, but of course on any specific quarter you may see a little movement just based on timing.
Speaker Change: Great. Thank you very helpful.
Speaker Change: Thanks, David.
Speaker Change: Thank you. Our next question comes from Schweitzer <unk> with Wolfe Research. Please go ahead.
Speaker Change: Thanks, a lot for taking my question I have one on CVC.
Speaker Change: Talked about three new additions 11 locations across four states could you help us think about how big of an opportunity. This could be for you, especially as it relates to demand Gen and what's your how do you think about expanding call.
Speaker Change: Call It one to three years out thanks a lot.
Speaker Change: Yes, I think.
Speaker Change: What are you seeing us continue to do on CVC is just take a very measured approach.
Speaker Change: With respect to rolling out that clinics as you know we were very happy with the performance of the clinics that we rolled out in 2024.
Speaker Change: We expect to end this year in the high teens that clinic, so so call it roughly 10 plus.
Speaker Change: Plus minus a little bit vet clinics that we expect to rollout in 2025, the performance of the vet clinics that are maturing.
Speaker Change: Been quite pleased with.
Speaker Change: We continue to grow their utilization and their bookings forward booking rates.
Speaker Change: Remained quite strong and continued to strengthen actually.
Speaker Change: We've been happy with the new customers that are being introduced to chewy.
Speaker Change: Which are significantly higher than what we originally modeled.
Speaker Change: And so that's been a very pleasant surprise to us and then as we've mentioned on some prior calls.
Speaker Change: On those new customers that are coming into the vet clinics and that's their first experience with chewy.
Speaker Change: About half of them are then following that visit up within 30 days and actually purchasing from chewy Dot com. So I would say in terms of that retention in terms of performance of individual four wall clinic.
Speaker Change: Kind of all metrics screen by and large for the vet clinics and so we're we're quite quite pleased with that performance and I think youll continue to see us take a measured approach with respect to rolling out that clinics in terms of the opportunity I think the opportunity is clear you got.
Speaker Change: Roughly.
Speaker Change: $20 billion plus type of market for vet services in the U S.
Speaker Change: This enables us to tap a portion of that market, albeit with a slow rollout as we kind of perfect. Our offering. It also enables us to continue to grow our pharmacy business.
Speaker Change: And get more insight into all of the pharmacy Thats offered within vet clinics not just the portion that we're currently kind of seeing through our existing business and so I think from that perspective in terms of opening up a large tam for us on a go forward basis.
Sumit: We're quite pleased we're pleased with the results our customers are pleased with the with the services and the care that they're getting and perhaps that's the most important thing Sumit do you have anything to add.
Sumit: So two comments starting with the Tam and then working backwards into how to think about too. We see in addition to what Dave said, so starting with the Tam the $20 billion to $25 billion that Dave is talking about it doesn't doesn't fully encapsulate.
Sumit: Newer tech or newer verticals newer technologies like either either telehealth to triage or insurance or software opportunities given how much opportunity there is to be able to.
Sumit: Bring a <unk> solution to a fragment that software space or the data space in the health sector and if you recall from our capital markets day presentation, we laid out a pretty compelling vision of the stack that we're building.
Sumit: And that the industry is starting to benefit from so we're super excited about that in terms of how we can contribute to expanding the Tam beyond what is currently captured number two when you think about CVC.
Sumit: You have to also think about CVC and similar lines as to how you think about auto ship or two plus these are ecosystem.
Speaker Change: Type concept that allows a customer to discover chewy and a new plays and then expand there.
Speaker Change: Engagement with chewy, regardless of their point of entry into chewy and so.
Speaker Change: These are these are highly defensible moats in the way that they bring customers in and keep customers in and as we compound. These modes, we only add auto ship several years ago now we have ownership in the future we're going to have CVC in the middle we have the app and the <unk> plus programs and so we're sort of excited.
Speaker Change: How do we think about customer engagement and growth of share of wallet. In addition to opportunity of acquiring new customers through these very very channels.
Speaker Change: Okay.
Dave: Okay. Thanks, Amit Thanks, Steve Dave Congrats and all the best.
Shannon: Thanks Shannon.
Speaker Change: Okay.
Speaker Change: Thank you we have time for one final question. So our last question today comes from Steven <unk> with Citi Great. Stephen. Please go ahead.
Speaker Change: Great.
Speaker Change: Good morning, Thanks, very much for taking my question.
Speaker Change: I had two quick ones first one just on pricing so.
Speaker Change: What have you seen from a pricing standpoint tariffs are probably starting to impact some of the product costs out there in the industry. So has anything changed on your view of the year and then the second is from an underlying category perspective dogs vs. Cats, we've heard about more strength in the cat quarter.
Speaker Change: Category this year.
Speaker Change: Has that been the case in your business as well.
Speaker Change: Sure I'll take pricing and submit maybe you want to comment on dogs and cats.
Speaker Change: Look from a pricing perspective like for like we see very little inflation in the industry right now so again I'm talking like for like.
Speaker Change: Products that stated we do see we continue to see Humanization of pets and that Humanization is leading to premium innovation in terms of customers wanting more medicine better supplements better food.
Speaker Change: For their pets to improve their overall pet health and so so while we're seeing we're continuing to see the trend is towards premium innovation, we are not seeing kind of on a like for like product basis much inflation right now.
Speaker Change: And I am including the hard goods into that category.
Speaker Change: You take the hard good category, even some of the ones that perhaps could be impacted by tariffs.
Speaker Change: You have to really look at how much inventory is physically and individual suppliers locations onshore and so that inventory is still in place and I would say you havent yet seen any increase from tariffs kind of flow through the hard goods category.
Speaker Change: So stay tuned on that front as you know from our perspective, the vast majority of our portfolio is consumables, 85% ish plus.
Speaker Change: Of our portfolio is consumables with domestic input source streams.
Speaker Change: We see very little impact from from tariffs on chewy in fiscal year, 'twenty five and what we have seen we've embedded in our guidance.
Speaker Change: Sumit any any comment on dogs vs cats, yes.
Speaker Change: We love them all equally.
Speaker Change: Yes.
Speaker Change: In the previous calls we've come into the year sort of seeing the proportion of cats or costs being a popular choice.
Speaker Change: The data doesn't refresh as often.
Speaker Change: We've continued to see strengthening of the Caf business and at the same time, the dog business as well given that we drove 6% year over year growth in consumables.
Speaker Change: Which is which accounted for roughly 50% of the growth overall for chewy, So happy with the performance.
Speaker Change: Thanks for the next day.
Speaker Change: These are all the questions we have time for today. So this concludes alco.
Speaker Change: You all for your participation you may now disconnect your lines.
Speaker Change: [music].