Q2 2025 Chewy Inc Earnings Call

Speaker #1: Hello, everyone, and thank you for standing by. Today's call will be beginning in one minute's time. We thank you for your patience.

Emily: Hello, everyone, and thank you for standing by. Today's call will be beginning in one minute. We thank you for your patience. Hello, everyone, and welcome to the Chewy, Inc. second quarter 2025 earnings call. My name is Emily, and I'll be coordinating your call today. After the presentation, you will have the opportunity to ask any questions, which you can do by pressing STAR, followed by the number one on your telephone keypad. I would now like to hand over to Natalie Nowak, Director of Investor Relations. Natalie, please go ahead.

Speaker #2: Hello, everyone, and welcome to the Chewy second quarter 2025 earnings call. My name is Emily, and I'll be coordinating your call today. After the presentation, you will have the opportunity to ask any questions, which you can do by pressing Star, followed by the number one on your telephone keypad.

Speaker #2: I would now like to hand over to Natalie Nowak, Director of Investor Relations. Natalie, please go ahead.

Speaker #3: Thank you for joining us on the call today to discuss our second quarter results for fiscal year 2025. Joining me today are Chewy's CEO, Sumit Singh, and Will Billings, our Chief Accounting Officer and Interim Principal Financial Officer.

Natalie Nowak: Thank you for joining us on the call today to discuss our second quarter results for fiscal year 2025. Joining me today are Chewy's CEO, Sumit Singh, and Will Billing, our Chief Accounting Officer and Interim Principal Financial Officer. Will is a respected leader with extensive finance and accounting experience, and we appreciate his dedication to Chewy as he takes on this expanded role while we continue to search for a permanent CFO. Our earnings release, which was filed with the SEC earlier today, has been posted to the Investor Relations section of our website. In addition to the earnings release, a presentation summarizing our results is also available on our website at investor.chewy.com. On our call today, we will be making forward-looking statements, including statements concerning Chewy's financial results and performance, industry trends, strategic initiatives, share repurchase program, and the environment in which we operate.

Speaker #3: Will is a respected leader with extensive finance and accounting experience, and we appreciate his dedication to Chewy as he takes on this expanded role while we continue to search for a permanent CFO.

Speaker #3: Our earnings release, which was filed with the SEC earlier today, has been posted to the Investor Relations section of our website. In addition to the earnings release, a presentation summarizing our results is also available on our website at investor.chewy.com.

Speaker #3: On our call today, we will be making forward-looking statements, including statements concerning Chewy's financial results and performance, industry trends, strategic initiatives, share repurchase program, and the environment in which we operate.

Speaker #3: Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks, uncertainties, and other factors that could cause actual results to differ materially from our forward-looking statements.

Natalie Nowak: Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks, uncertainties, and other factors that could cause actual results to differ materially from our forward-looking statements. 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. Reported results should not be considered an indication of future performance. Also, note that the forward-looking statements on this call are based on information available to us as of today's date. We assume no obligation to update any forward-looking statements except as required by law. Also, during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided on our Investor Relations website and in our earnings release.

Speaker #3: 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 #3: Reported results should not be considered an indication of future performance. Also, note that the forward-looking statements on this call are based on information available to us as of today's date.

Speaker #3: We assume no obligation to update any forward-looking statements except as required by law. Also, during this call, we will discuss certain non-GAAP financial measures.

Speaker #3: 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 #3: These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise stated, all comparisons discussed on today's call will be against the comparable period of fiscal year 2024.

Natalie Nowak: These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise stated, all comparisons discussed on today's call will be against the comparable period of fiscal year 2024. 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. With that, I'd like to turn the call over to Sumit.

Speaker #3: 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.

Speaker #3: And with that, I'd like to turn the call over to Sumit.

Speaker #4: Thanks, Natalie, and good morning, everyone. Q2 net sales grew by nearly 9% year-over-year to $3.1 billion, exceeding the high end of our guidance range.

Sumit Singh: Thanks, Natalie, and good morning, everyone. Q2 net sales grew by nearly 9% year over year to $3.1 billion, exceeding the high end of our guidance range. Moreover, against an industry backdrop of low to mid-single-digit growth, our Q2 performance demonstrates a clear share gain outcome. Strength of our AutoShip program in categories such as consumables and health anchored Q2 net sales performance. Second quarter AutoShip customer sales of $2.58 billion represented 83% of our Q2 net sales, reaching a new record high for the company. Growth in AutoShip customer sales once again outpaced overall top line growth, increasing by nearly 15% in Q2. We are also pleased to see the continued strength within our hard goods business, which grew over 15% in the second quarter, primarily on the back of structural volume growth. A rapidly strengthening Chewy Plus program exceeded our expectations in the second quarter.

Speaker #4: Moreover, against an industry backdrop of low to mid-single-digit growth, our Q2 performance demonstrates a clear share gain outcome. The strength of our auto-ship program in categories such as consumables and health anchored Q2 net sales performance.

Speaker #4: Second quarter auto-ship customer sales of $2.58 billion represented 83% of our Q2 net sales, reaching a new record high for the company. Growth in auto-ship customer sales once again outpaced overall top-line growth, increasing by nearly 15% in Q2.

Speaker #4: We are also pleased to see the continued strength within our hard goods business, which grew over 15% in the second quarter, primarily on the back of structural volume growth.

Speaker #4: And finally, a rapidly strengthening Chewy Plus program exceeded our expectations in the second quarter. I will comment more on our progress with this program in a moment.

Sumit Singh: I will comment more on our progress with this program in a moment. Moving to customers, we ended the second quarter with 20.9 million active customers, reflecting 4.5% year over year growth. Importantly, the strength and quality of our new customers continue to improve. New customer net pack for the Q2 2025 cohort strengthened quarter over quarter and is trending mid-single digits higher on a year over year basis relative to the comparable Q2 2024 cohort. For total Chewy, we continued to expand customer share of wallet in the quarter, with net pack reaching $591, representing 4.6% year over year growth. Moving down the P&L to profitability, gross margin reached 30.4% in the quarter, expanding on both a sequential and year over year basis by nearly 80 and 90 bps, respectively.

Speaker #4: Moving to customers, we ended the second quarter with 20.9 million active customers, reflecting a 4.5% year-over-year growth. Importantly, the strength and quality of our new customers continue to improve.

Speaker #4: New customer NESPAC for the Q2 2025 cohort strengthened quarter-over-quarter and is trending mid-single digits higher on a year-over-year basis, relative to the comparable Q2 2024 cohort.

Speaker #4: For total Chewy, we continue to expand customer share of wallet in the quarter, with NESPAC reaching $591, representing 4.6% year-over-year growth. Moving down the P&L to profitability, gross margin reached 30.4% in the quarter, expanding on both a sequential and year-over-year basis by nearly 80 and 90 basis points, respectively.

Speaker #4: For Q2, the main drivers of gross margin were both our fast-growing sponsored ads business and favorable mix into premium categories. Pricing and promotion remains rational and did not have a material impact on gross margins in the second quarter.

Sumit Singh: For Q2, main drivers of gross margin were both our fast growing sponsored ads business and favorable mix into premium categories. Pricing and promotions remain rational and did not have a material impact on gross margins in the second quarter. Continuing on the topic of profitability, we generated $183.3 million of adjusted EBITDA in the quarter, representing a 5.9% margin and a year over year increase of over 80 bps. We also generated nearly $106 million of free cash flow in the quarter. Our robust 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 nearly $125 million we deployed towards share repurchases in the quarter. Now, I would like to provide an update on some of Chewy's strategic initiatives.

Speaker #4: Continuing on the topic of profitability, we generated $183.3 million of adjusted EBITDA in the quarter, representing a 5.9% margin and a year-over-year increase of over 80 basis points.

Speaker #4: We also generated nearly $106 million of free cash flow in the quarter. Our robust 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 nearly $125 million we deployed towards share repurchases in the quarter.

Speaker #4: Now, I would like to provide an update on some of Chewy's strategic initiatives. The Chewy Vet Care (CVC) network continues to outperform relative to expectations in terms of demand generation and driving broader ecosystem benefits.

Sumit Singh: The Chewy Vetcare, or CVC network, continues to outperform relative to expectations in terms of demand generation and driving broader ecosystem benefits. We are consistently observing that CVC customers drive both the highest and fastest net pack curves for Chewy. Additionally, we remain on track to open 8 to 10 new practices in fiscal year 2025 to reach a total count approaching 20 by year end, and we look forward to keeping you updated on our progress. Shifting gears, let's talk about Chewy Plus, our paid membership program. As a reminder, today Chewy Plus members receive the following benefits: free shipping on all orders, 5% rewards to redeem on future orders, limited time seasonally relevant member exclusive offers, and a 30-day free trial period. At the end of the free trial period, members pay an introductory price of $49 per year and convert to paid members.

Speaker #4: We are consistently observing that CVC customers drive both the highest and fastest NESPAC curves for Chewy. Additionally, we remain on track to open 8 to 10 new practices in fiscal year 2025 to reach a total count approaching 20 by year-end, and we look forward to keeping you updated on our progress.

Speaker #4: Shifting gears, let's talk about Chewy Plus, our paid membership program. As a reminder, today Chewy Plus members receive the following benefits: free shipping on all orders, 5% rewards to redeem on future orders, limited-time seasonally relevant member-exclusive offers, and a 30-day free trial period.

Speaker #4: At the end of the free trial period, members pay an introductory price of $49 per year and convert to paid members. As I shared in my remarks earlier, the Chewy Plus membership program is rapidly strengthening, indicating a strong product-market fit.

Sumit Singh: As I shared in my remarks earlier, the Chewy Plus membership program is rapidly strengthening, indicating a strong product market fit. In the month of July, roughly 3% of Chewy's total monthly sales were to Chewy Plus members. Importantly, we are observing strong incrementality in spend, net pack, and positive contribution profit per customer across Chewy Plus customers compared to non-members. Furthermore, other key leading indicators of success are promising. These customers are buying at a higher frequency and attaching a higher number of products to their orders. Additionally, we are observing incremental AutoShip adoption and greater mobile app usage from Chewy Plus members relative to non-members. All of this is leading to both higher as well as accelerated net pack curves for Chewy Plus customers compared to non-members, which in turn is contributing positively to Chewy's net sales flywheel.

Speaker #4: In the month of July, roughly 3% of Chewy's total monthly sales were to Chewy Plus members. Importantly, we are observing strong incrementality in spend, NESPAC, and positive contribution profit per customer across Chewy Plus customers compared to non-members.

Speaker #4: Furthermore, other key leading indicators of success are promising. These customers are buying at a higher frequency and attaching a higher number of products to their orders.

Speaker #4: Additionally, we are observing incremental auto-ship adoption and greater mobile app usage from Chewy Plus members relative to non-members. All of this is leading to both higher as well as accelerated NESPAC curves for Chewy Plus customers compared to non-members, which in turn is contributing positively to Chewy's net sales flywheel.

Speaker #4: As we exit this year, we expect approximately mid-single-digit percentages of our net sales to go through the Chewy Plus program. Further, we expect the program to generate positive gross profit dollars in fiscal 2025, though at a gross margin rate below Chewy overall, reflecting both the ramp that we anticipate in the second half of this year and the mix of paid versus free trial members.

Sumit Singh: As we exit this year, we expect approximately mid-single digit % of our net sales to go through the Chewy Plus program. Further, we expect the program to generate positive gross profit dollars in fiscal 2025, though at a gross margin rate below Chewy overall, reflecting both the ramp that we anticipate in the second half of this year and the mix of paid versus free trial members. As we scale, we will remain disciplined in evaluating the program structure, including pricing and member benefits. Moving on, now let's talk about Chewy private brands. I am excited to share that in August, we launched Get Real, our new Chewy exclusive private brand of healthy, fresh dog food. The fresh and frozen segment represents a fast growing TAM fueled by trends of humanization and premiumization in pet.

Speaker #4: As we scale, we will remain disciplined in evaluating the program's structure, including pricing and member benefits. Moving on, now let's talk about Chewy Private Brands.

Speaker #4: I am excited to share that in August, we launched GetReal, our new Chewy exclusive private brand of healthy, fresh dog food. The fresh and frozen segment represents a fast-growing total addressable market, fueled by trends of humanization and premiumization impact.

Speaker #4: Consumers believe that their pets deserve fresh and nutritious food, leading to longevity and an overall higher quality of life for their beloved pets. GetReal, a new line of minimally processed fresh dog food available only at Chewy, comes in three different pup-approved recipes, including chicken and Brussels sprouts, beef and sweet potato, and turkey and cranberry. All are available as both full meals and meal toppers, made with 10 or fewer ingredients plus vitamins and minerals.

Sumit Singh: Consumers believe that their pets deserve fresh and nutritious food, leading to longevity and an overall higher quality of life for their beloved pets. Get Real, a new line of minimally processed fresh dog food available only at Chewy, comes in three different pup approved recipes, including chicken and Brussels sprouts, beef and sweet potato, and turkey and cranberry, all available as both full meals and meal toppers made with 10 or fewer ingredients plus vitamins and minerals. Additionally, this premium product is delivered to your doorstep in pre-portioned, ready-to-serve meals. Just pour and serve. Although the product has only been in market a few weeks, customer reception is strong. Customers are pleased with the palatability, quality, and overall experience, which includes shopping, delivery, and consumption.

Speaker #4: Additionally, this premium product is delivered to your doorstep in pre-portioned, ready-to-serve meals. Just thaw and serve. Although the product has only been on the market a few weeks, customer reception is strong.

Speaker #4: Customers are pleased with the palatability, quality, and overall experience, which includes shopping, delivery, and consumption. I am also pleased to share that we have already built up sufficient capacity through 2028 to support our growth in the fresh frozen segment broadly, both for GetReal and for our national brand partners, while remaining very much at the lower end of our previously set CapEx guidance range of between 1.5% to 2% of net sales.

Sumit Singh: I am also pleased to share that we have already built up sufficient capacity through 2028 to support our growth in the fresh frozen segment broadly, both for Get Real and for our national brand partners, while remaining very much at the lower end of our previously set CapEx guidance range of between 1.5% to 2% of net sales. With the capital investment behind us, we are now in the process of scaling to a national footprint by leveraging our existing fulfillment center topology. By the end of 2025, we expect to be ready to deliver a majority of our fresh food offering to customers within a one-day transit time.

Speaker #4: With the capital investment behind us, we are now in the process of scaling to a national footprint by leveraging our existing fulfillment center topology.

Speaker #4: By the end of 2025, we expect to be ready to deliver a majority of our fresh food offering to customers within a one-day transit time.

Speaker #4: Furthermore, GetReal is exclusively an auto-ship subscription business that results in high gross profit per unit at scale, supporting both broad leverage across our operational infrastructure and our aspiration of becoming a leading profitable player in the fresh and frozen segment.

Sumit Singh: Furthermore, Get Real is exclusively an AutoShip subscription business that results in high gross profit per unit at scale, supporting both broad leverage across our operational infrastructure and our aspiration of becoming a leading profitable player in the fresh and frozen segment. While still early, we are pleased with the launch of this product and the positive response from our customers. Beyond Get Real, we are working on bringing other Chewy branded product innovation to market in the second half of 2025, and I look forward to keeping you updated on our progress. Before I turn the call over to Will, I would like to leave you with a few closing thoughts. The first half of 2025 has been an exciting and productive period for Chewy, reflecting the strength of our differentiated value proposition and the momentum across our business.

Speaker #4: While still early, we are pleased with the launch of this product and the positive response from our customers. Beyond GetReal, we are working on bringing other Chewy-branded product innovations to market in the second half of 2025, and I look forward to keeping you updated on our progress.

Speaker #4: Before I turn the call over to Will, I would like to leave you with a few closing thoughts. The first half of 2025 has been an exciting and productive period for Chewy, reflecting the strength of our differentiated value proposition and the momentum across our business.

Speaker #4: Looking ahead, we expect the second half of the year to be even more dynamic given the evolving macro. As many retailers prepare to pass tariff-related costs on to customers, we believe Chewy is well positioned to mitigate these pressures.

Sumit Singh: Looking ahead, we expect the second half of the year to be even more dynamic given the evolving macro. As many retailers prepare to pass tariff-related costs onto customers, we believe Chewy is well positioned to mitigate these pressures. Our higher mix of consumables and health and proactive investments in onshoring incremental discretionary inventory provide meaningful safeguards. These actions will help deliver a superior customer experience by selectively evaluating pricing while protecting product margins. Additionally, instead of absorbing these pressures, we plan to lean into growth by investing behind the expansion of programs like Chewy Plus and our private brands. Customers are embracing these initiatives for their compelling value proposition, and we are equally encouraged by their strong return on investment. Overall, we see the second half of 2025 as an opportunity to further accelerate market share gains in the U.S. and position Chewy for even greater long-term success.

Speaker #4: Our higher mix of consumables and health and proactive investments in onshoring incremental discretionary inventory provide meaningful safeguards. These actions will help deliver a superior customer experience by selectively evaluating pricing while protecting product margins.

Speaker #4: Additionally, instead of absorbing these pressures, we plan to lean into growth by investing behind the expansion of programs like Chewy Plus and our private brands.

Speaker #4: Customers are embracing these initiatives for their compelling value proposition, and we are equally encouraged by their strong return on investment. Overall, we see the second half of 2025 as an opportunity to further accelerate market share gains in the U.S. and position Chewy for even greater long-term success.

Speaker #4: With that, I will turn the call over to Will. Thank you, Sumit, and thank you all for joining us today. Let's review our financial results and outlook.

Sumit Singh: With that, I will turn the call over to Will.

Will Billing: Thank you, Sumit, and thank you all for joining us today. Let's review our financial results and outlook. Second quarter net sales grew 8.6% year over year to $3.1 billion, exceeding the high end of the Q2 guidance range we provided last quarter. We reported second quarter gross margin of 30.4%, representing approximately 90 bps of margin expansion year over year. Shifting to operating expenses, Q2 SG&A, excluding share-based compensation and related taxes, came in at $592.8 million, or 19.1% of net sales, deleveraging approximately 30 bps year over year. Q2 deleverage was driven by the ongoing ramp of our Houston fulfillment center, which launched in April, coupled with the wind down of certain shifts at our Dallas facility.

Speaker #4: Second quarter net sales grew 8.6% year-over-year to $3.1 billion, exceeding the high end of the Q2 guidance range we provided last quarter. We reported a second quarter gross margin of 30.4%, representing approximately 90 basis points of margin expansion year-over-year.

Speaker #4: Shifting to operating expenses, Q2 SG&A excluding share-based compensation and related taxes came in at $592.8 million, or 19.1% of net sales. Deleveraging approximately 30 basis points year-over-year, Q2 deleverage was driven by the ongoing ramp of our Houston fulfillment center, which launched in April, coupled with the wind-down of certain shifts at our Dallas facility.

Speaker #4: We also incurred higher inbound inventory processing costs, primarily within hard goods, to ensure we have the right assortment for pet parents as we head into the peak holiday periods.

Will Billing: We also incurred higher inbound inventory processing costs, primarily within hard goods, to ensure we have the right assortment for pet parents as we head into the peak holiday periods, while also allowing us to mitigate impact from tariffs in 2025. Additionally, a smaller contribution came from increases in wage and benefit costs within the period. Importantly, we believe these increases are primarily temporary in nature, and we continue to expect to deliver modest SG&A leverage in fiscal year 2025. Second quarter advertising and marketing expense was $200.6 million, or 6.5% of net sales, in line with our expectations and consistent with our previously stated target of 6% to 7% of net sales. Q2 adjusted net income was $141.1 million, representing a 34.8% increase year over year, and we delivered $0.33 of adjusted diluted earnings per share within the guidance range we provided last quarter.

Speaker #4: While also allowing us to mitigate impact from tariffs in 2025, additionally, a smaller contribution came from increases in wage and benefit costs. Within the period, importantly, we believe these increases are primarily temporary in nature, and we continue to expect to deliver modest SG&A leverage in fiscal year 2025.

Speaker #4: Second quarter advertising and marketing expense was $200.6 million, or 6.5% of net sales. This is in line with our expectations and consistent with our previously stated targets of 6% to 7% of net sales.

Speaker #4: Q2 adjusted net income was $141.1 million, representing a 34.8% increase year-over-year. We delivered 33 cents of adjusted diluted earnings per share, which is within the guidance range we provided last quarter.

Speaker #4: Second quarter adjusted EBITDA came in at $183.3 million, representing a 5.9% adjusted EBITDA margin, which reflects 80 basis points of year-over-year margin expansion. We reported Q2 free cash flow of $105.9 million, which reflects $133.9 million of net cash provided by operating activities and $28 million of capital expenditures.

Will Billing: Second quarter adjusted EBITDA came in at $183.3 million, representing a 5.9% adjusted EBITDA margin, which reflects 80 bps of year over year margin expansion. We reported Q2 free cash flow of $105.9 million, which reflects $133.9 million of net cash provided by operating activities and $28 million of capital expenditures. For full year 2025, we reiterate our expectation to convert approximately 80% of adjusted EBITDA to free cash flow, and CapEx will be at the low end of our previously stated range of 1.5% to 2% of net sales. In the second quarter, we repurchased approximately 3 million shares for a total of approximately $125 million. At the end of Q2, we had $359.8 million of remaining capacity under our existing program for future repurchases.

Speaker #4: For the full year 2025, we reiterate our expectation to convert approximately 80% of adjusted EBITDA to free cash flow, and CapEx will be at the low end of our previously stated range of 1.5% to 2% of net sales.

Speaker #4: In the second quarter, we repurchased approximately 3 million shares for a total of approximately $125 million. At the end of Q2, we had $359.8 million of remaining capacity under our existing program for future repurchases.

Speaker #4: We ended the quarter with approximately $592 million in cash and cash equivalents, and we remained debt-free, with an overall liquidity position of approximately $1.4 billion.

Will Billing: We ended the quarter with approximately $592 million in cash and cash equivalents, and we remained debt free with an overall liquidity position of approximately $1.4 billion. Now I'd like to discuss our third quarter and full year 2025 outlook. We expect third quarter 2025 net sales of between $3.07 and $3.1 billion, or approximately 7% to 8% year over year growth, and we are raising and narrowing our full year 2025 net sales outlook to between $12.5 and $12.6 billion, or approximately 7% to 8% year over year growth when adjusted to exclude the impact of the 53rd week in fiscal year 2024. This represents a $175 million increase to the midpoint of our guidance range. Moving to profitability guidance, we are maintaining our full year 2025 adjusted EBITDA margin outlook of 5.4% to 5.7%.

Speaker #4: Now I would like to discuss our third quarter and full year 2025 outlook. We expect third quarter 2025 net sales of between $3.07 billion and $3.1 billion, or approximately 7% to 8% year-over-year growth.

Speaker #4: And we are raising and narrowing our full-year 2025 net sales outlook to between $12.5 billion and $12.6 billion, or approximately 7% to 8% year-over-year growth when adjusted to exclude the impact of the 53rd week in fiscal year 2024.

Speaker #4: This represents a $175 million increase to the midpoint of our guidance range. Moving to profitability guidance, we are maintaining our full year 2025 adjusted EBITDA margin outlook of 5.4% to 5.7%.

Speaker #4: As Sumit shared in his remarks, we believe it is prudent to remain on the offense in the second half of 2025 and invest to strengthen Chewy's share position in the pet category.

Will Billing: As Sumit shared in his remarks, we believe it is prudent to remain on the offense in the second half of 2025 and invest to strengthen Chewy's share position in the pet category. The midpoint of our guidance range indicates 75 bps of adjusted EBITDA margin expansion year over year. Furthermore, at the midpoint of our 2025 net sales and adjusted EBITDA margin guidance ranges, we expect to deliver approximately 15% adjusted EBITDA flow through for the year, in line with our previously stated long-term target. Importantly, and consistent with our comments last quarter, we continue to expect approximately 60% of our adjusted EBITDA margin expansion to be driven by improvements in gross margin, confirming that we expect to continue to deliver healthy gross margin expansion year over year in fiscal 2025, with Q2 being the high point for the year.

Speaker #4: The midpoint of our guidance range indicates 75 basis points of adjusted EBITDA margin expansion year-over-year. Furthermore, at the midpoint of our 2025 net sales and adjusted EBITDA margin guidance ranges, we expect to deliver approximately 15% adjusted EBITDA flow-through for the year.

Speaker #4: In line with our previously stated long-term target—and consistent with our comments last quarter—we continue to expect approximately 60% of our adjusted EBITDA margin expansion to be driven by improvements in gross margin, confirming that we expect to continue to deliver healthy gross margin expansion year-over-year in fiscal 2025.

Speaker #4: With Q2 being the high point for the year, we also expect Q3 adjusted diluted earnings per share in the range of $0.28 to $0.33.

Will Billing: Finally, we also expect Q3 adjusted diluted earnings per share in the range of $0.28 to $0.33. For the full year 2025, we are also reiterating our previously stated expectations related to share-based compensation expense, including related taxes of approximately $315 million and weighted average diluted shares outstanding of approximately 430 million, 2025 net interest income of approximately $25 to $30 million, and we continue to expect our effective tax rate to be between 20% to 22% for 2025. Before we open the call for questions, I'd like to reiterate that our strong Q2 results underscore the continued momentum in the business and strength of execution by our Chewy team members. We believe that Chewy remains exceptionally well positioned to continue to deliver share-gaining growth and enhance shareholder value. With that, I will turn the call over to the operator for questions.

Speaker #4: For the full year 2025, we are reiterating our previously stated expectations related to share-based compensation expense, including related taxes, of approximately $365 million and weighted average diluted shares outstanding of approximately 430 million.

Speaker #4: 2025 net interest income of approximately $25 million to $30 million, and we continue to expect our effective tax rate to be between 20% to 22% for 2025.

Speaker #4: Before we open the call for questions, I'd like to reiterate that our strong Q2 results underscore the continued momentum in the business and the strength of execution by our Chewy team members.

Speaker #4: We believe that Chewy remains exceptionally well-positioned to continue to deliver share-gaining growth and enhance shareholder value. With that, I will turn the call over to the operator for questions.

Speaker #5: Thank you. We will now begin the question and answer session. As a reminder, if you would like to ask a question today, please do so now by pressing Start, followed by the number one on your telephone keypad.

Speaker 5: Thank you. We will now begin the question and answer session. As a reminder, if you would like to ask a question today, please do so now by pressing STAR, followed by the number one on your telephone keypad. If you change your mind or you feel like your question has already been answered, you can press STAR, followed by two to withdraw yourself from the queue. Our first question today comes from Douglas Till Anmuth with JPMorgan Chase & Co. Please go ahead. Your line is now open.

Speaker #5: If you change your mind or feel like your question has already been answered, you can press Start, followed by 2 to withdraw yourself from the queue.

Speaker #5: Our first question today comes from Doug Amos with JPMorgan. Please go ahead; your line is now open.

Speaker #6: Thanks so much for taking the questions. Sumit, can you talk more about the investments that are required in the back half and into 2026, just as you lean into growth?

Speaker 6: Thanks so much for taking the questions. Sumit, can you talk more about the investments that are required in the back half and into 2026, just as you lean into growth? A little bit more detail on those. Also, just how are you promoting and increasing awareness of some of the new offerings like Chewy Plus and Get Real? Thanks.

Speaker #6: You know, a little bit more detail on those. And then also, how are you promoting and increasing awareness of some of the new offerings like Chewy Plus and GetReal?

Speaker #6: Thanks.

Speaker #4: Hey Doug, good morning. So let's start with the second question first because it'll give you a sense for the investments that we're thinking about.

Will Billing: Hey, Doug. Good morning. Let's start with the second question first because it'll give you a sense for the investments that we're thinking about. As you know, we have a very large base of customers, which continues to grow. This customer base is sticky, and programs like Chewy Plus allow us to enhance the process of discoverability and get customers to attach, both explore, discover, and then attach even a greater set of products or a greater range of products and services offered by Chewy. Our first attack strategy is to essentially expose Chewy Plus to existing members. So far, we have not spent any incremental dollar on marketing the program externally, and we don't intend to do so as we ramp the program up. We're seeing really good participation of existing Chewy members converting to become Chewy Plus members.

Speaker #4: So you know, as you know, we have a very large base of customers which continues to grow. This customer base is sticky. The programs like Chewy Plus, you know, allow us to enhance the process of discoverability and get customers to attach both Explorer and Discover, and then attach even a greater set of products or a greater range of products and services offered by Chewy.

Speaker #4: So, you know, our first attack strategy is to essentially expose Chewy Plus to existing members, and so far we have not spent any incremental dollars on marketing the program externally.

Speaker #4: And we don't intend to do so, you know, as we ramp the program up. We're seeing really good participation of existing Chewy members converting to become Chewy Plus members, so the marginal cost of that acquisition is zero.

Will Billing: The marginal cost of that acquisition is zero or nearly zero to us, and most of the exposure is being provided by onsite and funnel shopping experiences. Now coming to Get Real, our approach is very similar. A large audience. We have what we believe, really good recognition of what looks like premium cohorts and consumables for us. Our strategy is much more leaning into the broader value proposition of Chewy externally as the place which is a destination for you to take care of your pets and providing food supplies, health, and other services, and really gearing ourselves for conversion, right, rather than consideration building when customers come to our website. From that standpoint, the inputs that we've been really focused on are getting the quality of the product, the palatability of the product exactly where we want it. We're pleased to see the customer response.

Speaker #4: Or nearly zero to us, and most of the exposure is being provided by onsite and funnel shopping experiences. Now, coming to GetReal, our approach is very similar.

Speaker #4: You know, large audience, we have, you know, what we believe is really good recognition of what looks like premium cohorts and consumables for us. You know, so our strategy is much more leaning into the broader value proposition of Chewy externally as, you know, the place, you know, which is a destination for you to take care of your pets.

Speaker #4: And providing, you know, food supplies, health, and other services, and really gearing ourselves for conversion, right, rather than consideration building. When customers come to our website.

Speaker #4: And so, from that standpoint, the inputs that we've been really focused on are getting the quality of the product and the palatability of the product exactly where we want it.

Speaker #4: And we're pleased to see the customer response. Number two, you know, we're price competitive. There are many products out there that are priced much higher.

Will Billing: Number two, we're price competitive. There are many products out there that are priced much higher, and we believe the value prop or the balance of quality and price that we deliver really passes good value to the consumer. Third, if you explore this product in the way that we've built it, this is not a standard product listing page experience. We've built a curated experience that allows customers to engage with this category in a manner that allows them to seek the education, have the content at their fingertips. We've paired that up with really high CRM capability internally, and that will be our strategy moving forward as well. From that standpoint, you shouldn't expect us to lean very heavily in marketing dollars. Currently, we're pairing Get Real with a strong acquisition offer, but candidly, Get Real customers are fresh and frozen customers or high net pack customers.

Speaker #4: And we believe the value prop, or the balance of quality and price that we deliver, really passes good value to the consumer. Third, if you explore this product in the way that we've built it, this is not a standard product listing page experience.

Speaker #4: We've built a curated experience that allows customers to engage with this category in a manner that enables them to seek education and have content at their fingertips.

Speaker #4: We've paired that up with really high CRM capability internally, and you know that will be our strategy moving forward as well. So, you know, from that standpoint, you know, we're not— you shouldn't expect us to lean very heavily on marketing dollars.

Speaker #4: Currently, you know, we're pairing GetReal with a strong acquisition offer, but candidly, GetReal customers are fresh and frozen customers and are high NESPAC customers.

Speaker #4: You're looking at, you know, plus $2,500 spend for full meal customers, and you know, running into the high hundreds for topper customers. But these customers are also really propensed towards health and wellness.

Will Billing: You're looking at plus $2,500 spend for full meal customers and running into the high hundreds for topper customers. These customers are also really propensed towards health and wellness and other high spend categories. Broadly, we see a tremendous potential for this category being the highest gross profit per unit category in the company. The fact that we've already spent the money in building CapEx or capacity should essentially make you comfortable to the point that we don't have incremental CapEx investments coming up through 2028. Of course, if the program exceeds our expectation in a major manner, then that's a high quality problem to have, and we'll talk about it at that particular point. Broadly speaking, these are high margin, high sales, high margin verticals, and we're excited to be finally leaning into them and driving even stronger net pack consolidation.

Speaker #4: And other high-spend categories. So broadly, we see a tremendous potential for this category being the highest gross profit per unit category in the company.

Speaker #4: The fact that we've already spent the money in building CapEx or capacity, you know, should essentially make you comfortable to the point that we don't have incremental CapEx investments coming up through 2028.

Speaker #4: Of course, if the program you know exceeds our expectations in a major manner, then that's a high-quality problem to have, and we'll talk about it at that particular point.

Speaker #4: But broadly speaking, you know these are high margin high sales, high sales, high margin verticals. And we're excited to be finally leaning into them and driving even stronger NESPAC consolidation.

Speaker #6: Great, thank you.

Speaker 6: Great. Thank you.

Speaker #5: Thank you. Our next question comes from Nathan Feather with Morgan Stanley. Please go ahead, Nathan.

Speaker 5: Thank you. Our next question comes from Nathaniel Jay Feather with Morgan Stanley. Please go ahead, Nathaniel.

Speaker #6: Thanks for taking my question and kicking off making encouraging momentum here. One of your questions on the SG&A de-leverage: any way to put some guardrails on the magnitude of temporary costs here and how much maybe we can attribute to some of the FC changes versus some of the hard-cut processing costs?

Speaker 6: Thanks for taking my question and keep that encouraging momentum here. Roger, a question on the SG&A leverage. Any way to put some guardrails on the magnitude of temporary costs here and how much maybe we could attribute to some of the FC changes versus the hard good processing costs? Because of that, how should we think about the leverage path into the back half? Thank you.

Speaker #6: And because of that, how should we think about the leverage path into the back half? Thank you.

Speaker #4: Yep, yep. Nathan, let me provide broader commentary on SG&A and also answer your question very specifically. So, first of all, as we discussed on the call, we expect roughly 60% of our adjusted EBITDA margin expansion to come from gross margin.

Will Billing: Yeah, yeah. Nathan, let me provide broader commentary on SG&A and also answer your question very specifically. First of all, as we discussed on the call, we expect roughly 60% of our adjusted EBITDA margin expansion to come from gross margin and 40% to come from OPEX leverage. We do expect to deliver, you know, SG&A leverage in 2025. By inference of our first half performance, you can expect that leverage will come in the back half of the year. Number two, yes, the amount of SG&A leverage on a year-over-year basis in 2025 will be lower than 2024, but I think that's the ebb and flow of SG&A, right? Let me kind of elaborate on that a bit. This will ebb and flow in cycles a bit. As we elaborated in our Capital Markets Day in December 2023, we set a target of roughly 200 basis points to deliver.

Speaker #4: And 40% to come from OpEx leverage. So, we do expect to deliver, you know, SG&A leverage in 2025. And by inference of our first half performance, you can expect that that leverage will come in the back half of the year.

Speaker #4: Number two, you know, yes, the amount of SG&A leverage on a year-over-year basis in 2025 will be lower than in 2024. But I think that's the ebb and flow of SG&A, right?

Speaker #4: Let me kind of elaborate on that a bit. So, you know this will ebb and flow in cycles a bit. As we elaborated in our Capital Markets Day in December 2023, we set a target of roughly 200 basis points to deliver.

Speaker #4: So far, roughly two years out, we've already delivered 100 basis points, or 50% of that target. The majority of that leverage has come from us ramping four fulfillment sites, which are automated 2G sites, and roughly flowing, you know, 40-plus percent of the volume through these states of automation within the company.

Will Billing: So far, roughly two years out, we've already delivered 100 basis points or 50% of that target. The majority of that leverage has come from us ramping four fulfillment sites, which are automated 2G sites, and roughly flowing, you know, 40+% of the volume through these states of automation within the company, right? By Q2 of next year, we expect nearly 50% of our volume will be automated, especially as Houston ramps up. Now, let me talk about the specifics in the quarter. There are a couple of things that are happening in the quarter and in 2025, right? A, we launched Houston in April of this year, and it takes roughly six months for a Gen 2 facility to ramp sufficiently to start delivering leverage. I went back and checked my notes from Q1, and perhaps we should have been a little more clear on that point upfront, right?

Speaker #4: Right? By Q2 of next year, we expect nearly 50% of our volume will be automated, especially as Houston ramps up. Now, let me talk about the specifics in the quarter.

Speaker #4: So there's a couple of things that are happening in the quarter and in 2025, right? So A, we launched Houston in April of this year.

Speaker #4: And it takes roughly six months for a Gen2 facility to ramp sufficiently to start delivering leverage. And I went back and checked my notes from Q1, and perhaps we should have been a little more clear on that point upfront, right?

Speaker #4: So, this facility is ramping well. It's ramping as expected, but it takes about six months for a Gen2 facility to ramp for it to deliver sufficient leverage as such.

Will Billing: This facility is ramping well. It's ramping as expected, but it takes about six months for a Gen 2 facility to ramp for it to deliver sufficient leverage. As such, we do expect to see leverage out of the facility beginning the second half of this year. The second thing that's going on in SG&A is, look, the faster we grow in 2025, and as you can infer, we're growing purely on the basis of units. It's structural growth, which is comping first half growth where we had pricing benefit. What you'll see is that SG&A, that is a variable cost element, will essentially be enhanced the faster we grow on the basis of units. That's a high quality problem to have because it builds density. It allows us to extract more cost out and get the economies of scale as our facilities fully ramp up.

Speaker #4: We do expect to see leverage out of the facility beginning in the second half of this year. Now, the second thing that's going on in SG&A is, look, the faster we grow in 2025—and as you can infer, we're growing purely on the basis of units. It's structural growth, which is comping first half growth where we had a pricing benefit.

Speaker #4: And so what you'll see is that SG&A, that is a variable cost element, right, will essentially be enhanced the faster we grow on the basis of units.

Speaker #4: But that's a high-quality problem to have because it builds density. It allows us to, you know, extract more cost out and get the economies of scale as our facilities fully ramp up.

Speaker #4: So again, that's a transitory thing, and we expect this to be a lot easier and better as we step out from 2025 into 2026.

Will Billing: That's a transitory thing, and we expect this to be a lot easier and better as we step out from 2025 into 2026. Now let's talk about the one-time elements. We picked up incremental inventory in hard goods because, as you can see from the commentary in the market, prices are expected to rise in the back half of the year, right? We wanted to both shore up the inventory to deliver an immaculate customer experience from an in-stock point of view. You know what? We might invest in price, right? We may invest in price to take share. While everybody else is raising price, Chewy becomes another destination for pet parents to really extract the maximum value. Temporarily, we believe this is a situation which is opportunistic, and we should lean in and improve our share position.

Speaker #4: Now let's talk about the one-time elements. So we picked up incremental inventory in hard goods because, as you can see from the commentary in the market, prices are expected to rise in the back half of the year.

Speaker #4: Right? And so we wanted to both shore up the inventory to deliver an immaculate customer experience from an in-stock point of view. But you know what?

Speaker #4: We might invest in price, right? We may invest in price to take share. While everybody else is raising prices, Chewy becomes, you know, another destination for pet parents to really extract the maximum value.

Speaker #4: So you know temporarily we believe this is a situation which is opportunistic and we should lean in and improve our share position. You talked about you know and so roughly we spent about you know three to five million dollars in this in this particular element in higher inbound processing cost, right?

Will Billing: You talked about, yeah, and so roughly we spent about $3 million to $5 million in this particular element in higher inbound processing cost, right? The last component that we talked about on the script was higher wages and benefits and higher wages and expenses, which was a smaller element which is sometimes cyclical, and that was about $2 million to $3 million per share. The important takeaway is that you can expect SG&A costs to moderate in the back half of the year relative to the first half, and we expect to deliver SG&A leverage in 2025.

Speaker #4: And you know the last component that we talked about on the script was higher wages and benefits and higher wages and expenses, you know, which was a smaller, you know, element which is sometimes cyclical. You know, and that was about $2 million to $3 million per se.

Speaker #4: So you know the important takeaway is that you can expect SG&A costs to moderate in the back half of the year relative to the first half, and we expect to deliver SG&A leverage in 2025.

Speaker #6: Great, thank you.

Speaker 6: Thank you.

Speaker #5: Thank you. Our next question comes from David Bellinger with Mizuho. Please go ahead; your line is now open.

Speaker 5: Thank you. Our next question comes from David Bellinger with Mizuho Securities USA LLC. Please go ahead. Your line is now open.

Speaker #7: Hey everyone, good morning. Thanks for the questions. Just squeeze a few together here. Maybe we could just start on the Q2 gross margin improvement.

Speaker 6: Hey, everyone. Good morning. Thanks for the questions. If I just squeeze a few together here, maybe we could just start on the Q2 gross margin improvement. You mentioned the premium products. That seemed like somewhat of a shift. Also, maybe talking about some of this price investment in the back half. Can you unpack all that for us and how we should think about the drivers of gross margin expansion in Q3 and Q4? Also, just on the new OpEx investments, can you help us understand if all of this is fully in your control and making decisions to further accelerate the top line and share gains versus something more reactionary or something changing in the external marketplace that is forcing you to do this? Help us understand that split and how Chewy Plus and fresh and frozen might impact the 15% incremental EBITDA margins for the business.

Speaker #7: You mentioned the premium products that seem like somewhat of a shift. Also, maybe talking about some of this price investment in the back half.

Speaker #7: So can you unpack all that for us and how we should think about the drivers of gross margin expansion in Q3 and Q4? And then also just on the new OpEx investments, can you help us understand, is all of this fully in your control and making decisions to further accelerate the top line and share gains versus something more reactionary or something changing in the external marketplace that is forcing you to do this?

Speaker #7: Just help us understand that split and how Chewy Plus and fresh and frozen, this might impact the 15% incremental EBITDA margins for the business.

Speaker #4: Yep, sure. No, it's a good question. Let's dive into it. So there's a couple of questions built into that. So let's pair them apart.

Will Billing: Yep, sure. No, it's a good question. Let's dive into it. There's a couple of questions built into that, so let's pair them apart. Gross margin first. We're pleased with the gross margin expansion that we've delivered this quarter, right? The drivers of gross margin, David, have remained very consistent over the past few quarters and overall in line with our story or the narrative that we've brought to the street, right? They include product mix across our merchandising-led businesses. You've heard us talk about health, premium consumables, now hard goods is starting to grow double digit, albeit a smaller contribution, but still we're encouraged to see kind of where this goes. That's kind of why we use the word product mix across merchandising-led businesses because it isn't just pharmacy, which has continued to contribute. It is health and wellness supplements. It's premium consumables. It's hard goods growth, etc.

Speaker #4: So, gross margin first. We're pleased with the gross margin expansion that we've delivered this quarter, right? And the drivers of gross margin, David, have remained very consistent over the past few quarters and overall in line with our story or the narrative that we've brought to the street, right?

Speaker #4: They include product mix across our merchandising-led businesses. So you've heard us talk about health, premium consumables; now hard goods are starting to grow double digits, albeit a smaller contribution, but still we're encouraged to see kind of where this goes.

Speaker #4: So that's kind of why we use the word product mix across merchandising-led businesses because it isn't just pharmacy which has continued to contribute. It is you know health and wellness supplements, it's premium consumables, you know it's hard goods growth, etc., etc., etc.

Speaker #4: So, the drivers of gross margin include product mix across merchandising-led businesses, increasing auto-ship penetration, and scale that provides economies of scale.

Will Billing: The drivers of gross margin include product mix across merchandising-led businesses, increasing AutoShip penetration and scale that provides economies of scale, and our ramping sponsored ads initiative, right? That's very consistent commentary. For Q2, the promotional environment remained highly rational, right? We don't expect the promotional environment to be irrational in the back half of the year. As Will mentioned in his remarks, Q2 represents the high point of gross margin for the year. I especially want to note that gross margin will fluctuate on a quarterly basis, right? That would be helpful to remember. This is the case because while we pride ourselves on being disciplined, we also pride ourselves in being able to run the business dynamically each quarter. For example, we will lean into opportunities where we believe Chewy will benefit long term.

Speaker #4: And our ramping sponsored ads initiative, right? So that's very consistent of commentary. For Q2, the promotional environment remained highly rational, right? And we don't expect the promotional environment to be irrational in the back half of the year.

Speaker #4: As Will mentioned in his remarks, Q2 represents the high point of gross margin for the year. I especially want to note that gross margin will fluctuate on a quarterly basis, right?

Speaker #4: And that would be helpful to remember. The This is the case because while we pride ourselves on being disciplined, we also pride ourselves in being able to run the business dynamically each quarter.

Speaker #4: So, for example, we will lean into opportunities where we believe Chewy will benefit long-term. For instance, we may lean into auto-ship subscription growth if we're seeing the right conditions and signals from our marketing teams.

Will Billing: For instance, we may lean into AutoShip subscription growth if we're seeing the right conditions and signals from our marketing teams. On the program ramp, supplier ramp, the ramp of phasing the suppliers and sponsored ads may lead to one quarter being more meaningful than the other in terms of contribution. The important point to remember for 2025 and in general is that we plan on delivering a healthy level of gross margin expansion on an annualized basis. Specific to 2025, if you recall our guidance, we expect approximately 60% of 2025 EBITDA margin expansion to come from gross margin. Clearly, the inferring here is that we do expect to deliver meaningful gross margin expansion this year as well. Where are we investing in the back half? If you look at our guidance, I'll just sort of plain map it out for us, right?

Speaker #4: Or you know on the program ramp, supplier ramp, the ramp of phasing the suppliers and sponsored ads may lead to one quarter being more meaningful than the other in terms of contribution.

Speaker #4: The important point to remember for 2025, and in general, is that we plan on delivering a healthy level of gross margin expansion on an annualized basis.

Speaker #4: So specific to '25, if you recall our guidance, we expect approximately 60% of '25 EBITDA margin expansion to come from gross margin. So clearly the inferring here is that we do expect to deliver meaningful gross margin expansion this year as well.

Speaker #4: So, where are we investing in the back half? If you look at our guidance, I'll just sort of map it out for us, right?

Speaker #4: At the midpoint, our guidance is expanding by roughly 175 million dollars, you know 15% of flow-through, you'd expect probably an incremental 20, 25 million dollars to flow through the bottom line.

Will Billing: At the midpoint, our guidance is expanding by roughly $175 million. With 15% of flow through, you'd expect probably an incremental $20 million, $25 million to flow through the bottom line, but we're choosing to invest that back into the growth of the company, whether that's growing the Chewy Plus membership program that we believe is going to be super incremental, and part of that incrementality is reflected in our top line guidance, or whether it's continuing to grow AutoShip stronger, or whether it's opportunistically evaluating the market in the back half and seeing if there is selective pricing lean-in opportunity. If there isn't, then great, we'll take it to the bottom line. We've left ourselves open to play the marketplace, and SG&A structurally, this is all within our control.

Speaker #4: But we're choosing right to invest that back into the growth of the company. Whether that's growing the Chewy Plus membership program that we believe is going to be super incremental and part of that incrementally is incrementality is reflected in our top line guidance.

Speaker #4: Or whether it's you know continuing to grow auto-ship stronger or whether it's you know opportunistically evaluating the market in the back half and seeing if there is selective pricing lean-in opportunity.

Speaker #4: If there isn't, then great, we'll take it to the bottom line. But we've sort of left ourselves open to play the marketplace and SG&A structurally, this is all within our control.

Speaker #4: So these are two different things that are happening in the way that we will invest in the growth of the business and the SG&A story, which is a very standardized, certain one-time element. But generally, the ramp of our fulfillment facility.

Will Billing: These are two different things that are happening in the way that we will invest in the growth of the business and the SG&A story, which is a very standardized, certain one-time elements, but generally the ramp up our fulfillment facility.

Speaker #7: Great, thank you very much.

Speaker 6: Great, thank you very much.

Speaker #4: Yep.

Speaker #5: Thank you. Our next question comes from Rupesh Parik with Oppenheimer. Please go ahead.

Speaker 5: Thank you. Our next question comes from Rupesh Dhinoj Parikh with Oppenheimer & Co. Inc. Please go ahead.

Speaker #6: Good Good morning and thanks for taking my question. So just going back to your GetReal and some of your fresh frozen efforts, at this juncture, how big do you think the business can go over time?

Speaker 6: Good morning, and thanks for taking my question. Just going back to your Get Real and some of your fresh frozen efforts, at this juncture, how big do you think the business can go over time? I know it's early, but just any characteristics of the initial customers that you're gaining into the franchise, and in this sense, are you getting a sense of, do you have a sense of whether you're actually getting new customers just given that launch?

Speaker #6: And then you know I know it's early, but just any characteristics of the initial customers that you're aiming into the franchise and at this sense, are you getting a sense of whether you're actually getting new customers just given that launch?

Speaker #4: Sure, yeah. So, if we look at the TAM of the category today, we believe it's somewhere in the $3 billion to $4 billion range.

Will Billing: Sure, yeah. If we look at the TAM of the category today, we believe it's somewhere in the $3 billion to $4 billion range. Over the next several years, we expect this category to be north of $8 billion, so somewhere in the $8 billion to $12 billion range. The category is growing at mid-teens levels. It was growing faster up until last year. Now it's growing at mid-teens level, and that's a really healthy growth rate for us to be able to get excited about, right? Number three, there is a lot of interest in this category from around the industry, right? You've seen some de novo players already leaning in. You've seen national branded players start announcing their announcements or their product offerings. We're really excited to be partnering with the national branded partners as they bring their products to life in the back half of this year.

Speaker #4: And over the next several years, we expect this category to be north of $8 billion. So somewhere in the $8 to $12 billion range.

Speaker #4: The category is growing at mid-teens levels. It was growing faster up until last year. Now it's growing at mid-teens levels, and that's a really healthy growth rate for us to be able to get excited about, right?

Speaker #4: Number three, number three there is a lot of interest in this category from around the industry, right? You've seen some de novo players already leaning in.

Speaker #4: You've seen national branded players start announcing their announcements or their product offerings. We're really excited to be partnering with, you know, the national branded partners as they bring their products to life in the back half of this year.

Speaker #4: And alongside that, right, GetReal, right, we expect to have a meaningful amount of share as the category grows. What is meaningful? We would consider, you know, roughly a share position commensurate to Chewy's share position in the industry to be a meaningful share outcome, right?

Will Billing: Alongside that, Get Real, we expect to have a meaningful amount of share as the category grows. What is meaningful? We would consider roughly a share position commensurate to Chewy's share position in the industry to be a meaningful share outcome, right? Now, given that we've built the capacity, given that we've built the topology to be a one-day network, and given the sophistication that we have in our supply chain, we expect the high gross margin possibility of the vertical to efficiently translate into high EBITDA as well, right? You asked about the quality of the customer. Let me answer that now. So far, it's early days. We've been at it less than four weeks, five weeks, and so far we're seeing roughly 70% of the customers are existing customers, 30% of the customers are net new customers.

Speaker #4: Now, given that we've built the capacity, given that we've built the topology to be a one-day network, right, and given the sophistication that we have in our supply chain, we expect the high gross margin potential of the vertical to efficiently translate into high EBITDA as well, right?

Speaker #4: And alongside, you asked about the quality of the customer. Let me answer that now. So far, it's early days. We've been at it, what, less than four weeks, five weeks.

Speaker #4: And so far, we're seeing, you know, roughly 70% of the customers are existing customers, and 30% of the customers are net new customers. And that is, you know, as my earlier comments to Doug indicated, you know, we'd expect that, right?

Will Billing: That is, as my earlier comments to Doug indicated, we'd expect that, right? We're benefiting from the general traffic that the industry will create in marketing the product, and we are priming ourselves for conversion using our site experience with Get Real. We'd expect the net pack of this customer to be north of $800 for toppers because we believe they will attach two or three more categories. For full meals, we expect this to be a plus $2,500 customer on an annual basis. We're excited about it.

Speaker #4: So, we're benefiting from the general traffic that the industry will create in marketing the product, and we are priming ourselves for conversion, you know, using our site experience with GetReal.

Speaker #4: We'd expect the NESPAC of this customer to be north of, you know, $800 for toppers, because we believe they will attach two or three more categories.

Speaker #4: And for full meals, we expect this to be you know a plus $2,500 customer on an annual basis. So we're excited about it.

Speaker #6: Great, thank you for all the color. Best of luck.

Speaker 6: Great. Thank you for all the color. Best of luck.

Speaker #4: Sure.

Will Billing: Sure.

Speaker #5: Thank you. The next question comes from Curtis Nagle with Bank of America. Please go ahead. Curtis, your line is now open. Please proceed with your question.

Speaker 5: Thank you. The next question comes from Curtis Smyser Nagle with BofA Securities. Please go ahead. Curtis, your line is now open. Please proceed with your question. We are not receiving a response, and I will move on to the next question, which comes from the line of Shweta R. Khajuria with Wolfe Research. Please go ahead. Your line is now open.

Speaker #5: We are not receiving a response, and so I will move on to the next question, which comes from the line of Shweta Kajuria with Wolf Research.

Speaker #5: Please go ahead, your line is now open.

Speaker #8: Okay, thanks a lot for taking my questions. Let me try too. Please, Sumit, could you talk about the advertising environment? What are the conversations you've had through the quarter, and what's top of mind across advertisers as we think about the back half of this year and potentially even next year?

Speaker 7: Okay. Thanks a lot for taking my questions. Let me try two, please. Sumit, could you please talk about the advertising environment, just the conversations you've had through the quarter, and what is top of mind across advertisers as we think about the back half of this year and potentially even next year, and how it is and how ad revenue is trending, or I guess advertising business, not revenue, is trending for you versus your expectations? The second question is generally, what are your expectations as we think about the macro in terms of net household formations for the remainder of this year and also next year? I ask because there could be inflationary pressure. How are you thinking about the mix of customer growth versus pricing?

Speaker #8: And how it is and how ad revenue is trending or I guess advertising business, not revenue, is trending for you versus your expectations? And then the second question, is generally what are your expectations as we think about the macro in terms of net household formations for the remainder of this year and also next year?

Speaker #8: And I ask because there could be inflationary pressure. So how are you thinking about the the mix of customer growth versus pricing? Do you still expect it to be call it low to mid single-digit percentage growth rate in the back half or is there potential for acceleration in the back half of this year?

Speaker 7: Do you still expect it to be, call it, low to mid-single % growth rate in the back half, or is there potential for acceleration in the back half of the year? Thanks a lot.

Speaker #8: Thanks a lot.

Speaker #4: Okay, there are three questions there: the state of the industry and key inputs, our composition of new and returning customers, and NESPAC. And then three, advertising.

Will Billing: Okay. There are three questions there: state of the industry and key inputs, our composition of new and new customers and net pack, and then three, advertising. Let's take them one by one.

Speaker #4: So let's take them one by one. So in terms of

Speaker #8: Exactly.

Speaker 7: Exactly.

Will Billing: In terms of the lay of the land, let's start with pet household formation trends. Overall, the trends that we spoke about last several quarters have remained consistent, and we're not seeing notable changes relative to those comments, right? With respect to data or the shelter channel, net adoptions remain stable, and relinquishments continue to trend down year over year. Overall, we expect pet households to be broadly flat to slightly up in 2025, right? The point on industry continues to normalize, you know, seems to be holding true. Across the conversations that we're having with our suppliers and interpreting the market from a consumer standpoint, we believe the back half of the year, or generally for 2025, the industry remains in low single digit to kind of perhaps the low end of the mid-single digit range in terms of growth.

Speaker #4: In terms of the lay of the land, let's start with pet household formation trends. Overall, the trends that we spoke about in the last several quarters have remained consistent.

Speaker #4: And we're not seeing notable changes relative to those comments, right? With respect to data or the shelter channel, net adoptions remain stable, and relinquishments continue to trend down year over year.

Speaker #4: And so overall, we expect pet households to be broadly flat to slightly up in 2025. Right? So the point on industry continues to normalize, you know, seems to be holding true.

Speaker #4: Now, across the conversations that we're having with our suppliers and interpreting the market from a consumer standpoint, we believe the back half of the year, or generally for 2025, the industry remains in low single-digit to kind of perhaps the low end of the mid-single-digit range in terms of growth.

Speaker #4: And so you know we are clearly taking share, growing on a 52-week basis between 7% and 8%, and on a 53-week basis, in the 6% range or so.

Will Billing: We are clearly taking share, growing on a 52-week basis between 7% and 8%, and 53-week basis, the 6% range or so, which we're excited about. This is on top of the fact that we have tougher comps that we're comping as we move into the back half of the year. We're excited about that. Now, let's talk about our composition. Our growth algorithm, as we've guided long term, is a combination of active customers growing low single digit to mid-single digit and net pack growing mid-single digits, right? We're pleased to essentially maintain that for the rest of the year. We're encouraged by the steady and consistent return to active customer growth that we have delivered over the past several quarters, and we expect that to continue on a sequential basis, right?

Speaker #4: So, which we're excited about. And this is on top of the fact that we have tougher comps that we're comping as we move into the back half of the year.

Speaker #4: So we're excited about that. Now let's talk about our composition. So you know our growth algorithm as we've guided long-term is a combination of active customers growing low single-digit to mid-single-digit and NESPAC growing mid-single-digits.

Speaker #4: Right? And so we're pleased to essentially maintain that for the rest of the year. We're encouraged by the steady and consistent return to active customer growth that we have delivered over the past several quarters.

Speaker #4: And we expect that to continue on a sequential basis. Right? Would remind you that we will be lapping our return to active customer growth in Q4 which will result in modestly tougher comps for us in Q4 and even with the tougher comps, we continue to expect to grow active customers at the high end of the low single-digit range in 2025.

Will Billing: I would remind you that we will be lapping our return to active customer growth in Q4, which will result in modestly tougher comps for us in Q4. Even with the tougher comps, we continue to expect to grow active customers at the high end of the low single digit range in 2025, right? When you look at net pack, we delivered 4.5% growth in Q2. That is in a normalized environment, where there is some pricing benefit. Right now, there is no pricing or no material pricing benefit flowing through. We're growing net pack at 4.5%, and we would expect net pack to continue to trend in that 4.5% to 5.5% range as we move into the back half. This is through stronger AutoShip, stronger product mix, programs like Chewy Plus that are driving consolidation.

Speaker #4: Right? And then when you look at NESPAC, we delivered 4.5% growth in Q2, which is in a normalized environment, you know, where there is some pricing benefit.

Speaker #4: Right now, there is no pricing or material pricing benefit flowing through. So we're growing NESPAC at 4.5%, and we would expect NESPAC to continue to trend in that 4.5% to 5.5% range as we move into the back half.

Speaker #4: And again, this is through stronger auto-ship, stronger product mix, you know, programs like Chewy Plus that are driving consolidation. So it makes a lot of sense for us to lean in.

Will Billing: It makes a lot of sense for us to lean in and continue to capitalize on the growth that we're seeing. Your final question on advertising, the market competitive intensity is high. We don't see generally from a lean-in point of view either suppliers nor competitors lean out. Competitive intensity remains high. We are really pleased with the metrics that we are seeing on our side. For example, our net traffic was up 14% in the quarter, number of sessions. On the mobile app side, sessions were up over 25% year over year. Broadly speaking, we're attracting customers, and we like that translation layer. When we think about sponsored ads, that continues to resonate really loudly. We feel good about the continued progress that the business made on ads this quarter, which again grew sequentially.

Will Billing: We have strong conviction in our long-term target of the 1% to 3% that we have brought to the table.

Speaker 7: Okay, that's helpful. Thanks, Sumit.

Will Billing: Sure.

Speaker 5: Thank you. Our next question comes from Michael Morton with Towers. Michael, please go ahead.

Speaker 6: Good morning. This question's for Sumit, a bigger picture, and then maybe a more near-term one. Chewy has done an excellent job kind of disproving the fears around competing with retail giants. There are the obvious competitive advantages like customer service. We were wondering if you could maybe speak to some of the aspects that are missed by us on the outside where you think your real opportunity is to continue gaining incremental share. Maybe just internally how this is reflected in your outlook as pet household formation continues to improve. Just on the hard good recovery, maybe just a little bit details on volume versus ASP would be helpful. Thanks again.

Will Billing: Let's start with the second question. It's all primarily volume. There is very little ASP benefit right now in the hard goods recovery. The primary drivers of hard goods recovery are, as you've heard me talk about last quarter, I will reiterate that, a rapid acceleration and expansion of in-stock, higher in-stock, so more products for customers to choose from. We've onboarded over 1,500 brands this year already, and customer reception on the freshness of that inventory is really encouraging for us to see. Number two, our in-stock levels have remained really high, and we want to keep them high, hence the investment in inventory in Q2 as we move into the back half of the year. Number three, continued exposure for hard goods customers in the way that we're communicating with them, both onsite and offsite.

So uh let's start with the second question. Uh you know it's all it's all primarily volume. There is a very little ASP benefit. Uh, right?

Will Billing: Overall, we're encouraged by what we are seeing in hard goods and don't expect it to slow down as we've played Q3 so far. Good story there. Your higher order question around differentiation. We really always interpreted the playing field as much broader than food and supplies. When you essentially interpret a $140 to $150 billion TAM, which is increasingly online, the value prop that we are bringing to the market, which is credibly connecting food, supplies, the entire health ecosystem, alongside B2C, B2B, or B2B2C type services options, and then really keeping customers in our funnel and building that layer cake, we do it, in my opinion, in one of the most efficient and powerful ways relative to anybody out there. There are reasons for that, right?

In the hard Goods recovery. Uh, the primary drivers of hard Goods recovery are. As you've heard me talk about last quarter, I will reiterate that uh a rapid acceleration uh and expansion of uh, in stock uh, you know, higher in. So more products for customers to choose from uh we onboarded over 1500 Brands this year already and customer reception on the freshness of that inventory, is, uh, really encouraging for us to see number 2, our in stock levels have remained, really high and we want to keep them high and hence, the investment in, in inventory, in Q2, as we move into the back, half of the year, uh, number 3, uh, you know continued, uh, exposure for hard Goods, customers in the way that we're communicating with them, both on-site and off-site. And so, overall, we're encouraged by what we are seeing in hard goods and don't expect it to, uh, you know, slow down as we've played Q3 so far.

So good, good, good story there, uh, and then your, your, your, your meta, your higher order question around differentiation. Uh, and you know.

Look we we really, you know, always interpreted the the playing field as much broader than food and supplies.

And when you essentially interpret, uh, $140 billion to $150 billion TAM, right? Which is increasingly online.

Uh, the the value prop that we are bringing to the market which is credibly connecting Food Supplies, the entire Health, ecosystem alongside b2c B2B or B2B to C type Services options.

Uh, you know, and then, uh, you know, really keeping customers in our funnel.

And building that layer cake, we do it in, my opinion, one of the most efficient and powerful ways.

Relative to, you know, anybody out there.

Will Billing: In the food and supply side, you would think that we are a scaled e-commerce player, but with the personalized service you would expect in a local neighborhood pet store. That combination is very hard to achieve, and we continue to achieve and outperform and are never satisfied with our performance when you think about it at the scale that we're operating. Next to it, we've stood up a very large and compelling health TAM, which now we're playing in nearly 100% of the $50 billion health TAM that is growing at two times the rate of food and supplies. Within that, we've built a very credible set of offerings.

And so, so there are reasons for that, right? So, in the

In the food and supply side, you know, you would think that we are a scaled e-commerce player. But with the personalized service, you would expect in a local neighborhood pet store, and that combination is very hard to achieve and we continue to achieve and outperform uh, and are never satisfied with our performance. Uh, you know, when you think about it at the scale that we're operating,

Will Billing: Whether it's the fact that less than a fourth of our customers are interacting through verticals like pharmacy, which gives us tremendous headroom to continue to grow in pharmacy, particularly as the vertical continues to move more and more online, or whether it's the growth of our compounding business. We haven't talked about compounding for a while. The gross margins, the compounding, there's only two credible compounders in the country, and we stepped into compounding to offer the first B2C offering for customers, but we're also becoming a more and more choiced product for veterinarians who want to lean into compounding services. The gross margins for compounding are even higher than gross margins for pharmacy, and the barriers to entry are really high, right? Next to it, we've built a very credible B2C and B2B software business, which continues to ramp.

Then next to it, we've stood up a very large and compelling Health Tam, which now we're playing in nearly 100% of the 50 billion dollar Health Tam, that is growing at 2 times the rate of food and supplies, and within that, we've built a very credible set of offerings. So whether it's, you know, the fact that less than a fourth of our customers are interacting through, uh, you know, verticals like Pharmacy, which gives us tremendous head rooms to continue to grow in Pharmacy, particularly as the vertical continues to move more and more on online.

Or whether it's the growth of our compounding business.

You know, we haven't talked about compounding for a while, and the gross margins. The compounding, there are only two credible compounders in the country. We stepped into compounding to offer the first B2C offering for customers, but we're also becoming a more and more choice product for veterinarians who want to lean into compounding services.

And the gross margins for compounding are even higher than gross margins for pharmacy. And the barriers to entry are really high.

Will Billing: Broadly speaking, and now with Chewy Vetcare ramping higher than expectation, it's only excitement that we can sort of project moving in the future. Chewy Plus is a program we're excited about, and that's why we believe it was important to inform you that the program's quickly ramped up to become 3% of net sales exiting the last month of the last quarter, and we expect it to continue, right? We see this program in line with an Amazon Prime or Costco membership or Walmart Plus, with similar benefits and similar returns. Our job is to position it as the best pet membership program in the industry. We're excited about that. There's lots in front of us that allows us to compete without really being concerned about competitive intensity. That's always, we are observant of that, but we really obsess over our customers.

Right next to it. We built a very credible b2c and B2B uh you know software business which continues to ramp and so broadly speaking and now with CVC ramping higher than expectation, you know? It's it's only, it's only excitement that we can sort of project move in the future.

Chewy plus is a program, we're excited about. And that's why, you know, we believe it was important to inform you that the programs quickly ramped up to become 3% of net sales exiting, uh, you know, the last month or the last quarter. And we expected to continue, right? We, we see this program in line with an Amazon Prime or Costco membership or Walmart. Plus, you know, with similar benefits and similar returns,

uh,

And so our job is to position it as the best, you know, pet membership program in the industry. We're excited about that.

So there's a lot in front of us that allows us to compete, you know, without really being concerned about competitive intensity. You know, that's always, you know, we are observant of that, but we really obsess over our customers.

Speaker 6: Thank you.

Thank you.

Speaker 5: Thank you. We have time for one final question, and our last question today comes from the line of Dylan Carden with William Blair. Dylan, please go ahead.

Thank you. We have time for 1. Final question. And so, our last question today comes from the line of Dylan carton with William Blair.

Dylan, please go ahead.

Speaker 6: Thanks. Sumit, curious, you had some earlier comments about the quality of cohorts improving year over year, and I was just wondering if you could elaborate on that. Is that simply the industry itself stabilizing and improving? Are you doing things to stimulate that? The growth, and maybe it's a related topic, the growth in AutoShip and the outperformance there, which has been relatively sustained over the last three quarters, how long do you think that runs? Thanks.

Thanks. Um.

Sumit curious. You had some earlier comments, about sort of the quality of cohorts improving year-over-year and I was just wondering if you could

Elaborate on that is that just sort of Simply the industry itself, stabilizing and improving um are you doing things to kind of stimulate that and the the growth and maybe sort of a related topic? But the growth in

Auto-ship and the outperformance there, which has been relatively sustained over the last three quarters. You know, how long do you think that runs? Thanks.

Will Billing: The quality of the cohorts improving is a result of two different things, Dylan, and they're both complementing us. One is the more customers we push into programs like AutoShip or bring in through programs like Chewy Plus, the more our ability to keep them in the funnel, get them more opportunities to talk to them, to get them to consolidate their net pack, and the faster net pack consolidation that we see from them. Within the program itself, we have worked towards improving settlement rates. For example, if you think about AutoShip, it's a two-sided funnel, right? We're bringing in gross subscription, and then we're retaining net subscribers. We've improved both. Our rate of gross subscription add to AutoShip has increased, and our second order, third order, fourth order settlement rates into AutoShip have improved, which means that the net retention in AutoShip is much better.

So, the quality of the cohorts improved.

2 different things. Dylan and they're both complimenting US 1 is the more customers we push into the into programs like auto ship or bring in through programs, like chewy plus the more our ability to keep them in the funnel, uh, you know, get them more opportunities. We have to talk to them, to get them to consolidate their, their nest pack, and the faster Nest pack consolidation that we see from them. So, you know, within the program itself, then we have worked towards improving settlement rates. So for example, if you think about auto ship, you know there's a it's a it's a 2-sided file, right? We're bringing in Gross subscription and then, you know, we're retaining net subscribers. So, we've improved both our rate of growth subscription, add to auto ship has increased and our second order, third order, fourth order settlement rates into Auto ships as improved, which then means that the net

Will Billing: You see that layer cake building pretty effectively, and that continues to push a greater portion of our sales moving through AutoShip. With Chewy Plus, we're seeing a similar effect. Chewy Plus members are engaging with and adding, on average, three more categories than non-members to their baskets. The mix of cohort is really interesting to us because it opens up Chewy to all of the low spending cohorts where we can rapidly consolidate baskets, and it's opening us up for high spend cohorts to expand and discover other products which are also expanding basket sizes. On average, we see really strong incrementality, and the quality of cohorts of the Chewy Plus program is healthy. We have a large and growing health business and a premium consumables business.

Attention and auto ship is much better. And you see that layer cake building pretty effectively, uh, you know, that continues to push a greater portion of our sales, moving through ownership, which we plus we're seeing a similar effect, right Chewie Plus members are engaging with and adding and on an average 3 more categories than non-members to their baskets. Right. And the mix of cohort is really interesting to us because it opens up chewy, right? To all of the low spending cohorts where we can rapidly consolidate baskets and it's opening us up uh you know for high spend cohorts to expand and discover other products which are also expanding basket size. So on an average, we see really strong incrementality and the quality of cohorts of the chewy plus uh uh you know, program is is healthy. Then we have a large and growing uh, Health business.

Will Billing: Remember, every time I've talked about this in the past, we've mentioned that when it comes to the low-end value segment of the market, which is roughly, in our opinion, 12% of the market or customers, that's slightly not the place for Chewy, but everybody else, Chewy is the place. The final thing is more and more people move in online. Clearly, online is consolidating share from offline. Once we lock these customers in, which we were not doing as well, in my opinion, in 2022, 2023, you're seeing the results sort of come through here.

Uh, and a premium consumables business.

Remember, every time I've talked about this in the past, you know, we've mentioned that, you know, when it comes to the low-end value segment of uh of uh you know, the market which is roughly in our opinion, 12% of the market or customers. You know, that's likely not the place for chewy but everybody else. Right Chewie, is the place and then the final thing is you know, more and more people move in online. So clearly, uh, you know, online is consolidating share from offline. Uh, and you know, once we lock these customers in uh, which we were, you know, not doing as well in my opinion in 20.

2:23, uh, you know, you're seeing the results sort of come through here.

Speaker 6: Thanks. Just curious, you know, Chewy Plus, I get that it's early days as far as sort of mid-single digit revenue penetration, but for a lot of loyalty programs, you mentioned Prime, that's kind of the majority of the business. Is that part of the intention here? Just from a margin standpoint, you know, let's assume it's the majority of the business, that would be margin accretive?

Thanks and and just curious, you know, should we pause I get that it's early days as far as sort of mid single digit.

Revenue penetration. But you know, for a lot of loyalty programs you mentioned Prime. It's kind of the majority of the business is that

Part of the intention here, and just from a margin standpoint, you know, let's assume it's a majority of the business that would be margin of creative.

Will Billing: I think we've shared this stat in the past that at some point we did the survey not so long ago, three-fourths of our customers are Prime members, right? I think that's probably well understood given how broad the penetration of that program is. Candidly, what we're observing is, you know, what we've also shared in the past is that generally, it is well understood that we retain a very high percentage of our customers from going into year two, right? Our attrition is de minimis past kind of a 30-month mark. You saw that in the way that our pandemic cohorts have settled out, right? What happens is that once we have a customer past the 30-month mark, in the past, they would rapidly consolidate their share of wallets over to Chewy, regardless of whether they're a Prime member or not.

So look, I mean, you know, I think we've shared the stat in the fact that, you know, at some point we did the survey not so long ago. Three-quarters of our customers are Prime members, right? And so I, I, I, I think that's probably well understood given how broad the penetration of that program is. But candidly, what we're observing is, you know, what we've also shared in the past is that our generally, it is well understood that we retain a very high percentage of our customers from going into year 2, right? And so our attrition is diminished.

Will Billing: Now with Chewy Plus, we're seeing that that consolidation is happening even faster. With AutoShip, we're seeing that that consolidation happens even faster because we've improved the proposition on the AutoShip program itself. That was my point on why we're seeing both accelerated as well as credibly built net pack curves on the back of these two programs. Your other question was around margin. We expect Chewy Plus to be margin accretive. As the program ramps, obviously, we're leaning in into the 30-day free trial period. There is the mix of new members to paid members. It'll take a few months for the net pack consolidation to start coming through. Broadly, yes, the program will be gross margin rate dilutive, but on a dollar basis, it will be highly accretive, and on a contribution profit basis, it will be highly accretive.

You know, past kind of a 30-month mark and you saw that in the way that our pandemic cohorts have settled out, right? And so what happens is that once we have a customer pass the 30-month mark in the past, right? They would rapidly consolidate their share of wallet over to chewy, right? Regardless of whether they're a Prime member or not and now it's chewy plus we're seeing that that consolidation is happening even faster right with auto ship. We're seeing that that consolidation happens even faster because we

To improve the proposition on the ownership program itself. So that was my point on. You know why we're seeing both accelerated as well as, you know, credibly built Nest pack curves on the back of these 2 Programs. And then uh, you know, your other question was around margin. Uh,

Will Billing: I think you would essentially underwrite a business case where if we came to you and said, "Hey, we're investing, you know, X basis points, but we get 6X the return in top line," I think that ROAF is something that we would underwrite.

uh, to paid members, uh, you know, it'll take a few months for the nest pack consolidation to start coming through but broadly so yes, the program will be gross margin rate dilutive, but on a dollar basis, it will be highly accretive, and on a contribution profit basis, it will be highly agreed, uh, you know and so I, I,

I think you would essentially underwrite a business case where, if we came to you and said, hey, we're investing, you know, X basis points, but we get 6X return in top line. Okay, I think that is something that we are on the right track.

Speaker 6: Yes, I really appreciate it. Thank you.

Yes, I really appreciate it. Thank you.

Sure.

Speaker 5: Thank you. Those are all the questions we have time for today, and this concludes our call. Thank you all for your participation. You may now disconnect your lines.

Thank you. Those are all the questions we have time for today, and this concludes our call. Thank you all for your participation. You may now disconnect your lines.