CHWY - NYSE

Good afternoon. Thank you for attending today's Chewy Second Quarter FY '23 Earnings Call. My name is Anna and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Jen Hsu, Head of Investor Relations, you may go ahead.

Thank you for joining us on the call today to discuss our second quarter 2023 results. Joining me are Chewy's CEO, Sumit Singh; and Interim CFO, Stacy Bowman. Our earnings release and letter to shareholders, which were filed with the SEC earlier today has been posted to the Investor Relations section of our website investor.chewy.com. On our call today, we will be making forward-looking statements, including statements concerning Chewy's future prospects, financial results, strategies and investments, industry trends, and our ability to successfully respond to business risks. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks, uncertainties, and other factors described in the section entitled Risk Factors in our Annual Report on Form 10-K and other subsequent quarterly reports, which could cause actual results to differ materially from those contemplated by our forward-looking statements. Reported results should not be considered an indication of future performance. Also note that the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements except as required by law 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 and letter to shareholders, which were filed with the SEC today. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise noted, results discussed today refer to the second quarter of 2023 and all comparisons are accordingly against the second quarter of 2022. Finally, this call in its entirety is being webcast on our Investor Relations website. A replay of this call will also be available on our Investor Relations website shortly. I'd now like to turn the call over to Sumit.

Thanks, Jen, and thank you all for joining us on the call today. Before we begin, I want to introduce Stacy Bowman, our Chief Accounting Officer. As previously announced, CFO, Mario Marte, retired on July 28, and Stacy, is serving as our Interim CFO, while we continue to search for a permanent CFO. She is a respected leader, who has been with Chewy for more than eight years and is deeply familiar with our finance organization, systems, and processes. Welcome, Stacy. Now, let's begin. Our second quarter carried on the positive trends we saw in our Q1 results , delivering mid-teens growth exceeding guidance as well as robust profitability. In Q2, we reported $2.78 billion in net sales, up 14% and a 3% adjusted EBITDA margin. Consistent with our expectation, active customers were broadly flat on a sequential basis, while net sales per active customer or NSPAC reached $530, reflecting a 15% increase. Net sales growth was underpinned by strong participation from our customers, underscoring the ever-increasing strength of the Chewy ecosystem. This momentum was evident across many of our focus areas, including Autoship, where sales continued to grow at a faster pace than our topline, increasing their share of total net sales to 76% in the second quarter. Autoship remains a key differentiator of Chewy's business model, enabling high visibility and predictability, driven by recurring revenue streams while engendering customer loyalty. Additionally, we are also successfully driving the discovery of our Chewy Health platform. For example, cross-category penetration into pharmacy now represents nearly 20% of our overall active customer base. Elsewhere across Chewy, our teams are continuously enhancing our CRM capability, improving targeting, and supporting strong customer engagement. Moving down the P&L, we delivered another quarter of robust profitability. The gross margin of 28.3% was broadly in line with expectation. As anticipated, promotional activity in the second quarter was higher than in the first quarter, however, the promotional environment on the whole remains largely rational. Adjusted EBITDA margin came in at 3% for the quarter, benefiting from our strong gross margin trends and fulfillment cost efficiencies, offset by the impact of our exciting growth investments, including our Canada expansion, which remains on track for a Q3 launch. As we indicated during our Q1 earnings call, we continue to utilize our growing free cash flow to self-fund a meaningful portion of these growth initiatives. Additionally, our automation efforts continue to be both a driver of margin improvement to date, as well as a source of continued upside. Two of our four automated facilities are still ramping and our fifth automated site is opening in early 2024. Combined, we expect them to provide additional operating efficiency in the future years. Before spending time on business initiatives, let me share our perspective on consumer behavior in the pet industry and in particular how these trends may impact active customers and NSPAC at Chewy. Coming out of the summer months, we are sensing a shift in consumer mindset towards being more discernible, and at the same time, with a higher willingness to consolidate their share of wallet to their trusted retailer of choice. This behavior is driven by a more fluid macro-environment, including high levels of inflation, which have been passed through the industry over the past 18 months. Our dialog with our suppliers confirms that these trends are permeating throughout the pet industry. At Chewy, we are in many ways insulated from these pressures given our high-quality customer base, the mix of our consumables and healthcare businesses, which drove nearly 85% of our net sales in Q2 Our powerful Autoship subscription service, best-in-class healthcare experience, and our overall promise of competitive prices, convenience, and unparalleled customer service. Our loyal customers recognize these attributes as key differentiators and continue to demonstrate robust ordering behavior, which in turn continues to support our strong performance. Further to this point, we see significant potential to continue growing share of wallet with our existing customers, evidenced by our strong track record of sustainable NSPAC expansion. As you may recall, we have grown NSPAC from around $330 in the year preceding our IPO to $530 this quarter, up approximately 60% over that time. While we saw a modest benefit from price increases efforts, such as growing Chewy Health ecosystem, increasing uptake of our Autoship program and our large customer base that spends more with us over time have driven the majority of our NSPAC expansion. This underscores the sustainability of our track record as well as the ongoing potential to outperform the pet industry and deliver strong and profitable growth. Now, while we are more insulated than some others, we are not fully exempt from the pressure is currently facing the pet industry. That household formation remains relatively muted and as I mentioned above, the consumer mindset continues to be pressured. These factors taken together, make the current environment a challenging period to forecast consumer behavior. Taking this into consideration, we continue to see the potential for returning to net-adds growth during the second half of this year, but in light of recent trends, we are now expecting a wider range of potential outcomes. While the industry-wide trends, I just described, make it challenging to forecast net adds. These dynamics are not specific to Chewy and we believe we are well-positioned to drive improved active customer trends as macro factors and consumer behavior patterns normalize. Now, I would like to provide an update on some of our strategic initiatives. Our upcoming expansion into the Canadian market remains on track for Q3 of this year. Canada represents a large and fast-growing pet category, and our teams are hard at work finalizing selection, ensuring the same convenient delivery experience and high bar service that our US customers enjoy. We look forward to sharing our progress over the quarters to come. In sponsored ads, one of our prospective margin-accretive growth vectors, we are executing against a compelling roadmap and remain on track to ramp the program throughout the second half of the year and into 2024. We remain encouraged by the opportunity ahead and will continue to update you on progress as we scale the business. Lastly, I'm excited to announce that we intend to host our first Investor Day later this year. Chewy has come a long way since our 2019 IPO, having nearly tripled our net sales to north of $10 billion, expanded gross margin by 800 basis points, and adjusted EBITDA margin by nearly 1,000 basis points. Yet, we are just getting started and believe that we still have considerable runway with clear potential to outperform the broader pet industry and drive both strong growth as well as significant margin expansion. We look forward to sharing a deep dive on our highly integrated pet ecosystem, unveiling our exciting roadmap ahead, and recalibrating our long-term financial expectations to reflect the upside we see in the Chewy platform. In closing, I am particularly proud of our strong results and high levels of customer engagement that we achieved in Q2. We operate in a secular growth category that demonstrated consumer resiliency and Q2 once again showcased the strength and durability of our platform. With that. I will turn the call over to Stacy.

Thanks, Sumit. I look forward to engaging with many of you in this new role. In the second quarter, net sales grew 14.3% or $347 million to $2.78 billion. Non-discretionary consumables and healthcare categories continued to meaningfully contribute to growth in the quarter, collectively representing approximately 85% of second-quarter net sales. Autoship customer sales were $2.1 billion, up 18.1%, and continue to outpace aggregate topline growth by almost 400 basis points. Autoship customer sales now represent 75.5% of total net sales. Active customers remained broadly flat on a sequential basis and finished Q2 at $20.4 million. However, our primary measure of customer engagement NSPAC grew 14.7% to $530. Notably, both NSPAC and Autoship customer sales yet again reached new record highs. As we move down the P&L, please note that my discussion of financials where applicable refers to metrics excluding share base compensation expense and related taxes, as well as certain other adjustments disclosed in our SEC filings, where relevant. The same applies to my discussion of guidance and financial outlook. Gross margin reached 28.3% in Q2, which reflects a 20 basis point expansion, broadly consistent with our expectations for the quarter. Continuing onto OpEx, SG&A excluding share-based compensation and related taxes, totaled $550.9 million or 19.8% of net sales, deleveraging 20 basis points compared to the second quarter of 2022. This temporary increase was largely driven by corporate payroll increases related to our growth initiatives such as sponsored ads and our expansion into Canada, ahead of realizing the associated expected net sales growth. The SG&A deleveraging was partially mitigated by continued fulfillment cost efficiencies, supported by our automation initiatives. Q2 advertising and marketing expense was $185.5 million or 6.7% of net sales, consistent with our expectation of 6% to 7% of net sales. Second quarter adjusted net income was $63.3 million, an increase of $1.2 million. The second quarter adjusted EBITDA reached $86.9 million, up $3.8 million, implying an adjusted EBITDA margin of 3.1%. Second quarter free cash flow was $101.1 million, reflecting $158.8 million in net cash provided by operating activities and $57.6 million in capital expenditures. Capital expenditures were primarily comprised of automated fulfillment center investments and ongoing technology projects. As a reminder, we regularly see fluctuations in CapEx intensity from quarter-to-quarter. Following below-average CapEx intensity in the first quarter, CapEx spending increased in the second quarter. Overall, we expect 2023 capital expenditures to remain in the range of 1.5% to 2% of net sales. We finished Q2 with $905.4 million in cash and cash equivalents and marketable securities, nearly $300 million higher than the balance at this time last year and we remain debt-free. At the end of Q2 between cash-on-hand, marketable securities, and availability on our ABL, our liquidity stood at $1.7 billion. That concludes my second quarter recap. So now let me cover our third quarter and full year 2023 guidance. As always, our guidance reflects a balanced view that incorporates the strength of our business model and customer engagement, along with the latest views on the evolving economic outlook. We expect third-quarter net sales to be between $2.74 billion and $2.76 billion, representing year-over-year growth of approximately 8% to 9%. We are reiterating our full-year 2023 net sales outlook of $11.5 billion to $11.35 billion, representing growth of approximately 10% to 12% compared to the full year 2022. We are also reiterating our full-year 2023 adjusted EBITDA margin outlook of approximately 3%. As you update your models, also note that we expect our free cash flow for full-year 2023 to be approximately 2.5 times the free cash flow we generated in the full year 2022. Before we open the call to questions, I'd like to reiterate that our strong second-quarter earnings reflect the resilience of our operating model in an evolving macro-environment. We believe that Chewy is exceptionally well-equipped to navigate the road ahead and deliver strong performance, as our execution is grounded in our operating philosophy of driving sustainable, profitable growth. And with that, I'll turn the call over to the operator for questions.

[Operator Instructions] Our first question is from the line of Doug Anmuth with JPMorgan. You may proceed.

Thanks so much for taking the questions. Sumit, if you could talk more about the wider range of outcomes for active customers in the back half, curious how much hard goods-driven acquisitions are factored here, even though it's not a big piece of your business. And if my math is right, the 4Q guidance ranges around 5% to 12%, which feels pretty wide. Just hoping you can help us understand what's happening at both of those extremes? Thanks.

Okay, just to clarify the guidance range, you're talking about is revenue guidance range or somehow customer guidance range?

Revenue. Yes, the implied revenue guidance range for 4Q?

Okay. That's not, so just to address that head-on, that's not how wide we're thinking. We're estimating the range of outcomes on net adds to be a bit wider. We clearly communicated that. We expect growth in the back half of the year. And while that's certainly possible, we're sort of modeling a couple different types of scenarios. But on the back of that, I want to reiterate the guidance that we provided, which we actually feel pretty good about given the strength that we're seeing from ordering customers and the engagement from those customers on our platform. Now let me go back and kind of give you the color on why we are projecting a wider outcome or wider range on the net adds or active adds kind of conversation that we've been having in the last couple of quarters So essentially what's happening is, I'll provide a short course. I'm happy to dive into the details here. So consistent with what we previously communicated, the large COVID cohorts that were a headwind to net adds during the first half of the year, where we continue to expect this impact to diminish in the second half, now that we've reached the two-year mark for a majority of these cohorts. At the same time, coming out of Q2 what we've seen is a slightly more discernible customer and it really started in July for us, much more than it did in May and June. And so we just haven't had enough time for this to play through. And we're projecting what we're seeing right now forward and what it is, is that for the more recently-acquired or newer cohorts of customers, who's behavior is proving difficult to forecast given kind of the pressures that they're under given the high inflation, we just have to - we believe we have to work harder, we will have to work harder to earn their trust, simply because they are more distracted by the current macro pressure, and they haven't yet had the cycles to experience the Chewy magic. So we know that we have to execute even more sharply to deliver value to the cohorts of customers that are seeking value in the near term, such that we are winning with them as much as we win with the customers that are already loyal to Chewy. So it's really kind of a tale of two cities. The loyal cohorts stay loyal and they're consolidating their share of wallet with us. So that is driving the NSPAC expansion and then this recent kind of July trends that were slightly is being projected into August so far is what's causing us to say, hey, maybe we should widen the aperture here and play through a range of sensitivities. Yes, but on the back half, we're pretty confident about delivering or holding our guidance, which by the way is going to be a share-winning position in the back half of the year.

And if I could just follow up on NSPAC. Can you just help us parse out what's happening kind of 2Q and 3Q between inflation and like-for-like pricing?

Yes sir, so pricing is going to impact in two different ways and Stacy can also provide some color, if you want to hear. But essentially, on pricing, what you're going to see is the back-half the cost increases that came through in 2H of '22, right, we benefited from them in the first half of '23. So going into the back half, our growth is driven as a combination, the revenue composition is weighted, volume and price and not overweighted towards price. On NSPAC, as we decomposed our NSPAC or deconstruct our NSPAC, what we can confidently state is that inflation over the past years has provided a modest benefit. So greater than greater than kind of two-thirds to north of 70% of the benefit that we're seeing in the NSPAC growth is organically cohort development plus Autoship development plus health development et cetera, et cetera. So it's all accretive. And obviously, in Q4, we expect a little more transactional given kind of the holiday season and the ASP compressions that generally take place time like that. So it's a bit more transactions than the Q3.

Great. Thank you, Sumit.

Sure.

Thank you, Mr. Anmuth. Our next question is from Eric Sheridan with Goldman Sachs. You may proceed.

Thank you so much for taking the question. Maybe you want to come back to be ads business potential both to the end of this year and into the next fiscal year. Maybe you can refresh us on some of the key learnings you've had from debating and working with partners on the ads business rollout? And how should we be thinking about the elements of ad coverage or advertiser response, the things that you're trying to line-up ahead of that more wider launch later this year? Thanks so much.

Sure. Eric, this is essentially a tale of two cities also. The demand on the platform is far exceeding the supply that we have right now opened up to our suppliers, which is obviously a point that proves kind of the conviction behind the product as well as the quality of the product that the team is launching. The guardrail on opening up supply is limited to make sure that we're making sure that the organic experience that customers have come to enjoy, but it doesn't get overrun by sort of them - we just want to make sure we're very thoughtful and opening up that supply. So the plan has always been to ramp this up in 2H and we're on track for that. In fact, the original forecast that we had kind of coming into perspective as the program scales, we were sort of thinking of this as 1%, 1.5% off of opportunity that we now kind of squarely thinking in the 1% to 3% range, and the widen our aperture as the program kind of takes hold per se. So the response rate is there, the teams are appropriately focused, customer experience forms the right type of bar to make sure that our quality and go-to-market execution is high. ROI is that our vendors are seeing or at least the participating suppliers are seeing are high, particularly as you deal with the subscription nature of our business, and therefore, the ROI is appropriately converted into an LTV basis rather than a one-time transaction that most ad platform is going to run in the market per se, which we have always been aware of and that we believe is the strength of the Chewy platform and will allow our suppliers to kind of build their brands in an even more compelling manner.

Great. Thanks for the color.

Sure.

Thank you, Mr. Sheridan. Our next question is from the line of Steven

Hi. Good afternoon, and thanks for taking my question. Stacy, congrats on the new role. Sumit, I was hoping you could elaborate a little bit more on the commentary about the consumer changing out of the summer months. Are you seeing more trade down, are you seeing smaller baskets from these customers and guess like, what makes you concerned, it's a new trend versus just a two-month period at the end of the summer? And when you say you need to work harder with these new customers, does that mean more promotional at the start, should we assume that at some gross margin implications?

Sure, sure, sure. Yes, so it's a great question. So, are we seeing concerning trends? Not really, not yet. So what do I mean by saying, we're observing the consumer become a bit more discernible? For the first time in July, we've really noticed a shift out of kind of wet food more towards the dry food, and that generally is an indication off, more value-seeking behavior. We're also seeing kind of treat pull back a little bit. They have gained traction in Q1 coming out of 2022 and they pulled back slightly in Q2, particularly coming out of July, but it's not material yet to come out and actually raise any alarm bells, and we're not because, we believe we're fairly insulated. So let me give you kind of color on what's happening and I think to really gain the color, we like broaden the aperture and give some context here. So from '20 to 2022, the storyline was all about dealing with the pandemic. So coming out of last year, right, 2022 became the year of recovery. Supply-chain stabilized, but costs rose dramatically through this period and have been passed onto the consumer by way of unprecedented high prices. And these inflationary pressures are now showing up industry-wide and also impact. Now, recall that pet household formation was already muted, but that hasn't changed through 2022 and continues for the first half of '23. In addition to that, this behavior that I am kind of calling out here, it indicates that the consumers being more value-conscious, at this point. And that makes sense I mean to think that in times like these, the consumer preferences towards value our convenience makes sense, but the winning combination is offering them both value and convenience. And we believe that for a majority of the consumers, we do that. We offer both value and convenience and therefore, we believe we're somewhat insulated from the full impact of these current times given the strength in the business model. Now for recently acquired customers, right, we were - their behavior is hard to predict, right. Their order purchase frequency might be slightly off. Usually when we see customers come back in four weeks, that might be five weeks, et cetera. So we believe that we have to be extra sharp and the CRM capabilities that we've deployed, that we developed kind of towards the latter half of last year into this year, right, those are going to be much more sharply deployed it towards the back half of the year. So in terms of promos, we are not going to lead the market as we never do right. We are price followers are not price leaders in that way, but we stand ready to respond. Internally, we are going to find ways to self-fund, right creative ways to pass on the value to the customer and that doesn't have to be kind of promo-led per se, it could be other tactics as well. We also have a series of kind of roadmap where that we are taking into account in H2 as well as next year that'll formulate our strategy to both acquire net new customers as well as improved retention of the recently acquired cohort. I can continue, but hopefully, that provides a bit of color.

No, that's very helpful. I appreciate all that color. I guess, just have a brief follow-up then. Do you think the overall industry gets more promotional as we get into the back half of the year. So I'm curious as the two months of activity of what you've seen, has your peer set gotten more promotional?

We do expect that. So if you recall, we've been we've been transparent about our expectation of greater promotionality in 2023 from our Q1 call itself. And both Q1 and Q2, we saw higher promotional activity relative to kind of the pandemic years, but the promotional activity so far has been lower than our expectations. As we move from first half into second half, we've continued to bake in an incremental promo spend because our expectation is that promotions are going to be higher in the back half of the year. So like I said, we're not looking to lead the market, but we stand ready to respond to make sure that customer experience and demand are both protected.

Okay, thanks for all the details. Best of luck in the back half.

Thank you.

Thank you, Mr.

Great. Thank you so much. Good afternoon, guys. Just a follow-up on previous question. Just any color on how we should think about the gross margin for the third quarter, just given your comments on potentially higher promo for the industry as we approach the back-half? And then secondly, just as a follow-up, you had talked about 50 basis points to 75 basis points from Canada investments this year, what was the amount in the second quarter and should we think about the balance more or less evenly split in the back half?

Sure, Hi Anna, this is Stacy, I'll take the first question on gross margin. So as you know, we don't typically give formal guidance around gross margin, but we do note it is typical to see some fluctuations from quarter-to-quarter, but we feel good about this quarter and expect gross margin to remain around the 28% level for the balance of the year. Longer-term, we're excited because we believe there is still meaningful room left for gross margin expansion. So for example, as Sumit mentioned earlier, we continue to grow and have gained market share in existing high-margin verticals like Chewy Health and we also are investing in and scaling new initiatives such as sponsored ads that are margin accretive.

And on the second question, the EBITDA guidance essentially implies and consumes the level of investment that we are going to make. So they started - we started ramping investments into Canada and other verticals such as sponsored ads et cetera in Q2, and we will see those continue to ramp up through the back half of the year, which is baked into the guidance. Also, if you recall, we mentioned, in on - our Q1 call, we are going to ramp up new fulfillment centers that launched in the middle of - middle of the year, which has continued on its pace and we should expect some short-term dilution as a result of that. And then finally, the incremental promo or promotional environment that we are talking about is also baked in. So that's kind of formulates the way that guidance is built for - on a profit basis for the back half.

All right, thank you so much, guys.

Sure.

Thank you, Ms. Andreeva. Our next question is from Dylan Carden with William Blair. You may proceed.

Thank you very much. So, I am just trying to reconcile the idea of a wider range of outcomes now anticipated for net customer ads, albeit still positive? And keeping the guidance for the year, I'm just kind of curious what levers or optionality you might be envisioning in doing that?

How we've done on exceeding our own expectations Dylan, is that basically the question?

It seems like there is certainly kind of caution on the net customer ads in the back half and then sort of keeping the guidance as it is. And so where you said the third quarter is trying to understand just reconcile the two as you seems to be at up?

Got it, okay. The strength that we're seeing, the balance is essentially drawn Dylan from the strength that we're seeing open customers. So market prices are holding up pretty, pretty good. Autoship penetration rates are holding up steady. Asset into Autoship are holding up steady. And so our ordering frequency was higher for existing customers. And so it's - this notion of, during times like these customers look to consolidate their share of wallet, instead of continuing to perhaps crush shop even a little bit that they do as part of their normal day-to-day. And so we believe that trend will continue through the back half of the year. Secondly, we provided a bit of a data point here today stating the penetration that we're driving into our verticals such as Chewy Health, particularly prescription food and medication, that continues through the back half of the year as well. And three, our mobile app continues to gain traction. The percentage of orders that went through the app and the AOE benefits that we see for customers that are more engaged is also going to build in a little bit in the back half, per se. So all of that essentially hold us. Right now, it gives us the confidence that we can deliver the back half in the way that we are. On the customer side, we - it's more recent, right. These recent cohorts that have been a little more deals seeking and value-conscious. And so we're just - we're watching this one really carefully to understand what kind of cohort behavior are being demonstrated or the repeat order rate like we expect and want them to be, is there ASP compression in basket sizes as this cohort kind of ramps up, et cetera, et cetera. So primarily, we're going to deploy a series of tactics to make sure that we are kind of protecting ourselves as well as serving both value and convenience. So overall, we feel good playing out from here.

Got it. And kind of sneak one just about automation. Any way to kind of quantify or scale the impact you're seeing already from automation and kind of where you are in the utilization of those facilities that I think you've given that historical?

Yes, so if you recall, we've launched four, we are on-track to open our fifth one next year. Of the four that have launched, two our ramped and two are ramping. And for every new fulfillment center that we ramp, you should expect roughly 20 basis points to 30 basis points of leverage that we will provide. Of the remaining 10 fulfillment centers, we have left room and are actively starting to retrofit with other ideas that will serve to provide leverage in the future for us. We're actually excited to share our roadmap of the future at the Investor Day that we announced today in the back half of this year. So we're always on track on the supply transformation side.

Great. Thank you very much.

Thank you, Mr. Carden. Our next question is from Mark Mahaney with Evercore. You may proceed.

Thanks. I wanted to ask a question on the Canada launch and on sponsored ads. On the Canada launch, could you give us a sense of the timing of that during the quarter? Like, and if it's successful, should we start seeing that in net adds already in the September quarter or is it a late quarter launch, until if successfully would only show up in Q4? And, I know we're talking starting from nothing. So, I guess that I'd be a small contribution, but just trying to understand the timing? And then on sponsored ads, are you doing this all internally organically or you're working with third party retail media networks to start growing that? Thank you.

Sure, so on sponsored ads we're doing most of this internally, Mark, so that's the short version of that answer. On Canada, we are expecting launch imminently and it starts ramping really in Q4. So the impact would likely start - we will start feeling the impact in Q4, but we haven't built in any materiality in our forecast for this year.

Okay. Thank you, Sumit.

Sure.

Thank you, Mr. Mahaney. Our next question is from Brian Fitzgerald with Wells Fargo. Please proceed.

Thanks guys. A couple of follow-ups. The cross-category form of penetration 20%, where do you think that can get to at maturity and is that accelerating? And then follow-up on NSPAC hitting $530, can you opine a little bit on what's going on with household spend and how much of that you think you can eventually capture as you continue to add different products and different SKUs and services?

Sure. Hi, Brian. On the cross-category for Rx, in one of our top priorities inside the company is one where we believe every active Chewy customer should also be a Chewy Pharmacy customer. So there is a lot of headroom here for us and we are excited about that. And yes, on a year-over-year basis, it is accelerating or has accelerated and so all positive here. NSPAC, household spend can recaptured. We believe we are - for our loyal customers, we're likely capturing a majority of their spend in the food and health segment today. Supplements was an opportunity for us two years ago, but we closed that gap pretty credibly last year, which has actually also contributed to the NSPAC expansion for us. So on these merge classes that constitute food, toppers, health, whether it's diet or prescription medication or OTC, or supplement, we believe we are actively consolidating and gaining share. And that truly is kind of where the consumers' mindset is today. Because if you recall, what's happened is consumer allocated $100 towards pets. In the past, it used to be $80 on consumables and health, $20 on hard goods. That $20 hard goods thanks shifted out of there, and most of that is now being spent on consumables and health, and it will remain so up until the macro recovers in our opinion. Long-term, we're actually - the fact that the spend continues to move from offline to online, I believe, we will emerge as a stronger company in the future, given both our base, the level of investments that we've made through the pandemic and the execution quality that the team continues to demonstrate. Overall, we're much - we're bullish about the future. We all collectively have endured just a short-term macro as it played through.

Thank you so much, appreciate it.

Thank you, Mr. Fitzgerald. Our next question is from Lauren Schenk with Morgan Stanley. You may proceed.

Hi, everyone. It's Nathan Feather on for Lauren. Perhaps you could dig in a little bit more on the industry that we hop road-map. What gets you from the encouraging 20% cross-category penetration today to the goal of 100%? And from the pharmacy side, how much of that SKU expansion versus getting more customers to discover and adopt it? Thank you.

Yes, so it's primarily - it's a great question. Primarily - our primary challenge is the discoverability of this platform and essentially winning customer trust. If you noticed, or if you recall, I may have mentioned this data point, a third of the customers today in the United States don't visit their pets at a recurring frequency or don't consume medication at the recurring frequency. And so we have an opportunity to not only expand the current TAM that we see in this particular space, we also have the opportunity by driving - essentially by driving incremental compliance and that has truly been the power of how we go-to-market with customers on the back of our Autoship platform. So our Autoship eligibility for pharmacy is at par or even higher than our consumables businesses and we are rapidly innovating to make sure that customer sign - any kind of friction around customer experience, whether it's sign-up or whether it's discovery or whether it's sort of checkout is being addressed actively by the team. Overall, our NPS on this platform continues to remain high and we're pretty proud to serve a large base of customers. So this is less about adding SKUs, it's much more about just making sure that there is awareness as well as discoverability.

Okay. Thank you.

Thank you. Our next question is from Trevor Young with Barclays. You may proceed.

Great. Thanks for the questions. First on a category basis, it looks like hard goods returned to growth in the quarter. Is that kind of consistent with your expectations and do you expect that cadence to improve from here or does that more discerning customer and tougher compares, make it likely that growth stays a bit more challenged? And then any update on the insurance initiative, with Trupanion and Lemonade. I think that's now available nationwide. Just any initial comments on uptick there relative to your own expectations? And can you shed any light on how that maps to the P&L? Thank you.

Hi, Trevor. This is Stacy. So I'll take the hard good question, first. So historically, we always do have some seasonality in our hard goods sales with a small pullback between the first and second quarter. So that also combined with the value-seeking behavior that Sumit spoke about shown by the consumer recently, contributed to some softness in hard good growth for this quarter. Our expectations for the rest of the year have not really changed, yes.

On hard goods, it's also easier comps. If you noticed last Q2 was a negative, almost high single-digit, low-double-digit decline and so you're comping a much softer year from last year. On insurance, we are super-excited about having two best-in-class providers on our platform Trupanion and Lemonade as expected. What it has done is, it's opened up the range of plans and choices across various different price points and coverages to a wider range of our customers. And as you would expect what that has translated to is the rate of policy sign-up has gone up proportionately because you opened up the assortment, it drives to incremental revenue on a pretty indirect coordination basis. So while that's a really positive data point, this vertical itself requires a ton of education and awareness, and we're seeing our metrics had in the positive direction. Our quote-to-conversion rates or - call-to-quote rate and quote-to-conversion rates are all improving. As you would expect, our customer care team is actually becoming a pretty powerful source of educating customers about insurance and therefore also driving on a high-cost basis, providing the information and driving the conversion. This was always our hypothesis to start with, because you don't really buy insurance online. You buy it via kind of these assisted channels and we have one of the best assisted channels out there. So overall, we're super excited about what's to come. I must kind of note on you that this is a bit of a longer arc vertical, given that the consideration cycle for customers is longer. So we're going to be appropriately patient and play this game over the long-term.

Thank you.

Thank you, Mr. Young. Our next question is from Seth Basham with Wedbush. You may proceed.

Thanks a lot and good afternoon. I was wondering if you could provide some color on gross ads relative to 2019, like you did in recent quarters? And then also provide some color on CAC trends year-over-year sequentially?

So gross ads, continue to run higher than 2019. We're not entirely dissatisfied by the pace of our gross ads. We believe the team has executed incredibly. Yes, the categories that are muted are, of course, are causing a pullback on gross ads. I think, Doug mentioned whether like the contribution of hard goods is weighing in on customer acquisition, it absolutely is. But on the balance, we're not totally dissatisfied by the pace off of gross ads. Net new to Chewy is slightly softer than pre-pandemic, but reactivations are much stronger than pre-pandemic. So if you combine those two, the overall output is that gross ads is stronger than 2019. And then color on CAC, not much has changed from what I believe I shared last-time, which is the CAC has increased over the last couple of years, at least through the - as we've come out of the pandemic, because then you were picking up - everybody was declaring intent and you were picking up customers quite economically. But candidly when viewed from the lens of LTV to CAC, LTV has also continued to go up. So our ratios have actually very nicely maintained and an ROI standpoint we're spending, where we believe we should be spending from a marginal point of view. The reason CAC continues to go up right now and will remain high up until the macro recovery in my opinion is, A, there is a shallower pool of customers declaring intent. So clearly, the competition for the same customer is higher and that drives up the bid rate. And then, B, recall that social used to be a pretty active channel a few years ago and the loss of targeting has actually led to a loss of yield that drives up CAC in the social channels. So it's a combination of those two, but LTV is going up appropriately.

That's helpful. And just as a follow-up, is LTV going up appropriately for the most recent cohort customers too? And if not, is that LTV direct CAC ratio is weakening for the most recent cohorts? Are you going to adjust where you're spending - find new customers?

We always do, actually. So the cumulative contribution profit is what we go after. And we're always trying to sort of find that tangential point where the steps over to the fact where - to the point where the campaign actually become negative returning. so far the team has been very diligent and we've actually experimented with trying to spend money to pick up discretionary customers and it's just not a high ROI effort right now. So we're not really going after that, because we would rather maintain the quality that drives the repeat purchase, otherwise you never really get out of this spiral of churn and spending money to keep that customer per se. And so we are - our engines, our performance marketing teams appropriately adjust to find the best customer, the best return across the best channel. And that is done on a daily, weekly, monthly basis, not on a quarterly basis. We're fairly responsive.

Thank you.

Thank you, Mr. Basham. Our next question is from Lee Horowitz with Deutsche Bank. You may proceed.

Great. Thanks for taking the questions. Two if I could, when you think about the consistently challenged pet household growth environment, do you think that you need pet household growth to turn more meaningfully positive in order to return Chewy back to more meaningfully positive user growth in the medium-term? And then maybe digging in again through these recently acquired cohorts in the platform and some of the caution you are seeing amongst these users, can you talk a bit more specifically on what you maybe you're seeing from these cohorts in terms of repeat purchase rate, Autoship penetration and basket size, relative to the core, anything that these users are flagging to you as way this degree modest caution that leads you to believe, maybe this is just structurally higher churn than your existing base? Thanks so much.

Sure. Sure. On the first question of do we need them to turn more meaningfully positive? Well, there is certainly a factor. Household penetration is a factor and that - it is an important input into the model. But it's not the - it's not what we are solely dependent on. In fact, for - our teams are progressing multiple features across chewy.com, which we expect and this is all kind of in the back half, which will continue - some of this will continue into next year per se. Our team is progressing multiple features across chewy.com, which we expect - where we will expect to credibly reduce friction and lower conversion barriers in areas of - for example account creation and improve both sign-up rate as well as customer retention, right. So some of the specific examples might be in areas of account creation, payments, our content platform, our CRM mechanisms or we've talked about, which I will discuss more in detail at our next earnings call. But we're super excited to talk to you about Chewy loyalty, which we're progressing for an early 2024 launch. So we're not we're not sitting idle, waiting for the macro to recover, right. It's just this notion of what cannot be cured has to be endured. So we're going to endure that and at the same time, everything that is controllable on our side, which is improving experience and opening up new avenues to acquire and retain customers, we are absolutely focused on that. And then your second question was with the more recent cohorts, what are you seeing on repeat order frequency? We're seeing the repeat order frequency that - it's essentially what I was mentioning earlier. Autoship penetration actually is fairly intact. Their basket sizes are slightly lowered because they're more value speaking. So, obviously, there is an ASP compression that is taking place there. Their attach rates are slightly lower. So the units per order metric is where you will see that impact, which ultimately goes back and kind of talk to the basket size also. Repeat order frequency, they need a little more nudge relative to our kind of loyal customer bases. So we're just - we're watching right now. And that we've essentially baked that into the guidance and we're baking that into the active customer ads forecast as well.

Very helpful. Thank you.

Sure.

Thank you, Mr. Horowitz. Our next question is from Steven Forbes with Guggenheim. You may proceed.

Good evening, Sumit, Stacy. Just two quick follow ups, one on Autoship and one on pharmacy. So first on Autoship, Sumit. Can you comment on how the average number net ownership ordered by customer within some of your more mature cohorts are trending, relative to plan? And then on pharmacy, can you also talk about like how the customer journey for pharmacy customers has evolved over the years such as time to trial, usage statistics, Autoship adoption in maybe most importantly churn rate right among those customers that try and convert into pharmacy earlier in the lifecycle?

Sure. I may not be able to satisfy your full curiosity relative to some of the metrics that you're asking, but I'll build your intuition generally in stating that. Autoship continues to be more powerful in a way that it is accreting value for customers and passing that value onto customers. We've done that by making sure that the assortment under Autoship is maximized. We've also done that by making sure that barriers to either Autoship conversion or Autoship retention, whether there may be payments related or whether there may be attach related have continued to be lowered. Our improvement in segmentation and targeting ability does allow us to speak with customers a little more meaningfully and that'll only get better in the future. And then from a cohort development point-of-view, we've invested across our kind of discoverability and attach engine to make sure that customers not only discover complementary attached products, but are essentially attaching through them in a meaningful manner. So all of this is essentially, leading to the incremental Autoship sales that you're looking at. Autoship, the beauty of Autoship is, it is a very flexible program and customers trust that they won't - they both trust the flexibility and they have come to trust and reliability that we put behind Autoship. And so it's a high-value program from that point-of-view, not, only from a pricing point-of-view, but also from an overall experience point-of-view. On the Rx side, this is the, we believe we have the best healthcare experience that e-commerce can offer or that customers can find in the best of kind of retailers out there per se. So our metrics on pharmacy, our adoption - Autoship adoption is even higher in pharmacy than it is in some of our other merged classes. Our churn rate is lower, given how high a bar we have. And at the same time, we always have opportunity that we're working on to make sure that we get even better with products like these. Overall, we're excited about this vertical.

Thank you.

Thank you, Mr. Forbes. Our last question is from the line of Rick Patel with Raymond James. You may press proceed.

Thank you. Good afternoon, everyone. Can you talk about what you're seeing in terms of spending by cohort for those customers that are not new to Chewy? So - I appreciate that and back is growing, but just as we think about how much customers are spending further along in their lifecycle, 'm curious if you're seeing changes in that trend line?

Yes, we are. We absolutely are. In fact our - like our more recent cohorts are slightly - as we've kind of mentioned on this call, they require a little more nudging. But the NSPAC development curves through our older cohorts. If you look at the three main factors of NSPAC development, right, cohorts maturity leads the way, followed by kind of the other two which is a combination off Autoship plus health and other [indiscernible] kind of mixing it per se. So without kind of talking to specific numbers, hopefully, that's enough intuition building, if not, happy to -- happy to take a double click.

Great. And can you also talk about your go-to-market strategy for Canada? How are new customers going to learn about Chewy? And how are they going to experience the brand and anything to think about in terms of marketing spend over the next couple of quarters as you ramp in Toronto?

Yes, sure. So this is some - this is - we're very excited about this. We are going to, I think the punch line here is that we will - our aspiration is to show up in Canada as a Canadian brand, not as an American brand that - and so essentially, what you should hear in that statement is, we will - we are going to try and understand the customer, their needs, their wants, their desires, their behaviors, and then model the offering in a manner that appeals to them in the best possible manner. That by the way is also the most efficient way to market to customers and the most efficient - and a way of keeping our cost minimalize per se. We're going to be much more focused on delivering the experience through kind of trusted proven mechanisms that we have here in the United States, those we do believe carry over pretty nicely. I was in the Canadian market with the rest of the senior leadership team, a few weeks ago. Sort of walk in the stores and the experience all the way from our fulfillment side to the delivery side, to the end market. And we're excited. There's going to be a ton to learn here. We're going to try and sell fund a bunch of this and at the same time whether investments required will be upfront and candid about them. Overall, we're looking for high-quality - high-quality growth, not dilutive growth here.

Thank you. All the best.

Thank you.

Thank you, Mr. Patel. That is all the time we have for questions. I will now turn the call over to Sumit for any closing remarks.

Thank you very much. Just want to welcome Stacy again and wish everybody a nice evening. Thank you.

Thanks, everyone.