CHWY - NYSE

Hello, everyone. Thank you for attending today's Chewy Third Quarter 2023 Earnings Call. My name is Sierra, and I will be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Jen Hsu with Chewy. Please proceed.

Thank you for joining us on the call today to discuss our third 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 have 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 risk. Such statements are considered forward-looking statements under the Private Security Litigation Reform Act of 1995 and are subject to certain risks, uncertainties, and other factors described in the section titled Risk Factors in our annual report on Form 10-K and other subsequent quarterly reports, which could cause actual results to differ materially from this 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. Reconciliation 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 third quarter of 2023, and all comparisons are accordingly against the third 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 Smith.

Thanks, Jen, and thank you all for joining us on the call today. Before we jump in, as we have previously announced, we will be hosting our inaugural investor day next week on Thursday, December 14th. We look forward to seeing many of you in person and encourage everyone to tune into the live webcast which can be found on our Investor Relations website. I am excited to introduce you to our broader senior leadership team next week. We plan to provide a comprehensive update on our strategic roadmap, including a deep dive into our Chewy Health business, and will share refreshed long-term financial targets. In light of our Investor Day next week, we will streamline today's call to focus on this quarter's results and a few notable recent updates. We will leave most strategy and innovation topics for next week. Now let's review Q3. Chewy continues to outperform and gain market share through the present environment. We reported $2.74 billion in net sales this quarter, up 8% against an industry that grew in the low single digits with pet inflation continuing to return to historical levels. Additionally, the team is executing admirably against controllable factors as reflected by another strong quarter of 3% adjusted EBITDA margin. Consistent with the expectation we shared on our last earnings call, active customers declined marginally on a sequential basis. Looking beyond the near term, we believe we remain well positioned to drive improved active customer trends as the macro environment and pet household formation trends recover. Notably, we yet again demonstrated our ability to grow wallet share with our customers as net sales per active customer or NSPAC exceeded $540, up nearly 14%. Throughout the third quarter, customer engagement remained strong. Our industry leading mix of non-discretionary consumables and health bolstered by our Autoship subscription service continues to reinforce the structural soundness and defensible nature of our business model. The loyalty and spending resiliency of our Autoship customers remains unabated with no changes to their ordering behavior. Additionally, our conversion of new customers into Autoship continues at a healthy rate. As a result, Autoship customer sales continue to outpace overall top line growth and were up nearly 13% in the quarter and represented over 76% of net sales. Non-discretionary consumables and health categories anchor our business, collectively representing approximately 85% of third quarter net sales. Pharmacy continued to grow at a premium to the overall company and now represents north of $1 billion business for us, based on trailing 12 months net sales. At this scale, Chewy is the number one pet pharmacy in America. We look forward to sharing more with you about the financial performance and strategic direction of our health business holistically at next week's Investor Day. As anticipated, we launched Chewy Canada at the end of September, bringing Chewy's compelling value proposition to millions of pet parents in Canada. Initial customer demand has been strong. Autoship sign-up rates are healthy, our delivery experience is compelling and customer satisfaction is high. While it is early, we are pleased with our progress in market thus far with key indicators of success pointing towards a bullish future. Turning to profitability, we reported gross margin of 28.5%, which is a new record in itself. Strength in gross margins reflects mixed-rate benefits, tightly managing promotional spend, and strong performance in logistics by our team. Finally, adjusted EBITDA margin came in at 3% for the quarter, even during a period in which we had planned pronounced growth investment. Shifting gears from in-quarter results, I'd now like to provide some commentary on how we performed on Black Friday and Cyber Monday of this year. We observed strong customer purchasing intent during this important holiday shopping week. Traffic and sales exceeded our expectation across all categories, including hard goods, and conversion rates were up year over year. New customer acquisition was 40% higher than our Q3 weekly average. While we have seen trends return to pre-holiday levels, our Black Friday and Cyber Monday performance is encouraging. Specifically, while consumer spending behavior remains opportunistic in the current environment, our results illustrate that Chewy's value proposition continues to resonate loudly and will prevail when consumer demand and industry inputs improve. Before I turn the call over to Stacy, I would like to share some context regarding a couple of important company-wide developments. In November, as part of our 2024 strategic planning process, we implemented actions to reduce our headcount in certain areas of the organization. This decision was carefully considered as part of our ongoing focus on becoming an ever more agile and disciplined company and aligned our efforts into priorities which we believe will gain us the most significant customer wins and generate the highest business returns. While we consolidated some roles within the organization, we continue to invest in other high priority areas. As we head into 2024, we expect these actions to create room for us to continue investing behind our growth initiative. We are incredibly grateful to our team members for their contributions and remain committed to supporting them during this transition. Lastly, I'm excited to announce that David Reeder will be joining us as Chewy's new Chief Financial Officer starting early in 2024. Dave joins us from Global Foundries, where he is currently CFO. He brings with him extensive experience across a multitude of operational and financial roles at Global Foundries, Lexmark, Cisco, and Broadcom, amongst others. I look forward to working with Dave as we continue to execute against the many compelling growth and margin opportunities across our ecosystem. I would also like to thank Stacy for all that she has done to support me and the Chewy team in her role as interim CFO. Following Dave's start date, Stacy will continue to serve as our Chief Accounting Officer. With that, I will turn the call over to Stacy.

Thank you, Sumit, and thank you all for joining us today. In the third quarter, net sales grew 8.2% to $2.74 billion. Autoship customer sales growth outpaced total net sales growth by almost 460 basis points and came in at $2.09 billion in Q3, up 12.8%. Autoship customer sales now represent 76.4% of total net sales. We ended the third quarter with 20.3 million active customers. Our primary measure of customer engagement, NSPAC, grew 13.8% year-over-year to $543, yet again reaching a new record high. As we move down the P&L, please note that my discussion of financials where applicable, refers to metrics excluding share-based compensation expense and related taxes, as well as certain other adjustments disclosed in our SEC filing where relevant. The same applies to my discussion of guidance and financial outlook. Growth margin reached 28.5% in Q3. Our Q3 growth margin highlights our ability to deliver steady margin accretion in this part of the P&L, and we continue to believe there is meaningful room for continued growth margin expansion over time. Continuing on to OpEx. SG&A totaled $545.9 million, or 19.9% of net sales, de-leveraging 30 basis points compared to the third quarter of 2022. This increase was largely driven by investments related to our growth initiative. Q3 advertising and marketing expense was $179.2 million, or 6.5% of net sales, consistent with our expectation of 6% to 7% of net sales. Third quarter adjusted net income was $63 million, an increase of $14.6 million. Third quarter adjusted EBITDA reached $82.1 million, up $11.7 million, implying an adjusted EBITDA margin of 3%. Third quarter free cash flow of $48.5 million continues to be strong, reflecting $80.2 million in net cash provided by operating activities and $31.7 million in capital expenditures. Our third quarter trailing 12 months free cash flow was over $300 million and demonstrates our ability to execute sharply and generate meaningful cash flow through all economic environments. Capital expenditures continue to be comprised primarily of automated fulfillment center investments and ongoing technology projects. As planned, our CapEx spend tapered this quarter, following above average CapEx intensity in the second quarter. And we expect 2023 CapEx to remain in the range of 1.5% to 2% of net sales, consistent with past investment levels. We finished Q3 with $957.2 million in cash and cash equivalents and marketable securities, nearly $351 million higher than the balance at this time last year, and we remain debt-free. At the end of Q3, between cash on hand, marketable securities, and availability on our ABL, our liquidity stood at $1.7 billion. That concludes my recap of our third quarter results. So now, let me cover our fourth quarter and full year 2023 guidance. While we remain confident in the overall resilience of the pet category, as well as Chewy’s ability to deliver growth above the industry average, in light of the near-term macro environment, we are updating our top-line guidance as we head into year end. We expect fourth quarter net sales to be between $2.78 and $2.8 billion, representing year-over-year growth of approximately 3%. We are narrowing and revising our full year 2023 net sales outlook to be between $11.08 and $11.1 billion, representing growth of approximately 10% compared to full year 2022. We are reiterating our full year 2023 adjusted EBITDA margin outlook of 3%. As you update your model, also note that we expect our free cash flow for full year 2023 to be in excess of 2.5 times the free cash flow we generated in full year 2022, implying an adjusted EBITDA to free cash flow conversion rate north of 80%. Our third quarter results once again demonstrate Chewy's unique ability to deliver strong results in the current environment. We expect to continue taking share and expanding profitability, while the pet industry works its way back towards steady state trends. And we remain highly encouraged by the various strategic opportunities that lie ahead. We look forward to seeing many of you next week. With that, I will turn the call over to the operator for questions.

Thank you. [Operator Instructions] Our first question today comes from Eric Sheridan with Goldman Sachs. Please proceed.

Thank you so much for taking the question. I just want to come back to the Q4 guidance on the revenue side. Can you walk through some of the headwinds and tailwinds we should be thinking about in terms of the revenue build for Q4? And how much of this is down to broader promotional or competitive intensity versus elements of the macro environment and basket size or just the lapping effect of inflation from a year ago? Thanks so much.

Hi, Eric, this is Sumit. So I'll speak to it. Our guidance reflects sales growth that is expected to outpace the industry, first of all. So we're continuing to see changes happen post our commentary from the July-August time frame when we last spoke. So here are a couple of main points. When you look year-over-year, the revenue composition is shifting out of pricing and more into structural unit and attach. So there's little or no benefit from pricing from a comp point of view. That, combined with continuing lower mix of hard goods and discretionary this year relative to last year explains sort of the year-over-year comps that you're seeing. As it relates to guidance, the softness that we called out last quarter, that we started seeing in the July-August time frame, has persisted. We're seeing the impact of this softness most materially in the non-Autoship portion of our business, right? So the 25% of the business that doesn't go through Autoship, and primarily across highly discretionary components, some consumable components. This is related and coupled with the impact of the newer customer cohorts that we talked about last time where loyalty is still continuing to be earned, right? These customers are early tenure, and we're taking steps to engage with them and making forecasting a little bit difficult across the macro that is keeping discretionary soft and overall spending patterns a little bit opportunistic. So that is all reflected in the new guidance that we're providing. We came out of last quarter, starting to see these trends, the trends have sort of persisted. So this time was the right time to make the call to update the guidance as we're seeing it at this time. Having said all this, we have a moat in Autoship portion of the business that remains strong and has proven to be resilient through the current macro per se. Happy to take a follow-up. And I just want to reiterate that at the midpoint of our 2023 net sales guidance, we will deliver approximately 10% growth year-over-year, which is share gaining. And then next week's Investor Day, we intend to share additional perspective on our long-term growth algorithm and expectations.

Great. Thanks for the color, Sumit.

Your next question comes from Doug Anmuth with JPMorgan. Please proceed.

Thanks for taking question. Sumit, got the color there on 4Q revenue. Can you just help us square a little bit the strong Black Friday and Cyber Monday performance you called out with the rest of the outlook for 4Q? Is that just purely promotional driven? And I guess why does that give you some degree of longer-term confidence? And then second, perhaps you can just provide a little bit of color on how you're thinking about gross margins in 4Q. Obviously, the EBITDA -- implied EBITDA guidance is down. You mentioned a few things there on revenue, but is that related to promotions, normalizing inflation, some seasonality? Any other factors we should think about?

Sure. There's a lot there. Nice to hear from you, Doug. There's a lot there. So let me decouple it one by one and Stacy can jump in at any point if I miss anything. So first of all, promotional activity during Black Friday was slightly steeper than prior year, although it remained broadly rational. So what we are essentially calling out is the way that we went to market, the specific offers that we took to market, the way customers engage with the overall proposition, our existing customer is engaging along with the healthy mix of new customers that we picked up, essentially signals to the fact that structurally, right, the business is sound and when stimulated the right way and customers being in the right mind frame, they do respond. So it sort of speaks to the tenability of the industry rebouncing once customer pressure sort of abate. That's the reason we provided those commentary, we thought it would be helpful. Overall, the way that we're thinking about gross margin, we expect to hold within the 28% range is that we've been communicating so far. So we don't expect an impact to gross margin because we expect the promotional environment moving forward to remain rational with typical seasonal guardrails similar to what we've observed over other Black Fridays, Cyber Mondays. Happy to provide more promotional color in the way that we've played through Q4. So all of the Q3 implied EBITDA that you're seeing is essentially as a result of incremental dollars spent during this Black Friday, which was roughly approximately 30 basis points higher than last year. So that component is building in. And then two, our growth investments started flowing through in Q3 and are continuing to flow through to Q4. So if you normalize for that, it essentially gets you back to the to the healthy levels of EBITDA that we've delivered in the front half of the year. Anything to add, Stacy?

Yes, I would just reiterate that our Q4 profitability reflects the usual seasonal impact of holiday promotional activity. But as Sumit just mentioned, it is largely rational and within our expectations. And we will see some investment behind our growth investments. So that flows through to the adjusted EBITDA. But I do want to reiterate that we are really proud that we're able to self-fund our growth. And so we continue to do so throughout the year.

Thank you both.

Our next question comes from Lauren Schenk with Morgan Stanley. Please proceed.

Hi, everyone. Thanks for taking my question. This is Nathan Feather on for Lauren. Can you dig a bit more into the direct impact of macro across each of gross adds, churn and NSPAC? And then is the embedded macro environment in the 4Q guide worsening for 3Q? Or is it just largely stable? Thank you.

Hi, Nathan, this is Sumit. So on the macro it is -- the trends that we started seeing coming out of Q3 have largely persisted, right? For the most part, you're seeing discretionary -- spending in discretionary being low persisting, you're seeing a shift out of that in to drive persisting. So nothing has broadly changed. We're not seeing broad trade downs happen on our side. So customers that are engaging with premiumized assortment aren't the ones essentially trading down. So loyalty within core consumables categories and customers' general reluctance to switch from a proven food that works well for their pet, that is pretty intact. The power of the Autoship model, which facilitates the stickiness and behavior is intact. And all of the softness that we're seeing is primarily in our non-Autoship-driven businesses. which are more egregiously weighted towards discretionary, including categories such as treats per se. You had a second part to your question, I think, additional commentary on NSPAC, gross ads. Our commentary on customers hasn't necessarily changed. We guided in Q3 that we expect a wider outcome. If you can -- I mean, of course, we've been about roughly 100,000, 150,000 customers down on a year-over-year basis, on an average, 100,000 customers. We don't expect to make that up and our customer sentiment doesn't change up until kind of the macro starts resolving. We're happy with the way that we played through Black Friday, Cyber Monday. We're happy with the way customers are responding to us across our consumables, Autoship, health-type categories. Our reactivation rate remains pretty strong. So all of those are positive trends. Q4 typically comes with a very high mix of seasonal discretionary categories. And if you look at it from a year-over-year perspective, it's down relative to last year. But compared to 2021, discretionary is down roughly -- on a mix basis, roughly 15%, and that definitely has an impact.

Yes. I would just go back to the NSPAC point as well. We continue to meaningfully expand our wallet share. So it continues to show our loyal customer base and they continue to penetrate into other categories such as our high-margin health category and whatnot. So we are seeing some growth there as demonstrated over -- by our record highs this quarter.

Great. Thank you.

The next question comes from Anna Andreeva with Needham. Please proceed.

Great. Thank you so much. Good afternoon. A couple from us. I guess if we continue to see inflation exit the space into next year and the consumer remains pretty price sensitive, how do you think about the trade down for Chewy in margins versus topline? I guess in other words, would you pull back on promotions to this non-Autoship customer to preserve margins or not necessarily? And secondly, just a follow-up on Canada. Did you break out Canada in terms of net adds and sales during the quarter? And are you seeing a similar consumer behavior with trade down to value in the region as well? Thanks so much.

Sure. Hi, Anna. So first of all, our discounting/promo spend isn't materially elevated. From the beginning of this year, we had said that there's an opportunity that we might spend up to 30 basis points higher in promotions on a year-over-year basis. And so far, we had not seen the environment where that spend had come through. And we have seen it only during the holiday period where our discounting/promotional spend was roughly 30 basis points higher than last year. And beyond that, we've gone back to our normal levels of discounting, which may be very slightly elevated now just responding to seasonal patterns. But broadly speaking, promotionality remains relatively rational from our vantage point. Also, I want to make sure that it is clear that our ability to navigate through kind of the promotional variability, however small it might be, is reflected through the continuous kind of strong gross margin performances. And last, I would say, we continue to work closely with our supplier partners to ensure a high degree of MAP compliance, which essentially protects prices and large variability in the pet space, and we expect MAP discipline to be enforced by the overall market as we continue to move through Q4 and beyond. So that was the first part of your answer. Number two, in Canada, yes, we like the business the way it's performing. We're continuing to add assortment and open up a geography, which we will come talk to you here in the next 1 to 2 quarters. Alongside -- overall in FY '23, the business has not a material impact. So we'll stay away from providing numbers or guidances accordingly. And we're seeing consumers respond well to promotions around the Boxing Day time frame. And even there, we've actually pulled back and gone back to leading our businesses or building it via a recurring theme in mind. So we are heavier on Autoship and not so much on non-Autoship type transactional offers.

Fair enough. Thanks so much.

Next question comes from Rick Patel with Raymond James.

Thank you. Good afternoon, everyone. I just had a question on active customers. So to what extent are you still being impacted by churn of COVID cohorts in terms of the headwind? And as we think beyond macro and pet household formation, can you talk about the levers you have to accelerate new customers that are under your control. I'm curious if you would consider leaning more into discounting or marketing to get more consumers into your ecosystem?

Sure. So our COVID cohorts, I'm just looking at the data here, they continue to settle out well. And the highest amount of churn that we're seeing is actually in the near-term cohorts. So I have provided a little bit of color on this in my -- in the last quarter's earnings script, around customers that were picked up in the 2022 or the near-term cohort that were demonstrating more discretionary-type behavior. Beyond that, our COVID cohorts continue to settle out well and churn rate there has continued to stabilize. Now that we're past the two year mark for the 2020 cohort and the 2021, for the most part, 2021 cohort as well. And so just to be sure, we've been consistent in saying that their retention was just low single-digit percent point lower than our classic kind of best high-quality legacy cohorts. And that theme has essentially stayed consistent as well. The second part of your question is what levers do you have to accelerate in customer growth? Will you lean to discounts on marketing? So marketing our philosophy, as you know, is not to govern ourselves with a specific dollar amount rather to essentially spend up to the point where we see profitable returns. So it's a more fluid budget, and our marketing teams are fully empowered. A large portion of our spend is lower funnel with healthy mixes into mid and upper funnel. So while upper funnel budget is less flexible and a lower funnel basis is where we act based on how we see market demand and consumer kind of predictive lifetime value. So we're optimizing there appropriately in our opinion. The discretionary that actually drives a very healthy level of customer acquisition into the platform, of course, is muted. And the gaps that we're seeing primarily from a historical point of view are all deltas that are coming from those categories primarily. Our premium businesses continue to outpace historical acquisition rates, which we're happy about because they build high-quality cohorts. In terms of discounting, we've always believed in building a high-quality, recurring business, less so a transactional business. We leaned into discounting tactics early in 2023 and late in 2022. And that is part of the reason why we believe these cohorts are not as sticky as our legacy cohort. So that's a good lesson learned, even though intuition was true, we went out, tested it, found it to be true again, and we've pulled back on that pretty dramatically. We don't expect to bring that back. Yes, happy to take a follow-up.

Thanks very much.

Our next question comes from Steven

Great. Good afternoon. Thank you very much for taking my question. I wanted to follow up on the pricing discussion. So it sounds like the fourth quarter outlook embeds that pricing will basically be flat year-over-year. Is that the right way to think about your initial outlook for 2024? We've heard more about pet food supply coming to the market. So I'm just curious how you think pricing trends into next year?

Yes, it's a good question. So a couple of points there. First, from our vantage point, we do not expect deflationary pressure in the consumables or the health categories. We've heard certain questions or acknowledge that there has been commentary out in the market around potential food deflation in the near term. We do not believe that deflationary pressure, which may exist or impact traditional grocery and food players will translate into the pet category, right? There's -- consumables and pet category are branded. Our vendors have significantly invested. And jointly, we are motivated in protecting MAP pricing framework, which broadly speaking, does not exist in conventional grocery per se, which is non-branded. So anyway, so that's the comment there. Second, pet inflation continues to come down, and this quarter running at mid-single digits. Ultimately, we believe this will very quickly come down to low single-digit levels, and there will be no impact of pricing or no benefit from pricing as we get into next year. You might see a little bit of pricing benefit getting into Q1 based on kind of how the cost price increases came in through 2022, 2023, but you will not see any impact or any benefit of pricing as we move out of our Q1 quarter. So what does that mean? It means that as the pricing environment continues to normalize, structural unit growth will essentially drive the majority of the overall topline growth. And we expect Chewy to remain in share gain position in 2024 as well.

Okay. Understood. I do have a brief follow-up. So the announcement around some of the cost savings, just to be clear, do you expect those savings to flow to the bottom line? Or will you need to reinvest those savings in other initiatives?

Not need to, we will choose to reinvest. The answer is yes to both. Yes, some of that will flow to the bottom line. So we will drive leverage as a result of these actions, which we will quantify more when we talk to you about 2024 guidance. And we will also prudently invest back in what we consider A-list priorities for the company that are poised for new customer acquisition and growth in the future.

Okay. Thanks. See you next week.

Our next question comes from Brian Fitzgerald with Wells Fargo. Please proceed.

Thanks. Maybe two broader ones. What are you seeing in the broader pet household market in the U.S. and Canada. Are there differences between the two? What about shelters and rescue adoption levels, bring backs, any color on the market for pet households? And then can you give us an update on your advertising initiatives and what you're seeing and doing there? Thank you.

Brian, lots of questions. Let's unpack them one by one. Broader pet household markets in U.S. and Canada, I talked about customer behavior through the holiday period, which is the most recent period that we were playing through. Similar participation rates, Canadian customers love the brand, the customer centricity, delivery experience, overall proposition, a lot of experiences of tech resonating very loudly there. So we're happy to see that. Differences that we're seeing slightly higher population or mix of cat relative to dog or as a result, we're going to see obviously slightly lower AOEs. Not a surprise, this is something that we knew going in studying the Canadian market. We're happy to see the mix that is playing through right now as we ramp -- continue to ramp up premium assortment that push us through from Q4 into Q1. We're going to see that premium mix jump even more. Also not a surprise. So overall, I would say broadly, and just so you know, we haven't yet turned on marketing in Canada. We're playing through some basic cold start marketing, as you would expect a start up to do. And so we're essentially actively learning the market as we do in a humble and curious manner. But we're poised to receive the signals, and we like the signals that we're receiving right now. Number two, any -- trends. Adoptions are down 16% year-over-year. Relinquishments are down 3% year-over-year. So what that tells you is that broader trends of pet adoptions being down hasn't reversed at the same time. Fewer pets were returned back to shelters to the tune of 3%. So overall, the trend hasn't broadly reversed. What else? Updates on advertising initiatives. We are pleased with the ramp. We have essentially released more supply. Our commitment was to start ramping this up in the back half of this year, and we've ramped up credibly. In fact, the gross margin, strong performance that we are seeing. We didn't actively put this in the script, it's a combination of -- the discipline from the team and execution and the two line items that are playing through our contribution of ads, as well as our work through supply chain into logistics, where we're seeing a better benefit come through. So overall, we're happy suppliers. We're out in front to suppliers now as we get down into annual vendor negotiations. We're having good conversations listening to the right type of feedback, and we're poised to ramp this up in 2024.

Got it. Thank you. Appreciate it.

No problem. Thank you.

Our next question comes from Steve Forbes of Guggenheim. Please proceed.

Good morning. Sumit, Stacy. Sumit, I wanted to start on pharmacy sales. You mentioned achieving $1 billion on an LTM basis. So it's sort of a two-part question. One, what was the growth rate during the quarter in sort of any context around gross margin benefit from that mix in isolation? And then two, I know, Sumit, we've talked in the past about the share of pharmacy within your pharmacy customer base. What does that $1 billion represent in terms of share?

Yes. Steve, nice to hear from you. We will satisfy more of your curiosity next week when we see you at Investor Day. In terms of mix and gross margin, we -- obviously, pharmacy delivers premium gross margins, as we've said in the past. And essentially, what we saw in Q3 is pharmacy overdelivering through gross margin, offsetting all of the decline that we saw from the higher-margin hard goods businesses, which are obviously slower given the discretionary pressures that we're seeing. So for now, I'll give you -- I'll leave you with that qualitative commentary. And in terms of presenting CAGRs and growth rates and share positions, we will talk about that more next week.

Okay. And then maybe just a quick follow-up, right? I think we noticed some shipping threshold changes during the quarter. I don't know if you can maybe just help frame to the group here. Why did you test lower threshold, what drove you to that decision? And what does those learnings informed you about that part of the value proposition in the current backdrop?

Yes. It's all -- it's -- I like your framing, right? What did you learn? Because it is all part of our continuous test and learn in how to add more value from the platform into the customer. And there are a couple of ways you can add value. You can price discount brands transactionally. And that, to us, sometimes becomes brand dilutive and you don't really drive recurring sort of behavior shifts. The other one is testing or lowering barriers for customers. And so in this particular way, we're testing it shipping across certain categories or certain merge classes or certain segments of customers is a barrier in how we essentially pass value directly back to the customer without -- while at the same time, protecting our vendor partner brands that we've so proudly built on our platform. So this is something that you will continue to see from us. If we signal any broad shifts, we'll be transparent around that. For the most part, we're liking some of the elasticity that we're seeing around seasonal trends. On others, we've always been proud of the fact that customers build really healthy baskets with us. So what some other brands might feel as barriers are not always barriers when you interact with Chewy. So it's a healthy set of learnings that we're going through.

Thank you.

Our next question comes from Lee Horowitz with Deutsche Bank. Please proceed.

Thanks for the question. A couple if I could. I guess with user pressures persisting longer than you guys would have thought entering the year, how do you get comfortable with the idea that Chewy can, in fact, grow users even if pet household formation remains under pressure for a sustained period of time? And then secondly, I know this is a topic that we will dive deeper on next week. But can you comment at all on how CarePlus adoption or customer adoption rates have materialized in the back half of this year? And perhaps how do you guys think about driving greater adoption of Chewy services broadly? Thanks so much.

Sure. The second part of your question around CarePlus and driving services adoption, we will answer more holistically next week. We promise to bring you a really engaging and comprehensive update there. So thank you for your patience on that. On the first part of your question around how do we get comfortable with the idea that Chewy can still grow active customers. So I will say two things. First of all, we're a young player, right? We are a 12-year-old company. So we're obviously learning through a lot of these trends. But we have the benefit of having strategic relationships with our vendor partners who've played through the pet category for decades. And so when we sit with them and understand historical data, times that the pet industry has been pressured and break down the components of pet growth, tonnage growth, ASP growth, et cetera, et cetera. Everything points to the fact that pet ultimately comes out resilient. Right now, pet household formation is muted, and it's muted because of the high kind of pressures that consumers are seeing from every direction. But it is expected that this will abate or no reason to believe why this will not abate. In fact, in 2006 recession, or 2006 to 2008, when overall CPT spending was down 2%, pet was actually up 6% during that time. And there's this element of companionship that continues to play through. If you look at the last 10 years, premiumization has had a big impact. So the humanization and premiumization trends are expected to continue. The difference in 2006 versus -- 2006 to 2008 versus now is that the level of inflation that have passed through the system have been unprecedented. So it's taking recovery that usually takes four to six quarters, has essentially taken a bit longer, but ultimately is expected to return back to normal levels. So that's sort of one industry context. The second reason why we feel confident is because the structural value proposition that is fueled both by new customer acquisition but also growing share of wallet is highly, highly sound at Chewy. The way that we acquire and then build baskets with you, the complementarity of features that we put on top of consumables and getting you into health care and then selling you an insurance and building your share of wallet, which by the way, we will provide more intuition into next week when we see you for Investor Day. Allows us to sit back and evaluate the long-term trajectory of our consumer being highly recurring in nature and highly profit contributing to the bottom line. So I think with the two flywheels, the acquisition and the share of wallet growth, it provides us a defensible moat around models that primarily have either fixed subscription service on one side or that must acquire customers to continue delivering topline algorithm growth.

Helpful. Thank you so much.

Our last question today comes from Rupesh Parikh with Oppenheimer. Please proceed.

Good afternoon. Thanks for taking the question. Just going back to Canada. Your commentary there was very upbeat. Just any surprises thus far in terms of how that launch is going?

It's a very good question. Our surprises are always around how could we have moved faster. So no particular surprises. It's just learnings that we sort of internally ramp up to ourselves. How can we move faster, expanding regions? How do we double down on ramping more assortment up? How do we understand consumer behavior better. So it's just all of those areas that we're focused on, I would say, all the right things per se, but it's a good one. I'll give the surprise a little more thought and perhaps we can talk next week when we see each other.

Thank you for your questions.

We really appreciate your time, and we hope to see you all next week. Thank you.