Chewy Inc (CHWY) 2019 Q1 法說會逐字稿

Good afternoon.

My name is Jesse and I will be your conference operator today.

At this time, I would like to welcome everyone to the Chewy first-quarter 2019 earnings call.

(Operator Instructions)

Thank you.

Kelsey Turcotte, you may begin your conference.

Thank you for joining us on the call today to discuss the results of our first-quarter fiscal 2019.

Joining me on today's call are Sumit Singh and Mario Marte, Chewy's CEO and CFO.

Our earnings release and a letter to shareholders, which we filed with the SEC on Form 8-K earlier today, have been posted to the investor relations section of our website, investor.chewy.com.

A link to the webcast of today's conference call can also be found on our site.

We would also like to remind everyone that we will be making forward-looking statements on this call, including statements concerning Chewy's future prospects, financial results, business strategies, and industry trends.

Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to materially differ from those contemplated by our forward-looking statements.

Reported results should not be considered as 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 statement except as required by law.

For further information, please refer to the risk factors and other information in Chewy's final prospectus filed with the SEC on June 17, 2019, the Form 8-K that we filed earlier today, and other filings with the SEC.

Also during this call, we will discuss certain non-GAAP financial measures.

Reconciliations to the most directly comparable GAAP financial measures are provided in the earnings release and the letter to our shareholders on our IR website, which were filed with the SEC on Form 8-K earlier today.

These non-GAAP financial measures are not intended to be a substitute for GAAP results.

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 IR website shortly.

And now I would like to turn the call over to Sumit.

Thanks, Kelsey, and thanks to all of you for joining us on the call today.

We are excited to report our first quarterly results as a public company.

I want to extend special thanks to our new investors for their confidence in our team and our Company.

I'd also like to thank the Chewy team for their support during the IPO process.

Since we provided significant detail in the shareholder letter, I will address a few highlights from this quarter but will maintain my comments on trends in our business.

As this is our first earnings call, I also want to take some time to share the Chewy story and tell you about our operating philosophy.

After that, I will turn the call over to Mario to discuss our financial results and guidance and then we will take your questions.

Net sales for the quarter grew 45% year over year to $1.1 billion, reflecting our focus on customer experience and the strength of our underlying business model, including growth in spending among existing customers.

Q1 marked our second quarter with greater than $1 billion in sales.

Active customers grew 3.5 million year over year to 11.3 million active customers.

Net sales per active customer increased approximately 9%, from $315 to $343.

Autoship customer sales as a percent of net sales represented 67.1% of our revenue.

Gross margin for Q1 was 22.9%, up 330 basis points year over year and the highest level in the Company's eight-year history.

This margin improvement is a result of our disciplined execution to improve product margin and supply chain efficiencies.

Finally, our adjusted EBITDA margin of negative 1.4% improved 530 basis points versus Q1 2018 as a result of gross margin expansion and leveraging of our operating expenses.

The core inputs of our business are trending positively as we continue to innovate with a keen focus on growth and on delivering the best possible customer experience.

We are pleased with our Q1 results and believe we are in the early stages of our growth.

Now turning to the Chewy story.

We are on a mission to become the most trusted and convenient online destination for pet parents, offering a broad assortment of pet products, supplies, and prescriptions at competitive prices, coupled with a high-touch personalized customer experience and fast, reliable delivery.

There are currently more than 10,000 Chewy employees, known as Chewtopians, across the country who are united by our goal to provide each customer with best-in-class service every day.

From our headquarters in South Florida and Boston to our customer service and fulfillment centers across the country, we are passionate about our work and are constantly thinking of new ways to make the customer experience even better.

The pet industry is a large and growing market, with approximately $70 billion in annual spend in 2017.

In addition, the pet care market is resilient during economic downturns because of the nature of the pet parent/pet relationship and is experiencing a secular shift from off-line channels into online.

Pet humanization and the increased focus on pet health and wellness are also notable trends that are driving growth in the pet industry.

The momentum of our business is rooted in innovation and we are always identifying new ways to enhance the customer experience.

We are bringing customers the convenience of e-commerce along with the expertise and personalized service of the best local neighborhood pet store.

From our convenient autoship subscription program to our personalized shopping features to our wide selection of products, including our proprietary brands, we are leveraging key opportunities to drive repeat and recurring purchases and ultimately build brand loyalty and long-term growth.

We believe our personalized high-touch customer service is what sets us apart in the industry.

Over the past eight years, we have successfully created a customer-centric culture with 24/7 access where pet parents can reach our knowledgeable award-winning customer service team at any time to interact with a live team member in either our Hollywood, Florida, or Dallas, Texas, customer service centers.

As part of our customer service, we create special moments that wow and delight our customers, from sending handwritten welcome cards to new customers to surprising pet parents with hand-painted portraits of their pets.

Our experiences build memories and customer engagement, which fuels long-term loyalty for our Company and our brands.

In addition to our high-touch customer experience, we make shopping easy and enjoyable for pet parents.

And that makes finding and buying the right product an amazing start to the customer journey.

We are proud of what we have accomplished thus far in 2019 and look forward to executing on our strategy for the remainder of the year.

And now I would like to highlight a few milestones.

This month marks one year since we launched our online pharmacy, Chewy Pharmacy, complementing our healthcare offerings of veterinary, which I will refer to as vet moving forward, diet products.

These offerings reflect our commitment to the health and wellness of pets and is another step in our mission to become the most trusted and convenient destination for pet parents to fulfill all of their pet needs.

Improving pet health and wellness is a common goal that we share with the vet community.

We also enjoy a deep connection with our customers and are continuing to raise awareness on pet health and preventative care by utilizing our marketing abilities.

This, along with our autoship program, helps drive increased compliance for vet prescription diets and medication, benefiting pets, customers, and vets alike.

To further that goal, we now offer a new product feature, My Prescriptions, which is akin to a human medicine cabinet and provides customers a convenient and transparent way to view and manage all of their pet prescriptions, like tracking refills and prescription expiration dates.

To accommodate the growth of Chewy Pharmacy, in Q1, we launched a new pharmacy colocated within our fulfillment center in Phoenix, Arizona, and we operate this new location under our own licenses.

As we celebrate our first anniversary, we have been pleased with the customer response thus far.

We are still early in the pharmacy offering and will continue to look for opportunities to deepen our engagement with veterinarians and pet parents as we expand in this area.

Keeping pace with our continued top-line growth, we opened our eighth fulfillment center, this one in Dayton, Ohio, which began operations last month.

Growing our physical capacity and extending our delivery network is an important part of our operational strategy.

We continuously improve our logistics processes and drive efficiencies every time we open a new facility.

Each fulfillment center has been ideally positioned in key locations throughout the country to provide our customers with fast delivery times on their orders.

Last, but not least, we continue to innovate and improve customer experience through product and tech initiatives.

For example, in Q1, we launched a new notifications platform, one that is more robust and customer-friendly and enhances our ability to communicate with our customers with push notifications.

Furthermore, our mobile app continues to be an important tech development, providing our customers with an even more convenient and personalized shopping experience.

We continue to improve functionality and usability, including enhanced shipment tracking and notification, a unique Q&A feature allowing pet parents to directly engage with Chewy's customer service, improvements in customization features, and touch and facial ID functions for increased security.

We have also recently rolled out improvements to the app, such as voice search and search autocomplete, product searches enabled by UPC codes, and enhanced autoship management, which delights our customers and have resulted in a significant improvement in our mobile app's ranking.

Product and tech innovation remain a key priority for us as we strive to make the product discovery purchase and post-purchase experience across all platforms easy and enjoyable for our customers.

Now I would like to transition to our operating philosophy.

I will note that our IPO in June was an important milestone for Chewy, but it is only one step in our journey.

We believe that we are positively transforming an industry with a superior value proposition that delivers customers an exceptional and personalized care and service at the scale and convenience of e-commerce.

This is a mission that will continue to require us to keep both a long-range mindset as well as a maniacal focus on day-to-day execution, understanding our customers' needs and then innovating, investing, and flawlessly executing on their behalf to earn and to retain their loyalty.

To maintain a long-range focus implies making decisions which maximize value for customers and shareholders alike because over the long term, these are the same.

With this in mind, we have chosen to invest in building the best customer experience for our customers and to maximize our growth while keeping cash flow as the governor of our growth.

We will continue to act in this matter and make big bold bets that satisfy the above criteria.

Last, but not least, our success in getting to where we are today has come as a result of the hard work of our talented team, of which we are incredibly proud to be a part.

Our team while delivering growth at scale and customer experience has also demonstrated an execution rigor that has resulted in expanding gross margins and improved operating losses while at the same time showcasing a highly disciplined cash flow management approach.

In this way, we are focused on building an enduring franchise.

We will continue to be relentless regarding this.

Thank you for your attention today.

It has been an exciting few months and we are pleased with our Q1 results.

More importantly, we look forward to continuing to strengthen our operating performance and serving even more pet parents as we execute on our long-term roadmap.

Now I will turn the call over to Mario, who will provide a more detailed review of our Q1 results and walk you through our financial outlook, which calls for continued growth and scale and improvement in EBITDA.

Mario?

Thank you, Sumit.

Good afternoon, everyone.

I would also like to thank you for your support of Chewy throughout the IPO process.

Given that this is our first call as a public company, I want to start this afternoon by giving you some insights into how we operate Chewy from a financial perspective and some of our key financial takeaways.

We use cash flow as the engine of growth and invest cash and profits generated from our existing and profitable customer base to acquire new customers.

We retain these customers over long periods of time by offering them a superb value proposition comprised of a broad selection of great products, the convenience of e-commerce, competitive prices, and what we believe is an unrivaled customer experience.

Our first-quarter results highlight our business philosophy and focused execution.

Net sales exceeded $1.1 billion, an increase of 45% compared to $763.5 million in Q1 2018.

And autoship customer sales continued to grow faster than overall net sales, reaching $743.9 million, an increase of 56% compared to $477.4 million in Q1 2018.

We ended the first quarter with 11.3 million active customers, up 3.5 million year over year.

Gross margin for the quarter was 22.9%, a 330-basis-point improvement driven by our disciplined execution to improve product margin and supply chain efficiencies.

Q1 operating expenses of $284.2 million or 25.6% of net sales decreased 190 basis points versus Q1 2018.

SG&A was $181.9 million or 16.4% of net sales.

As we have shared previously, SG&A for us includes all fulfillment and customer service costs as well as credit card processing fees.

The year-over-year increase was primarily driven by higher sales, expansion of our fulfillment network, and additions to our corporate team.

Advertising and marketing was $102.3 million or 9.2% of net sales, scaling year over year even as we continue to grow our active customer base.

Q1 net loss was $29.6 million, $30.3 million better than Q1 2018.

Our net margin was negative 2.7%, improving 510 basis points year over year.

Q1 adjusted EBITDA loss was $15.8 million, an improvement of $35.7 million compared to Q1 2018.

Our adjusted EBITDA margin was negative 1.4%, improving 530 basis points year over year.

Improvements in both adjusted EBITDA and adjusted EBITDA margin demonstrate our ability to continue to grow at scale while also improving the margin profile of the business.

Free cash flow of negative $63.4 million in Q1 2019 or negative 5.7% of net sales is a result of our net cash used in operating activities coupled with capital investments of $12.2 million, which were mainly associated with the launch of a Dayton, Ohio, fulfillment center and capacity expansion of our Kentucky and Phoenix pharmacy locations.

Cash from operations of negative $51.1 million was consistent with prior cycles.

We ended the first quarter with $29.3 million in cash and cash equivalents.

The closing of our IPO added an additional $117 million of cash to our balance sheet prior to underwriting and other IPO-related expenses and will be reflected in our Q2 statement of cash flows.

Now I will turn to guidance.

First, a few comments to help you understand our reporting calendar and seasonality.

Please note that fiscal 2018 was a 53-week year while fiscal 2019 will be a 52-week year.

This will impact year-over-year growth for both full year 2019 and Q4 2019.

You should also note that historically, we build our inventory levels when we launch a new fulfillment center and in the third quarter as we prepare for Q4 sales.

This, coupled with our favorable cash conversion cycle, may lead our cash from operations to fluctuate from cash use to cash production between quarters.

As we begin life as a public company, we want to ensure that we provide clarity and transparency to our shareholders into how we operate the business while maintaining our long-term focus as well as our ability to move quickly to capitalize on growth opportunities or to make the right investments which will maximize value for our customers, Company, and shareholders.

Balancing these two priorities, we are taking a thoughtful and deliberative approach to provide annual guidance on net sales and adjusted EBITDA margin and quarterly guidance on net sales.

We are committed to being transparent about both our performance as well as our investments in the quarters and years to come so shareholders are informed and understand our operating decisions.

For Q2 2019, we expect net sales between $1.12 billion to $1.14 billion, representing growth of 39% to 42% year over year.

For fiscal year 2019, which ends February 2, 2020, we expect the following: net sales between $4.675 billion to $4.75 billion, representing growth of 32% to 34% year over year.

Adjusted for the extra week in fiscal 2018, year-over-year growth is expected to be between 36% and 38%.

Adjusted EBITDA margin for the fiscal year is expected to improve 400 basis points to 450 basis points versus fiscal 2018.

Included in our EBITDA guidance are costs related to being a public company, which will begin to impact us during the second quarter of fiscal 2019.

We are pleased with our Q1 results and our guidance demonstrates that we are still in the early stages of our growth.

We are very excited about our future and look forward to reporting on our progress in the quarters to come.

With that, I will turn over the call to the operator for questions.

Operator?

(Operator Instructions) Doug Anmuth, JPMorgan.

Great.

Thanks for taking the questions.

I have two.

First, Sumit, can you just talk more about autoship customer revenue?

You talked about how it increased to 67% in 1Q.

Do you have any kind of targets or thought on where that can potentially go over time?

And then how do you utilize the initial order discount, given the seemingly temporary increase that we saw during the past week by Chewy?

And then the second question: can you just help us understand drivers of the revenue guide for 2Q and the full year?

We know you are not specifically laying out anything around active customers and then net sales per active customer, but are there any puts and takes that we should be thinking about through the year?

Thanks.

Hi, Doug.

It's good to hear from you.

The first one -- you know, first of all, the autoship -- I mean, net sales of 67.1% number itself is a pretty high bar for e-commerce.

Two, I think the other point I would make there is for the number of customers that have subscribed into autoship, there is a reasonably large number outside of that who behave like autoship.

So the contribution is actually larger than that.

Third, I think areas that we invest in to be able to make sure that that number continuously increases are possibly a couple different areas.

One: we are always looking to increase assortment.

Always looking to make sure that what part of our assortment is actually autoship eligible and if there is and we are incrementally upping that investment.

Two: launching complementarity.

So healthcare is a good example where the numbers that we are projecting do not contain any kind of numbers or autoship synergies that we are starting to see from our healthcare vertical because it is still pretty small.

But the hypothesis is that those complementarities build in.

And the third one is of course as we continue to improve our algorithmic science around personalization and recommendations to be able to offer customers an ability to build more relevant baskets than they already are, that actually also contributes to the increase of that autoship number.

So those are the three areas that we are focused on.

And the second part of your question was around general trends or projections for our focus on the rest of the year.

It's do more of the same.

It's three things.

One is do more of the same, so continue to focus on customer acquisition as well as offering customers a tremendous service to be able to engage them, retain them, drive repeat purchases from the active customer base.

Two, continue to focus on growing our private brands.

Three, thoughtfully, like we always do it thoughtfully in the way that we go to market and the way that we find the opportunity in the market to peg back into how we think about private brands.

And then three, of course, continue to invest and grow our healthcare offering.

So we will broadly attack all of these together.

Great, thank you.

Brian Nowak, Morgan Stanley.

Thanks for taking my questions.

I have two.

The first one is on active buyer growth.

You did a good job of growing the buyer base so far.

I was wondering -- could you just talk to us about some of the high-level hurdles you think you need to clear to continue to bring new customers on the platform?

What is sort of the biggest gating factor you have found and how do you overcome that?

And for customers you lose, what is the top reason they leave and how do you bring them back?

And then I was also just wondering if there is any update on the steps that we should be looking for as you start to build out the vet and the pharmacy side?

Thanks.

Hi, Brian.

It's good to hear from you.

So customer acquisition, a couple different ways to think about it.

One: we are playing in a large industry itself.

E-commerce penetration is low.

Not only are we enjoying a secular shift from off-line channels into online, we are obviously creating that shift as well.

We utilize -- our marketing techniques are both a combination of classical and digital.

So you should expect us to continue to initiate that.

We are launching newer offerings and newer verticals.

So healthcare is an example of that, where now we have got pharmacy not only as an acquisition channel but active customers are engaging with pharmacy.

You should expect us to continue to fire on these cylinders as we go out and broadly acquire customers from all channels.

Because the proposition that we are bringing to the table is offering that high-class personalized customer service that you see in a local neighborhood pet store, but at the scale and convenience of e-commerce.

So fishing from a wide net in that perspective.

The second part of your question was the top customers -- top reasons customer leave.

First of all, I think helpful to remind that our engagement -- customers are highly engaged with us and we retain them for a long time fueling their loyalty.

And we never take that loyalty for granted.

The reasons when they do leave, primarily -- there is nothing really insightful to discuss there.

Unfortunately, sometimes a pet passes away.

That would be a reason when we temporarily see customers disengage from the platform.

But our data suggests that a large number of over 80% of pet parents bring home another pet within six to nine months of a pet passing away.

The other one could be if you literally live right next door to a pet store, you may actually just be able to get that transaction transactionally, something like that.

The third part of the question was what should we be looking out as you build out pharmacy.

I think we are early in this inning.

We are out there building assortment, offering the experience.

We are looking to partner, enhance the proposition of health and wellness and keeping Chewy in the center of the pet parent and the vet community equation.

We believe this is a tripod of an equation.

And utilizing the tools and techniques that we have, the compliance that we can drive, the education and awareness that we can create, we believe we are going to fire on multiple cylinders here as well.

Great, thanks.

Nat Schindler, Bank of America Merrill Lynch.

Yes, hi.

Thank you for taking my questions and congratulations on your first public quarter and your IPO.

Could you just go a little bit more detail into the gross margin ramp that you saw this quarter?

If we look at last year's trends, you actually trended up through the year.

And I would expect that your mix of other goods, hardgoods, to food would be highest in Q4 around the Christmas sales.

So I would expect that gross margin would go up and Q4 would be the highest of the year, but you were up 200 basis points over Q4.

You did that also the previous year, but then trended up through the year.

Is there anything you can talk to us about the seasonality here and what is driving this up?

And what we should expect for the rest of the year?

I will talk to you broadly about that.

A couple different factors drive gross margin.

It's a combination of the fact that we are getting more sophisticated in helping people build larger baskets.

And that is a function of us having assortment and really knowing what our customers need and want.

And which we do, because we have that amount of data with them plus our customer service actually comes in really -- and plays a large part of that.

Number two, our economies of scale allows us to be able to not only drive supply chain efficiencies, but we are also using a lot of data science in our supply chain to be able to make sure that our cartonization principles are intact, that our density is maximized within the cartons that we are sending out.

And overall predictability of the business allows us to level load that demand and lower our overall cost structure.

And all of that flows through gross margin.

So it's a combination of multiple things.

The jump from -- and we have been on a path here, so nothing specifically to talk about jumped from Q4 into Q1.

There might be a little bit of a timing in play there, but that is how I would answer that question.

And would you expect to see the sequential improvement occur from rest of the year?

Yes, you should expect us to continue to be -- you should expect us to continue to maniacally focus on the above principles, the three principles that I have talked about.

A, helping customers build bigger baskets; two, continuing to optimize our operations and our supply chain to be able to extract costs out.

We are focused on gradual and incremental improvements.

Great, thank you.

Deepak Mathivanan, Barclays.

Hey, guys.

Thanks for taking the questions.

Two questions from us.

So first on the marketing expense for the quarter, I mean, I know that you guys have been testing out a few marketing programs related to building our brand on that side rather than just purely performance.

Can you talk about how much of that is factored into sort of 2Q guidance?

And then how should we think about the expected ramp through the year?

And then secondly on the fulfillment center, you guys just opened up the new one and it is about a month in operation.

How much of the cost to rent the fulfillment center is in the 2Q?

And then what should be the expected investment period before it sort of reaches max efficiency levels?

Thank you.

Hi, Deepak.

It's nice to hear from you.

On marketing, you are right in your observation.

Most of our spend is primarily acquisatory spend, direct response spend.

So we spend in a muted fashion on brand marketing.

One of the reasons we also do that is because the high level of engagement and care that we provide and the val mechanisms that we deploy allow us to be able to obviously create that network effect and get the halo of a little bit of building the brand.

But generally, our brand awareness is something that we will invest in.

For Q1, Q2, it was still primarily acquisatory because there is a little bit of a ramp that you need to be able to build out your upper funnels and your middle funnels in that way.

That is how I would think about that.

So it will gradually increase as we move forward into 2019 to 2020, that kind of stuff.

Fulfillment center, how much of the cost to ramp is in Q2.

And then we look at this as a pretty tight -- we plan our fulfillment center network two, three years out, but we invest very tightly in six- to twelve-month increments.

And that is because of the predictability that we have.

That is also because of the industrial engineering teams and the science that we deploy there.

So our payback is also fairly consistent and tight there.

Brent Thill, Jefferies.

Good afternoon.

Maybe you could just talk a little bit about the pathway to profitability and what gives you conviction over time that the bottom line can look a lot like what you are doing on the top line.

And share with us -- perhaps it would seem that some of these new businesses seem to be potentially even higher margin that you are moving into than you are in currently.

If you can highlight what you are seeing there.

Thank you.

Sure.

I will say a couple things there.

First of all, you know, you have noticed our ability to -- as we are getting big fast, we are also focused on getting fit fast.

And that is evident from the fact that we are delivering not only the top line or growing the top line but also improving our margin profiles.

And that is a function of the previous disciplined approach that I have spoken about.

Number two, we have clearly identified growth and margin vectors that we are going to continue to execute on as we move from today into the longer term.

You should think about those in two different buckets -- or three buckets, I would say rather.

The first bucket is doing more of the same, which is our active customers that engage with us, the longer they stay with us, the more share of wallet or net sales that they actually spend with us.

And that base to us is a profitable base.

And that defines the power of the Chewy business model.

Number two, you should think about as two other vectors that we fired which we are focused on growing and investing and offering a tremendous value proposition on, these are healthcare and private brands.

Private brands typically portfolio in a -- we are currently -- exiting 2018, we were about 5% of our sales.

And we aspire to play where typically large retailers or mature consumables players play, north of 15% over the long term.

And at that scale, we expect private brands to be profitable over our base business.

And then the third one is vectors that we have not fired, which is in our effort to build a destination for pet parents.

When we are ready and when we are ready to talk about it, you could think about services type of models that are inherently high-gross-profit verticals.

So a combination of those are how we are thinking about it.

The last thing I would say is look at our guidance.

We have provided adjusted EBIT margins improving 400 basis points to 450 basis points year over year, which are lending the confidence that we are -- while we execute our strategy, we are also focused on the bottom line.

Great, thanks.

Mark Mahaney, RBC.

Thanks.

Two questions, please.

Sumit, I think you talked about -- I want to ask about autoship.

You said you had customers that acted like autoship that actually weren't on autoship, i.e., they purchase pretty frequently.

Does it matter to you and to the business whether they stay where they are?

Are there any advantages to incentivize those kind of quasi- or shadow autoshippers to actually become full autoshippers?

Is that an opportunity?

And then second, just generally, I know you were asked about it a lot during the IPO roadshow, but anything new in terms of thinking on international markets?

Thanks a lot.

Hi, Mark.

It's good to hear from you.

You know, when we study our autoship customers that are not on autoship, it isn't necessarily a defect that we are out to fix.

They have chosen not to remain on autoship for a variety of personal reasons.

For example, they could be -- they could have been burned by previous subscription services, so they just like to retain control.

Although ours is completely no tax attached, easy to subscribe into, subscribe out of, super-intuitive, super easy, but just a personal preference.

Other things that we have heard from people are look, we travel so much that we'd rather just maintain control of that ordering pattern rather than putting it on an autoship type subscription service.

So not really a defect that we are out to sort all fix.

But if they want to convert at any point, we will be happy to take them.

International.

The way I would answer that is the same as we had in the roadshow, which is we are currently focused on the United States.

We have a large opportunity in front of us.

While I fully believe that the merits of our business model as well as platform are extendable to anywhere where pet parents live, Mark, today we are focused on the US.

When I am ready to talk about international, we will definitely come back and speak to that.

Okay.

Thank you, Sumit.

Eric Sheridan, UBS.

Thanks very much for taking the question.

Maybe two, if I can, as well.

Obviously, we're getting a lot of questions on the competitive landscape, given some of the pricing and discounting moves in the space over the last very short period of time.

Just philosophically, can you help us understand the way you approach competition?

And how you think about reacting to competitive moves, especially around price, that you see across the broader industry?

That is number one.

And number two, maybe driving back to some of the questions from earlier, can we talk a little bit about where you are seeing some of your better returns on marketing dollars?

And how you think about aligning those marketing dollars against ROI, whether it be on driving increased spend or increased buyer and user initiatives around the platform?

Thanks so much, guys.

Sure.

You know, the first question about pricing environment and that kind of stuff, look, e-commerce pricing and promotional space is always dynamic and that's just the nature of the beast.

Some months more than others.

We have the ability to monitor and effectively respond and that is what we do.

We are constantly monitoring to make sure that we are competitive.

We feel we have a good ability.

We feel confident about our ability to execute in that space.

And overall, we just remain focused on delivering the core value proposition.

Pricing is a part of it, no more no less meaty or weighted there.

So our ability to execute, our ability to respond to that keeps us whole.

Number two, I think it is important to remember that our partners, our suppliers, our brands do a great job in really demonstrating responsible price leadership with minimum advertised price, or MAP principles, in the marketplace.

That also allows sort of a general pricing discipline in the industry.

Second part of the marketing, you know, we are very data-driven.

Our direct response marketing.

We invest broadly across classical and digital techniques, but at the same time, we measure the efficiency on sort of attractive LTV to CAC ratios.

And lifetime value for us, we don't just look at it on a gross revenue basis; we take it down to profitability.

And then we super-load our customer acquisition cost to be able to make sure that our ratios remain attractive to us as we go out and invest in these channels.

And because we are direct attributed and direct response and data-driven, we are able to effectively attribute and change our strategies when we want to or as we need to.

And that is how we think about marketing and that is what we will continue to do.

Brian Fitzgerald, Wells Fargo.

Mark Kelley, Nomura.

Great.

Thanks very much, guys.

I kind of want to follow up on the last question about the competitive environment and discounting.

Sumit, you pointed out that it has always been a dynamic pricing environment in e-commerce.

And I think perhaps investors' focus is squarely on you guys because you are such a new public company and we don't have all the history and context.

But it seems like the majority of discounts are usually on getting new autoship customers, in your case, or similar products to Amazon.

And that is where the big discounts come in.

And given that you are already at 67%-plus of sales are from autoship customers, the incremental customer discounts really don't move the dial for margins.

It doesn't appear to be the case in your outlook and certainly over the last handful of quarters.

Can you maybe give us just some context around that dynamic competitive pricing environment over the last several years, just to give us some comfort that your margin outlook and the long-term margin structure really won't be impacted by discounting like that?

And then second, in terms of spend per active customer, how much do you think the healthcare piece of your business will draw some of that growth?

And what is the right way for us to think about percent of customers that will use your healthcare products?

Thank you.

Okay, there is a lot in your first question.

I was trying to sort of deconstruct it, but I think what you are trying to get at is how resilient is the general industry on pricing dynamics and pricing fluctuations.

I would point back to the point that I just made a few minutes ago; perhaps didn't come across as clearly as I wanted it to.

But the industry is generally MAP compliant.

So there is a minimum advertised price and there is a little bit of a fluctuation that happens around the MAP above and to it.

And that is the kind of space that we effectively monitor and respond on.

So that is how we look at the pricing dynamic.

The other question was on healthcare.

Healthcare share of wallet I think was the question.

If we look at the industry and break it down, I believe the share of wallet for healthcare is somewhere between $400 and $700 per household.

We are really early stages right now, so too early to comment on what the numbers are there.

But we do believe that greater than 90% of that particular vertical is addressable by Chewy.

And then last, the percent of customers that will use healthcare -- again, too early to sort of comment on that, but we don't see why it is not a uniformly applied proposition to our customers.

Got it.

Thanks, guys.

Robert Coolbrith, Wells Fargo Securities.

Thanks, guys.

It's Fitz on.

Sorry, I cut out on my line before.

A couple quick clarifications around the pharma business.

You call out in your letter that the new Arizona pharma facility operates under your own licenses versus the Kentucky facility.

Is that operation -- operational arrangement still in place with PetSmart for the Kentucky one?

Can you remind us of the details there?

And then kind of walk us through the development process.

And then one more quick follow-up.

Any color on how prevalent autoship is amongst pharma maybe relative to consumables?

And any dynamic to call with how that penetration is ramping, autoship penetration is ramping among pharma or cross-sell dynamics?

Thanks.

Sure.

So yes, we have retained the ability to operate out of our traditional facility that has the PetSmart licenses.

In the pharma space, the license is actually physically attached to a building.

So when we launch Phoenix, it also allows us the ability to ship from two sides of the country and therefore offers a better proposition for our customers in terms of bringing them faster delivery, just like we do for the rest of our network.

And then how prevalent is the second part of the question with autoship around pharma.

Look, it's also tremendously attractive.

In some cases, you would say that it is more.

And our ability to actually drive that compliance is even stronger because we have a targeted relationship with the customer.

We are able to monitor and effectively approach them and help them convert to become autoship customers.

And remind them with our newer launch that we just launched with the medicine cabinet type feature, the Rx manager, it actually allows the customer to even track and reminders, which should actually increase compliance.

Humans are bad at feeding humans medication; we sometimes forget to feed our pets.

And that is where the power of an autoship program comes in and we are excited about what this could hold for us in the future.

Great.

Thanks Sumit.

(Operator Instructions) Dylan Carden, William Blair.

Thanks very much.

Just sticking with pharmacy here, I'm curious how at year-end, so to speak, your conversations are going with vets and how you are positioned here in the competitive landscape.

I know there is a handful of other companies doing something not dissimilar.

And are you sort of making a big marketing push, either directly or a little more broadly to kind of shift customers over, shift their wallet spend over to that business?

And how you kind of see it growing organically and whether or not how much of that is embedded in your numbers thus far?

Thanks.

I will start answering from the back.

We are currently more focused on growing pharmacy organically.

The reason for that is because we are building out a customer experience and perfecting it as we continue to expand that offering with our customers and into the marketplace.

Number two, going back to the first question, so we believe we are in the mission of health and wellness alongside the vet community.

And so from that standpoint, the pet parent, the vet community, and Chewy together can deliver a tremendous value proposition in the industry, benefiting health and wellness propositions.

The vet community sits in the center of the equation.

The pet parent needs the advice and the encouragement of a reliable partner that can help drive compliance, that can help create education and awareness, that can actually provide them the convenience of e-commerce at the same time.

And so there is many innings to be played and we will continue to do that over the next couple of years.

That is how we are thinking about it.

Thank you very much.

That is all the time for questions that we have.

I will turn the call back to Sumit Singh for any closing remarks.

Thank you for all your attention and participation today.

We intend to be active with regard to our investor relations and look forward to seeing investors and analysts in the coming quarters.

Have a nice evening, guys.

Thank you.

This concludes today's conference call.

You may now disconnect.