Chewy Inc (CHWY) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Chewy Third Quarter Earnings Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Kelsey Turcotte.

Thank you.

Please go ahead.

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

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

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 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 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 statements, except as required by law.

For further information, please refer to the risk factors and other information in Chewy's 10-Q filed with the SEC on September 17, 2019, the Form 8-K that we filed earlier today and our 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 maintained on our Investor Relations website, including the earnings release and letter to our shareholders, which were filed with the SEC on Form 8-K earlier today.

These non-GAAP 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 be available on our IR website shortly.

I'd now like to turn the call over to Sumit.

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

As Kelsey mentioned, our shareholder letter is posted to our Investor Relations website, and I encourage you to review it.

I'll start this afternoon by sharing financial highlights of the quarter, then I'll discuss a few business updates.

And finally, I will turn the call over to Mario to discuss our financial results and guidance.

Net sales for the quarter grew 40% year-over-year to $1.23 billion, reflecting the strength of our business model as active customers grew 33% year-over-year to 12.7 million, net sales per active customer grew 11% to $360, and Autoship customer sales as a percent of net sales reached 70.4%.

The highest spending among existing customers and strong Autoship sales are a result of growth in assortment across new and existing verticals, including a more than 25% year-over-year expansion in SKUs, improved site merchandising and continuous innovation around the customer experience.

Gross margin for Q3 was 23.7%, up 410 basis points year-over-year.

Finally, our adjusted EBITDA margin of negative 2.5% improved 530 basis points versus Q3 2018 as a result of the growth and margin expansion across the businesses as well as scaling of our marketing spend as a percentage of net sales.

Chewy's mission is to be the most trusted and convenient online destination for pet parents everywhere.

We believe we are positively transforming the industry with a superior value proposition that keeps our customers at the center of everything we do from our high-touch customer service to our broad assortment of brands, to delivering on the core tenets of e-commerce of speed and convenience.

We are maniacally focused on providing a truly unique and personalized shopping experience that builds trust, brand loyalty and drives repeat purchasing.

Our team is executing well against our mission and the business continues to demonstrate strong forward momentum.

We believe that there is significant market opportunity ahead of us and remain focused on our strategy of sustainable top line growth at scale and margin expansion.

Recent investments in both private brands and Chewy Pharmacy, 2 pillars of our growth and margin strategy, contributed positively to both our year-over-year increase in net sales and gross margin expansion in the quarter.

I will now provide some color on both of these important strategic verticals.

Chewy private brands remain an important part of our proposition to delight customers with high-quality products.

Over the past year, we have grown our Chewy private brands assortment by over 80%, a significant portion of which was in higher margin hard good products.

As part of this process, we work backwards from customer needs and bring high quality, exceptional customer-rated products to life.

For example, our Frisco-branded beds, dog apparel and waste management products enjoy an average of 4.5 out of 5 stars or higher rating and over 90% customer repeat purchase recommendations.

As a result of high-quality assortment growth and continued focus on smart site merchandising, Chewy private brands sales grew more than 60% year-over-year in our third quarter or 1.5x our overall net sales growth.

These private brands now enjoy double-digit share of sales at Chewy in several growing subcategories such as frozen foods, jerky treats and natural bones and chews.

Similarly, in hard goods, Frisco potty pads, poop bags, apparel and leashes have reached over 30% of sales in their specific subcategories.

Our private brands portfolio has the potential to contribute meaningfully over time and is yet another proof point against our strategy of delivering growth and incremental profitability.

Chewy Pharmacy continued its rapid expansion as the fastest growing vertical in the company and continues to receive favorable reviews from our customers who love our overall value proposition in this space and then evangelize to their network of friends and family.

We believe that we are playing an important role in pet health and wellness.

In addition to driving growth in this vertical, we are focused on building a structurally profitable and enduring franchise.

Gross margin for the Pharmacy business improved more than 650 basis points year-over-year in Q3, driven by mix of existing customers converting to Pharmacy, MAP pricing discipline as well as improved logistics costs as we ramp up our Phoenix operation to service West Coast customers.

Additionally, we continue to work on products and process improvements behind the scenes to raise the productivity and efficiency of our pharmacy operations.

As a result of these efforts, pharmacy's fulfillment and customer service costs improved by over 1,000 basis points year-over-year and the business reached profitability at the order level.

On the product side, an increasing number of pharmacy customers continue to use our My Pet Prescriptions product, which helps them better manage information and accessibility of their pet's prescriptions and easily order prescription refills, therefore driving up engagement with our platforms.

These data points continue to lend confidence that our service and overall value proposition is resonating with customers and that we are making progress towards our mission of becoming the destination for food, supplies and medication for pet parents.

Overall, for Chewy, we ended the third quarter with 12.7 million active customers, an increase of 3.1 million customers versus Q3 2018 and 2.1 million versus the end of fiscal year 2018.

Customer retention rates continue to be stable, and we are pleased that initiatives such as increased assortment, improvements in site merchandising and maturation in both Pharmacy and private brands are contributing to ongoing expansion in lifetime value and an equal or faster payback period that proves out the efficacy of investments in new customer acquisition.

We believe we can further drive growth and profitability through innovation and technology that makes the process of finding and buying the right products easy, convenient and enjoyable.

Our Pet Profiles feature has provided us valuable insights into our customers and their pets.

We now have more than 5 million Pet Profiles, which enable us to provide pet parents with a more personalized experience that helps them discover new products, including treats and toys that are breed- and age-appropriate.

In addition, we recently upgraded our core shopping checkout experience by launching digital payment products, starting with PayPal, which is recognized as a leading name in payments, as a payment option across all of our shopping platforms.

This represents another step in our journey of providing current and future customers with easy to use and broadly accepted payment options.

Foundational to Chewy's success and leadership in our industry is our customer-centric culture, fueled by the common purpose of our team members.

United by our love for pets, we are building a great place to work for more than 12,000 Chewtopians located at corporate offices, customer service centers and fulfillment centers across the country.

Growing our Boston team has been a strategic priority that has allowed us to tap into one of the leading U.S. markets for top talent.

Today, our Boston core headquarter is home to over 325 Chewtopians.

Recently, we were publicly recognized as an employer of choice in Boston.

We are proud of this recognition as it represents our commitment to building a great place to work, a strong culture and an engaged workplace community.

As a city that is recognized as a hub for tech innovation, we look forward to further developing our Boston headquarters and deepening our presence in the community.

From our dual headquarters to our pharmacy sites and our customer service and fulfillment centers throughout the U.S., we have put in place an experienced team that is focused on providing a high-bar customer experience, delivering a unique customer value proposition and driving outsized value for our shareholders.

Before I turn the call over to Mario, I'd like to take a few minutes to talk about our Q4 holiday season.

These annual celebrations allow us to tap into that unique bond between pet parents and their furry family members, delivering more joy to everyone.

This year, we launched a fully coordinated Holiday Shop, which provides a broad yet personalized selection of holiday products for every type of pet and pet parent.

The holidays provide us an opportunity to expand our assortment and category depth in our most popular seasonal categories of holiday toys, treats, costumes and apparel and particularly in hard goods and our private brands.

For example, this year, we launched seasonal toys and dog beds as part of our private label brand Frisco and have already seen a positive customer response to the newly launched categories.

To further support our holistic assortment, we implemented an integrated marketing approach to amplify visibility of our Holiday Shop through a combination of smart and well-thought-out social media, e-mail, on-site and digital tactics.

Last, but not least, we enhanced our recommendation engine, leveraging our vast amount of data to make better and more targeted product suggestions.

This strategy, which we designed to be even more deliberate this year, given the shorter holiday calendar, has been well received by our new and existing customers.

We are thrilled that Black Friday and Cyber Monday were record-setting days, with Cyber Monday being the single biggest shopping day in our company's history.

Overall, we are pleased with our Q3 results and the underlying strength of our business.

We continue to deliver market-leading growth at scale, driven by our commitment to our customers and informed by a long-range mindset that allows us to make decisions and investments, which maximize value.

We look forward to a busy holiday season and a strong finish to the year.

Now I will turn the call over to Mario, who will provide a more detailed review of our Q3 results and walk you through our financial outlook.

Mario?

Thank you, Sumit.

Good afternoon, everyone.

Our third quarter results highlight our business philosophy and focused execution.

Net sales reached $1.23 billion, an increase of 40% compared to $875.6 million in Q3 2018 driven by growth in our customer base, catalog expansion particularly in hardgoods and private brands, and growth in our Pharmacy business.

Autoship customer sales reached $865.2 million, an increase of 49.2% compared to $579.9 million in Q3 2018, again, outpacing growth in overall net sales.

We ended the third quarter with 12.7 million active customers, an increase of 3.1 million customers versus Q3 2018 and 2.1 million versus the end of fiscal year 2018.

As a reminder, the increase in active customers in a reporting period captures both the inflow of new customers as well as the outflow of customers who have not made a purchase in the last 364 days.

Gross margin for the quarter was 23.7%, a 410 basis point increase year-over-year, driven by gross margin expansion across all business verticals, including improvements in the margin profile of private brands and Pharmacy.

Q3 operating expenses, which are comprised of SG&A and advertising and marketing, were $370.6 million or 30.1% of net sales.

SG&A was $258.5 million or 21% of net sales.

The increase in SG&A as a percent of net sales was driven by share-based compensation, which increased $36.1 million year-over-year, and the incremental costs associated with being a public company, driven primarily by D&O insurance as well as legal and audit expenses.

Excluding these 2 items, SG&A as a percent of net sales was nearly flat year-over-year.

Recall that SG&A for us includes fulfillment labor and facilities as well as customer service costs, merchant fees and corporate payroll facilities.

I'd also like to note that the team's disciplined execution drove a 40 basis point year-over-year cost reduction, driven by improvement in labor productivity and fixed fulfillment cost, which was offset by enterprise software investments, which we believe to be short-term in nature and scalable.

Advertising and marketing was $112.1 million or 9.1% of net sales, scaling 230 basis points year-over-year.

As Sumit mentioned, our customer retention rates continue to be stable, and we are pleased that our various initiatives and investments in growth and customer experience enhancements are contributing to ongoing expansion in customer lifetime value, or LTV, which we measure as the cumulative contribution profits derived from the cohorts.

This is valuable to us, because we measure the efficiency of our new customer acquisition on the basis of LTV to CAC.

And we are observing an equal or faster payback period that continues to prove out the efficacy of our marketing investment strategy.

It may also be helpful to recall that our repeat orders from customers are profitable, and we'll reinvest those profits to acquire more new customers in a disciplined and data-driven manner, while keeping a keen eye on these marketing efficacy metrics.

Q3 net loss was $79 million, nearly flat versus Q3 2018, due to the impact of share-based compensation, which was $39.3 million in Q3 2019 and $3.2 million in Q3 2018.

Net margin was negative 6.4%, improving 260 basis points year-over-year.

Excluding the impact of share-based compensation in both Q3 2019 and Q3 2018, net loss improved $35.7 million or 47.4%.

And net margin of negative 3.2% improved 540 basis points year-over-year.

Q3 adjusted EBITDA loss was $30.2 million, an improvement of $38.4 million compared to Q3 2018.

Our adjusted EBITDA margin was negative 2.5%, improving 530 basis points year-over-year.

Improvements in both adjusted EBITDA and adjusted EBITDA margin reflects our ability to grow the top line while improving the bottom line, executing against a strategy of long-term sustainable growth and margin expansion.

As we have shared previously, our adjusted EBITDA is a managed output.

We earn profits from repeat orders, and we take those profits plus the cash we generate from our favorable working capital strategy to invest in acquiring new customers.

Free cash flow was a net use of $12.8 million in Q3 2019 and was comprised of cash from operations of positive $1.6 million and capital investments totaling $14.4 million.

In the third quarter, capital investments were primarily comprised of cash outlays for IT equipment, capitalization of internal and external labor and spend associated with our Dayton, Ohio and Salisbury, North Carolina fulfillment centers.

We ended the third quarter with $135.9 million in cash and cash equivalents.

Now I'll turn to guidance.

As we have shared previously, fiscal year 2018 was a 53-week year, while fiscal 2019 will be a 52-week year.

The revenue contribution for this 53rd week in 2018 was approximately $83 million, which will be a headwind to year-over-year growth for full year 2019, and more meaningfully, for Q4 2019 as well as a mid-single dollar headwind to fourth quarter net sales per active customer.

More information about the net sales impact of the extra week in 2018 can be found in our shareholder letter.

Finally, we expect share-based compensation, which is reported in SG&A of approximately $40 million in the fourth quarter and first 3 quarters of 2020.

We will provide additional guidance for fiscal year 2020 on our Q4 earnings call.

For Q4 2019, we expect net sales between $1.33 billion and $1.35 billion, representing year-over-year growth of between 32% and 34%, excluding the extra week in Q4 2018.

For fiscal year 2019, we are raising guidance as follows: net sales between $4.82 billion and $4.84 billion, representing year-over-year growth of 40%, excluding the extra week in fiscal 2018.

This increase in guidance reflects third quarter outperformance as well as our improved outlook for the fourth quarter.

Adjusted EBITDA margin for the fiscal year is expected to improve 440 to 460 basis points versus fiscal 2018.

This represents an increase to both the low end and high end of our previously provided guidance range.

As we have previously shared, our EBITDA guidance includes costs related to operating as a public company.

Financial and operating results through the first 3 quarters of 2019 demonstrate our ability to execute against our strategic plan and provide strong momentum as we close out 2019 and look ahead to 2020.

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

Operator?

(Operator Instructions) Your first question comes from the line of Doug Anmuth with JPMorgan.

It's Cory Carpenter on for Doug.

Our question on gross margins, up sequentially despite which is typically a seasonally lower quarter for you guys.

It sounded like Pharmacy and private label were nice tailwinds.

But could you just talk more about the initiatives having the biggest impact on overall gross margins?

And then is there anything we should think about in terms of 4Q seasonality?

Cory, this is Mario.

I'll start off the answer and then Sumit can add maybe more color as we go through.

We saw strength in pricing across the business in the quarter.

And as you can tell by what we included in the script and in the shareholder letter, we're excited about the contribution of the new verticals, both Pharmacy and private brands.

And in the quarter, we were pleased to see the impact of MAP pricing in Pharmacy in the back half of the quarter.

So the business overall is performing well.

We'd be happy to take a follow-up if you have one.

Your next question comes from the line of Lauren Cassel with Morgan Stanley.

Maybe just following up on Pharmacy, any update on what percentage of the business that should represent at the end of this year?

Any other milestones you reached in that business during the quarter that you could share?

And then just one follow-up on Black Friday, Cyber Monday.

Any commentary on the promotional environment for yourself and for competitors around those 2 days?

This is Sumit.

On Pharmacy, we're still growing the business.

And we're very happy with the way that we're growing the business.

I think the meaningful input this way -- this time is the fact that as we continue to invest behind the growth and the customer experience, we're also driving to be a meaningful and profitable franchise, which is reflected in the way that we've grown gross margins both by the support of assortment.

I think one of the hypothesis that we've said in the past is Autoship subscriber rates to Pharmacy should be higher and attractive.

And we're seeing those kind of data points start to come through.

The business is still in its growth phase.

And so we are going to continue to invest and grow it in a meaningful manner.

Not much more to comment there today.

On Black Friday, Cyber Monday promotional activity, look, I think first thing to be said is we planned diligently, thoroughly and executed flawlessly in the way that we went to market.

We were happy to see that promotional environment as far as we were concerned was relatively stable, and there's not much to mention outside of that.

Your next question comes from the line of Brent Thill with Jefferies.

This is John Colantuoni on for Brent Thill.

Revenue guidance in Q4 implies growth accelerates sequentially quite a bit even after adjusting for 1 less week.

Can you discuss the puts and takes of your Q4 revenue guidance and how we should think about the outlook in terms of your forward growth potential?

Yes.

John, this is Mario.

I'll take that one first.

When you're talking about in total, absolute dollar terms, it still implies significant growth year-over-year.

But the base is getting larger.

So just naturally, we'll see a -- as a percent -- as the revenue base gets larger, we would see a decrease in terms of percentage.

But I would say this, we -- the range for full year and by connection, for fourth quarter on the revenue side, both the low end and the high end went up in this guidance.

Great.

And we also noticed during the quarter that the first order Autoship discount fluctuated at certain periods of the quarter.

Can you discuss if this was a reflection of promotions around the holiday, a competitive reaction of some sort?

Or are you just continuing to test the right balance of promotions?

John, I think you may be referring to the temporarily -- we increased our first time Autoship order to about 60% off with a cap of about $30.

And that's just natural during the holidays.

And then when we see competitors doing something similar, we are -- we remain competitive in the market.

But that was very limited.

I think it lasted about 3 days possibly.

Your next question comes from the line of Erin Wright with Crédit Suisse.

Can you speak to your efforts to align yourself with the veterinary practices to capture greater share in pharmacy?

Where are you at in the process, or even a pilot process in terms of better partnering with the veterinarians that still control the vast majority of the scripts?

This is Sumit.

I'll take that.

Thanks for the question.

We continue to have meaningful conversations with our veterinary partners across the country.

Notice that, first, we believe that we are meaningfully contributing to health and wellness for pet and the pet space.

And there's a couple of dimensions in that answer.

One is we -- with the way that we know our customers, the way we track that information, the way that relationships are built, we have a unique ability to interact with them and educate them and make them aware of the health and wellness space, but also the advantage of taking their pets to the vet at the required frequency.

One of the things that plagues the industry today is the fact that compliance overall in the veterinarian space is lower than it really should be or could be.

And we are stepping in into the middle of that via our products like Autoship and via our deep connection with our customers and our marketing tools and our directed capabilities to be able to go out and create that education and awareness with them, drive that traffic back into veterinarian channel.

So that's one.

Number two, I think the second conversation that we're having is, look, veterinarians spend a lot of time in their offices.

Vets should be focused on taking care of their pets, and they love doing that.

And so we're stepping into that equation and developing or having conversations about developing the products and tools that will help increase productivity in the vet space.

And the early days in the conversation, and there are many different dimensions that we will consider.

And we're happy about the way that we're treating it right now.

If there is a specific follow-up, happy to take it.

Yes, I do have a -- it's quite specific, but I do have a follow-up.

So I'm curious both on the prescription side and over-the-counter side your positioning and exposure to parasiticides, particularly heading into next year.

So that would include flea, tick and heartworm preventatives, both over-the-counter and prescription.

Just heading into next year, there will be a new combination flea, tick and heartworm product that will hit the market in the first quarter.

Do you think you're at risk for some cannibalization of your OTC business?

Or how should we anticipate that will impact pricing across that category?

It is a highly seasonal category, so it will be more important kind of heading into next year.

But I guess, will this dynamic be material from a financial perspective for you?

I think, yes.

Our tenet is to bring the broadest assortment to the customers and offer it in the most competitive prices at the best experience.

And that philosophy will not change for us regardless of how the mix changes in the industry.

So we're here to play and watch the game alongside with you.

Your next question comes from the line of Mark Mahaney with RBC Capital Markets.

Just one question.

The Autoship penetration rose.

I think that was a record high.

Just, if you could please, talk to the drivers of that and how to think about that going forward?

Mark, good to hear from you.

This is Sumit.

I'll take that one.

I think the first input is the assortment growth that we are proudly positioning at 25% increase in year-over-year assortment.

A bunch of that was in consumables, a bunch of that was in hard goods.

Number two, I would attribute it to the increase in the targeting capability that we have, both driven by an improvement in our recommendation science, but also in a way that we are able to extract data from Pet Profiles to be able to make more meaningful market size recommendation at the point that the customer is interacting with us.

Last, but not least, I would point back to the newer subverticals, particularly Pharmacy in the way that these businesses are growing and starting to mix in.

Those 3 are a combination, and that's what's driving the rate.

Your next question comes from the line of Deepak Mathivanan with Barclays.

So first, on the private label business, seems like there's strong penetration already in some of the categories like hard goods.

What do you need to do to achieve similar penetration on bigger categories like consumables over the next few quarters?

And then second question on the pharmacy business gross margin.

You called out 650 basis points improvement, but how should we think about the gross margin profile of pharmacy products currently versus other categories like consumers -- sorry, consumables?

And then also, how do you expect that to be long term?

Deepak, this is Sumit.

I'll take that.

Look, the core inputs of fast growing private label, we're happy with the way that we're growing penetration of these categories.

These categories are -- in terms of the growth, our assortment built is not completely built out.

So in meaningful categories, high ASP categories such as crates, such as dog beds, we're still really rolling out assortment.

That's one in the way that we grow assortment in the way that we see penetration increasing in hard goods.

On the consumables side, I think, recall that we've said, we're careful about creating brands that are competitive in nature.

And in that way, we have great brands, products like Tylee's, behind which we're getting and making sure that these newer type subcategories, right -- we've mentioned freeze-dried here and natural bones and chews.

These are really premium categories that we're getting behind to be able to grow them into a meaningful share.

And then last, but not least, our American Journey brand of products, which is a full suite of products across food of different grades as well as different treats, is something that we are starting to integrate back into our merchandising to go to market in a much more coherent and smart merchandise manner.

So that's the answer to the private brands.

On the Rx, I think recall that we've said that over the long term, we expect Rx to be 300 to 500 basis points gross profit accretive to the base business.

And we're maintaining that stand as of today's call.

Your next question comes from the line of Brian Fitzgerald with Wells Fargo.

A couple of questions.

It's been a couple of quarters or 1.5 quarters since you put the new DMP in place.

How would you grade your integration and execution there?

Any color on what you're seeing in terms of channel breadth or exercising more strategic and tactical marketing muscles as we progress through Q4?

And then on the -- you talked a bit about the RxManager.

Did you mention what the penetration is there and maybe what customer acquisition channels are giving you the most bang for the buck there?

Sure.

So 2-part question, DMP in general and then Pharmacy.

I'll take the first one first.

DMP, so we are seeing -- we're continuing to experiment with the DMP.

And we have utilized it both in our private brands segmentation exercises as well as our go-to-market with Pharmacy.

And these are smaller verticals, but they're allowing us to prove out the efficacy of the DMP.

In the holiday season, particularly when we went to market across the Cyber Week, we did use the DMP to be able to cross-check against smart segmentation.

And so from that point of view, early days for us, not much more than that to comment.

But you can see, it lends you insight into the way that we're utilizing the data and the capability of the management -- data management platform to be able to perform smart segmentation and tie that to our marketing channel mix and go-to market overall.

That's the first part of the answer.

The second question was on RxManager progress.

Look, we believe we are early days in terms of product innovation across Rx products.

We're happy with the way My Pet Prescriptions is going.

And as of this point, about 10% to 15% of our customers are engaging with it.

And that is pretty tremendous progress, considering that we launched that product less than 4 months ago.

In terms of customer acquisition channels that are performing best, I think the way I would say that is that we have a tremendous proposition in front of us to be able to make sure that we can expose our 12.7 million existing customers to Pharmacy.

And they love that proposition.

Along the same way, we've opened up a channel that is a new channel of acquisition for us, and we're happy about that as well.

I think that's -- I will limit my comments to that for now.

Your next question comes from the line of Mark Kelley from Nomura.

The first question is, looking back at Q4 of last year, I think that was the first quarter where you guys stepped up your first Autoship order discount at 30% from 15%.

Curious if you could remind us how much of a bump do you think that provided to annual growth last year, just to kind of level set?

And then number two, I know it's a little early to think about next year.

You gave us a little bit of color on some of the stock-based comp stuff, which is helpful.

Just curious if you can give us a little bit of help on the seasonality and cadence of gross margins next year.

I would imagine it's similar to this year, given that you're launching the North Carolina FC in Q2, and it's kind of the same size as Dayton.

But any thoughts there would be really helpful.

Okay.

I'll take the first one.

It's nice to hear from you, Mark.

I'll take the first one.

Mario will take the second one.

The Autoship, the way to think about that, it's actually not a clean way to think about it in the way that you're asking the question.

Autoship, remember, is a 4-quarter rolling number in the back.

So our increase -- look, we are extremely data-driven, disciplined and we spend cash in a responsible manner.

So when we change discount levels, we are careful about not only the subscription rate that comes in at the top of the funnel, we're also careful about the cancellation rate that might occur at the bottom of that funnel.

And we're trying to find that point of optimality where we actually go out and price the Autoship discount and cap it to the dollar value.

That's how we think about it.

So the level that we're at right now is the optimal level for us, and we're happy about that.

That's really the way to think about Autoship.

Mario?

Yes.

And I'll take the question on stock-based compensation.

So 2 things about it.

I believe your question is, what should you expect on that going forward.

And as we said in the prepared remarks, the expense of $40 million is something that we capture both in Q2, Q3, and we expect in Q4 and at least the first 3 quarters of 2020.

I can expand on that if you have any additional question.

Yes, sir.

I meant more gross margin, Mario, sorry about that.

Got it.

Yes.

Just with Dayton -- with North Carolina coming on and just kind of the moving pieces as we go through the year, that would be great.

Yes, certainly.

I think your question then on next year, 2 things.

One is there are many factors that go into gross margin.

And what we've shown is that we can expand gross margin while continuing to grow the top line.

We have shown a record of that.

Seasonality, we don't experience much with seasonality in the business, as you've seen in our historical financials.

But quarter-to-quarter, you would expect some fluctuations, and that's driven by discounting, market dynamics.

The fact that we're launching a new facility in North Carolina would be helpful, like every other facility we've launched.

It helps close the arc to the customer.

But the reality is that there are so many other factors, not necessarily related to that specific -- not to the, let's say, network topology, let me put it that way.

Your next question comes from the line of Erin Wright with Crédit Suisse.

Great.

So my first one is on FDA warnings on grain-free dog food that caused canine cardiomyopathy.

I guess, do you think that, that has created an opportunity for you to switch customers over to higher-margin, private label or premium options that are not grain-free?

And has this caused any sort of disruption or opportunity for you?

And then a separate question is on MAP pricing.

I guess, how much did that benefit consolidated gross margin, and when will you officially lap that benefit next year?

I'll take the second question first.

The MAP pricing that we talked about, I believe, is in Pharmacy, and it just came into perspective, about roughly 6 to 8 weeks ago.

So not much more to comment there.

On the FDA warnings on grain-free dog food, look, it definitely provides us an opportunity, because we're having meaningful conversations with customers as they call in.

And that is one of the strength of the Chewy business model as well as our proposition to our customers.

The impact that we're seeing is proportional to the impact that the industry has seen.

But our ability to be able to have meaningful conversations and drive the right amount of recommendation and mix shift is also something that is really attractive to us.

Yes, both of those are happening.

There are no further questions at this time.

I will turn the call back over to Sumit.

Thank you all for your attention and participation today, and happy holidays.

We look forward to seeing many of you to the rest of the quarter.

Have a nice evening.

Thanks.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.