Chewy(CHWY) - 2024 Q2 - Earnings Call Transcript

Financial Data and Key Metrics - Q2 net sales grew by 3% to $2.86 billion, at the high end of guidance [5][14] - Autoship customer sales grew 6$2.2 billion, representing 78.4% of total net sales, up 230 basis points YoY [5][15] - Net sales per active customer (NSPAC) reached a record $565, growing 6.2$145 million in adjusted EBITDA [8][18] - Free cash flow was $91.5 million, with$695 million in cash and marketable securities at quarter-end [10][18] Business Line Performance - Autoship program continues to drive engagement, with 78% of net sales coming from Autoship customers [5][15] - Chewy Vet Care clinics expanded to six locations, with early indicators showing strong customer acquisition and cross-category shopping behavior [10][11] - Sponsored Ads business is on track to reach the low end of the long-term target of 1%-3% of net sales by the end of 2024 [12] - Mobile app orders increased 15% YoY, with unique customers placing orders through the app up 13% YoY [6][7] Market Performance - Active customers grew modestly to 20 million, with net ads growing sequentially for the first time since Q1 2023 [7][14] - Canada market is performing as expected, with mid-to-high teens traffic coming from Ontario and strong customer engagement through the app [29] - Pet adoptions remained up in the low-teens YoY, while relinquishments were down low to mid-single digits YoY, indicating improving trends in pet household formation [25] Strategic Initiatives and Industry Competition - Chewy Vet Care is serving as an acquisition funnel, with net new customers acquired through clinics exceeding expectations [11] - Sponsored Ads are benefiting from inventory expansion, advertiser demand growth, and improved customer relevancy [12] - The company is focusing on mobile app improvements, with less than 20% of orders currently transacting through the app, compared to a target of over 60% [40][41] - Competitive trends remain stable, with Chewy effectively competing in consumables and health categories, while hard goods have stabilized [60][61] Management Commentary on Operating Environment and Outlook - Management highlighted the predictability and durability of the business model, even in a normalizing market [14] - The company expects gross margin to continue expanding as higher-margin businesses become a larger portion of total sales [8] - Full-year 2024 guidance includes net sales of $11.6-$11.8 billion (4%-6% YoY growth) and adjusted EBITDA margin of 4.5%-4.7%, up from previous guidance [20][21] - Management remains optimistic about returning to active customer growth in fiscal 2025 [26] Other Important Information - The company repurchased 17.6 million shares for $500 million from BC Partners and 1.3 million shares under its$500 million share repurchase program [19] - SG&A expenses improved by 100 basis points YoY to 18.8% of net sales, driven by fulfillment center automation and operational efficiencies [16] - Adjusted net income was $104.8 million, up 62$276 million [17] Q&A Summary Question: Trends in pet adoptions and expectations for active customer growth in fiscal 2025 [24] - Pet adoptions remained up in the low-teens YoY, while relinquishments were down low to mid-single digits YoY, indicating improving trends in pet household formation [25] - Management expects to return to active customer growth in fiscal 2025, driven by the value proposition of new products and services [26] Question: SG&A trends and international market performance, particularly in Canada [27] - SG&A expenses improved by 100 basis points YoY, with expectations for relatively flat SG&A going forward [28] - Canada is performing as expected, with strong app engagement and mid-to-high teens traffic from Ontario [29] Question: Changes in the consumer journey and competitive environment [32] - The secular trend towards e-commerce continues, with Chewy well-positioned to capture market share [34] - Competitive trends remain stable, with Chewy effectively competing in consumables and health categories, while hard goods have stabilized [36][60] Question: Mobile app improvements and future investments [39] - Mobile app orders increased 15% YoY, with unique customers placing orders through the app up 13% YoY [6][7] - The company aims to increase app order penetration from less than 20% to over 60% over time [40][41] Question: Monthly trends and hard goods performance [43] - Monthly trends were in line with expectations, driven by the predictability of Autoship and consumables [43] - Hard goods have stabilized, with sequential improvement in active customers and pet household formation [44] Question: Contribution of Canada to net ads and mobile app order trends [45] - Canada remains immaterial to overall customer base growth, with net ads driven by new customer acquisition and reactivation efforts in the U.S. [45] - Mobile app order trends are improving, with the company focusing on funneling mobile web users to the app [47] Question: Margin trends and marketing spend as active customer growth returns [49] - The company is acquiring higher-quality customers, with strong NSPAC curves and improved conversion rates [50] - Margin expansion is driven by Sponsored Ads, healthcare mix, and fulfillment center efficiencies [52] Question: Net ads trends and gross margin drivers [54] - Net ads are expected to be flat to slightly up in the second half of 2024, consistent with previous guidance [55] - Gross margin expansion is driven by Sponsored Ads, healthcare mix, and fulfillment center efficiencies [56] Question: Competitive trends and vet recruitment for Chewy Vet Care [60] - Competitive trends remain stable, with Chewy effectively competing in consumables and health categories, while hard goods have stabilized [60] - Vet recruitment is driven by the Chewy brand, career growth opportunities, and technology that reduces back-office work [62][63]