Highlights:

Paws for the Cause

Prepared Remarks:

Operator

Hello and welcome to the Chewy fourth quarter FY ’23 earnings call. My name is Elliott, and I’ll be coordinating your call today. [Operator instructions] And I’d like to hand over to Jen Hsu, the vice president and head of investor relations. The floor is yours.

Please go ahead.

Jen Hsu — Vice President and Head of Investor Relations

Thank you for joining us on the call today to discuss our fourth-quarter and full-year results for fiscal year 2023. Joining me today are Chewy CEO, Sumit Singh, and CFO, David Reeder. 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 financial results and performance, industry trends, strategic initiatives, and the environment that we operate in.

Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks, uncertainties, and other factors described in the section titled Risk Factors in our annual report on Form 10-K and 8-K filed earlier today and in our other filings with the SEC, which could cause actual results to differ materially from those contemplated by our forward-looking statements. Reported results should not be considered an indication of future performance. Also, note that the forward-looking statements on this call are based on information available to us as of today’s date. We disclaim any obligation to update any forward-looking statements except as required by law.

Questions and Answers

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Call Participants

Also, during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided on our Investor Relations website and in our earnings release and letter to shareholders, which were filed with the SEC earlier today. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise stated, all comparisons discussed today will be against the comparable period of fiscal year 2022.

Finally, this call in its entirety is being webcast on our Investor Relations website. A replay of the webcast will also be made available on our Investor Relations website shortly. I’d now like to turn the call over to Sumit.

The Strategic Growth Framework

Sumit Singh — Chief Executive Officer

Thanks, Jen, and thank you, all, for joining us on the call today. Before we cover our fourth-quarter and full-year 2023 results, I’m thrilled to welcome David Reeder, who joined us in February as our Chief Financial Officer. Dave is a key addition to our leadership team, and I look forward to having many of you engage with him in his new role. I would also like to thank Stacy Bowman for her support as interim CFO. Now, let’s review our results.

The team delivered a strong finish to the year with our fourth-quarter and full-year 2023 performance demonstrating our ability to deliver market share, gaining growth while expanding margins and accelerating free cash flow generation. I will provide an overview of our performance, followed by some perspectives on the pet industry and Chewy’s strategic priorities as we embark on 2024. Dave will then discuss our financial results in greater detail and share our guidance for the year.

Q4 net sales increased by 4% to $2.83 billion, resulting in full-year 2023 net sales of $11.15 billion, representing 10% year-over-year growth. Our favorable mix of nondiscretionary consumables and health categories continues to be a pillar of strength for Chewy, representing approximately 85% of full-year 2023 net sales. Additionally, our autoship subscription program, which delivered $8.5 billion of autoship customer sales in full-year 2023, continues to provide unparalleled convenience for pet parents, enhancing customer stickiness for Chewy.

Progressing through the P&L, we are incredibly proud of our ability to deliver consistent profitability expansion over time. Our gross margin exceeded 28% for both the fourth quarter and the full year of 2023, representing an improvement over the prior year period. As planned, our sponsored ads program also ramped up throughout the latter half of the year, supporting our gross margin performance. We achieved an adjusted EBITDA margin of 3.1% for the quarter and 3.3% for the full year, a continued improvement relative to full-year 2022.

Our results reflect our ability to deliver improved profitability steadily even while investing in growth initiatives expected to deliver long-term value to shareholders. Finally, expanding margins coupled with disciplined capital spending has allowed us to generate meaningful levels of free cash flow.

We exceeded our 2023 free cash flow expectations and generated over $340 million of free cash flow, nearly three times our 2022 free cash flow. We have reached an exciting inflection point in this area and expect to generate substantial free cash flow moving forward. As we close the chapter on 2023, let me spend a few moments framing our view on the pet industry and Chewy’s outlook.

Chewy’s Anticipated Growth and Strategic Vision for Fiscal Year 2024

No Dogs, Just Growth: The Canine Corridor in Retail

The year 2023 was a transformative period for Chewy as it staked its claim in the burgeoning Canadian pet market valued at $10 billion. The pet industry, known for its resilience during economic downturns and embrace of online shopping, stands as an inviting pasture for the pet retailer giant, Chewy.

Historical Insights: Paws-ing to Reflect on Industry Growth

Stepping back to assess the historical perspective, the pet industry has demonstrated steady growth over decades, dancing to the tune of mid-single digits annually. The industry’s growth thrived on the marriage of unit and pricing growth, bolstered by a trend towards premiumization. Looking ahead, similar growth patterns are projected to continue, albeit with some nuanced changes in the air.

Forecasting the Future: Slowing Down but Not Out

In the fiscal year 2024, expectations paint a picture of subdued industry growth below the historical average. Factors such as tepid unit growth due to lagging pet household formations and stable pricing indicate a year of modest industry expansion, setting the stage for a return to normalcy in 2025.

Growing Pains: Resilience Amidst Industry Woes

Regardless of the industry landscape, Chewy remains poised to capture market share in 2024 with a laser focus on profitability. The company anticipates sustained growth in adjusted EBITDA margins through economies of scale, augmented by the Chewy health segment and strategic retail initiatives.

Beyond Kibble: The Evolution of Chewy’s Strategic Roadmap

Looking towards sustainable growth avenues, Chewy’s strategic initiatives, like the Chewy Vet Care clinics, are set to broaden the company’s Total Addressable Market (TAM) by $25 billion in the $47 billion U.S. pet health arena. The addition of Chewy Vet Care aligns seamlessly with Chewy’s ecosystem, underpinned by a proprietary health tech platform and a suite of integrated services.

Unleashing Innovation: Paw-sibilities on the Horizon

The unveiling of Chewy’s Vet Care clinics marks a milestone moment, revealing the company’s foray into an untapped segment of the market. With a focus on customer experience and operational efficiency, Chewy charts a path towards meaningful and sustained growth.

Clawing for Success: Financial Fortitude and A Tail-Wagging Future

As the Chief Financial Officer, David Reeder, notes Chewy’s robust financial performance in terms of net sales growth and margin expansion. Anchored by a subscription-like revenue stream and a loyal customer base, Chewy’s financial outlook remains strong, setting the stage for burgeoning profits and value creation.

Chewy Revolutionizes Financial Landscape with Stellar 2023 Performance and 2024 Projections

Unveiling Impressive 2023 Achievements

Chewy recently disclosed its financial performance for the year 2023, showcasing remarkable growth and strategic initiatives. The company’s gross margin expanded by 40 basis points, attributed to the successful launch of sponsored ads, which saw significant traction in the final quarter of 2023 and is expected to drive further growth in 2024.

Strategic Financial Insights

The discussion delved into Chewy’s operating expenses (opex), revealing that SG&A expenses for the company totaled 565.4 million, amounting to 20.2% of net sales for the fourth quarter of 2023. Notably, the discussion excluded share-based compensation expense and related taxes from the SG&A calculations.

Focus on Profitability and Cash Flow Generation

Chewy highlighted its ability to increase adjusted EBITDA margins while investing in strategic growth initiatives. The company reported a substantial growth in free cash flow, with 2023 witnessing a significant rise to 342.9 million, nearly tripling the previous year’s figures. Chewy’s disciplined approach towards capital expenditures, representing about 1.3% of net sales, aligned closely with its financial objectives.

2024 Outlook and Projections

Looking ahead to 2024, Chewy expressed confidence in its ability to sustain growth and profitability. The company expects net sales for the first quarter to range between 2.84 billion and 2.86 billion, signaling a 2% year-over-year growth, with full-year estimates projecting net sales between 11.6 billion and 11.8 billion for a 4% to 6% year-over-year growth.

Chewy anticipates a full-year 2024 adjusted EBITDA margin of approximately 3.8%, driven by further gross margin expansion and SG&A leverage. With a focus on enhancing cash flow generation and aiming for a free cash flow conversion above 80%, Chewy aims to deliver attractive returns to its shareholders.

Optimistic on Strategic Initiatives and Market Impact

Embracing forward-looking optimism, Chewy emphasized its commitment to executing key strategic plans outlined at Chewy’s Investor Day. The company highlighted initiatives like Chewy Vet Care as drivers of future growth and profit enhancement in the pet industry. Chewy remains dedicated to margin expansion, enhanced free cash flow, and generating value for its investors.

Insights from Q&A Session

During the question-and-answer session, executives elaborated on revenue growth dynamics for 2024, emphasizing volume-driven growth in a stable pricing environment. They shared insights into customer trends, indicating a balanced outlook amidst macroeconomic uncertainties impacting pet household formations.

The discussion showcased Chewy’s strategic approach to financial management, projecting strong cash flow generation and profitable growth prospects for the year ahead.

Q&A Excerpts

Operator:
Thank you. [Operator instructions] Your first question comes from Doug Anmuth with J.P. Morgan. Your line is open. Please go ahead.

Doug Anmuth — JPMorgan Chase and Company — Analyst
Thanks so much for taking the questions. I have two. First, Sumit and David, can just talk about the ’24 revenue growth, obviously, starting with 2% outlook in 1Q, but perhaps you can talk about what drives the confidence and acceleration as you go through the course of the year?

David Reeder — Chief Financial Officer
Yeah. So, hi, Doug. It’s a pleasure to meet you virtually. Look forward to meeting you in person as we work through the coming quarters.

Sumit Singh — Chief Executive Officer
On customers, Doug, the situation is quite — quite similar, actually. So, when you look at kind of the discretionary environment is essentially holding back on our side, it’s impacting roughly kind of 300,000.

Unveiling Bright Horizons: A Dive into Financial Growth

Sumit Singh — Chief Executive Officer

Our journey into the heart of financial buoyancy unveils a tapestry of stability illuminated by the glow of operational prowess. Seated at the helm, we unveil a story of resilience amidst uncertainty, where the ripples of our actions echo through the waters of prosperity.

Stability Amidst Turmoil

In the wake of turbulent tides brought by the pandemic, our cohorts have found solid ground, with each wave stabilizing to reveal a promising horizon. As the numbers dance on the charts, the narrative weaves tales of steadfast reactivation, painting a portrait of growth that transcends mere numbers.

A Symphony of Business Expansion

Embracing the realm of premium businesses with open arms, we witness an unyielding surge in customer engagement. The acquisition of premium consumables and health supplements echoes like a crescendo, resonating with the harmonious melody of customer loyalty and participation. The allure of autoship beckons, enticing a vibrant cadence of signups into its fold.

Charting New Territories in Advertising Revenue

Amidst the labyrinth of advertising revenue opportunities, we navigate the terrain with precision and vision. The landscape unfolds with a mosaic of on-site and off-site ad revenue, crafting a symphony where margins flow gracefully to the bottom line. Supplier participation and healthy ROAs set the stage for a performance punctuated by consumables, hard goods, and health, while regulatory constraints stand as vigilant guards of integrity.

A Glimpse into Cohort Analysis

In the realm of cohort analysis, the pulse of NSPAC beats to the rhythm of health and autoship. The intricate dance of growth unfurls its petals, driven by organic efforts that have shaped our trajectory. As NSPAC’s story unfolds, a tale of pure expansion emerges, devoid of the shadows cast by pricing or inflation, standing as a testament to the power of autoship and health.

Quest for Profitability

In the pursuit of profitability, we embark on a philosophical quest, charting a course toward the shores of incremental margins and operational leverage. The path to a 10% EBITDA margin beckons, whispering promises of free cash flow generation that glisten like treasures in the sunlit waters of financial success.

The Tail Wagging the Stock: A Deep Dive into Pet Industry Growth and Margin Expansion

Driving Forces Behind Gross Margin Expansion

In a recent financial call, executives from the leading pet-focused online retailer dived into the intricate details of their strategy to magnify margins. The company highlighted various factors contributing to the expansion of gross margins, emphasizing their ability to leverage existing infrastructure as they witness a surge in volume. As the infrastructure reaches critical mass, the company finds itself in a favorable position to benefit from incremental volume, with fixed costs showing a higher absorption rate.

The Power of Product Mix

In addition to infrastructure efficiencies, the company pointed to the positive impact of product mix on gross margins. By delving into new territories like healthcare and pharmacy products, the company is not only broadening its offerings but also elevating its overall margin performance.

Sponsored Ads and Future Projections

Furthermore, sponsored ads were identified as a key player in the quest for greater revenue. The company highlighted a significant uptick in sponsored ads in the fourth quarter and expressed intentions to bolster this strategy in the forthcoming quarters of 2024, indicating a solid revenue stream on the horizon.

Navigating Operating Expenses and Capital Expenditures

While the focus on margin expansion is paramount, the company also sheds light on their strategic investments in operating expenses. With plans to scale core expenses and venture into new territories like Toronto and vet care, the company aims to strike a delicate balance between growth and profitability.

Guidance on Capital Expenditures and Free Cash Flow

Addressing concerns about capital expenditures, the company provided guidance on maintaining a prudent range relative to net sales. Despite falling slightly below the mark in the previous year, the company remains optimistic about generating robust free cash flow in the foreseeable future.

Industry Insights and Market Dynamics

Reflecting on the broader pet industry landscape, the company’s CEO touched upon prevalent trends and challenges facing the market. From promotional activities to evolving consumer behaviors, the CEO painted a comprehensive picture of the industry’s trajectory moving forward.

Post-Pandemic Normalcy and Growth Trajectories

Highlighting the return to pre-pandemic promotional norms, the CEO expressed confidence in the industry’s ability to stabilize in the coming year. With a shift towards mainstream products and steady growth in the healthcare segment, the pet industry appears poised for balanced growth in the post-pandemic era.

Strategic Positioning and Market Share Gain

Amidst fluctuating adoption rates and consumer preferences, the company remains steadfast in its commitment to consumables and healthcare segments, where significant market share gains have been observed. By strategically positioning itself in high-growth categories, the company aims to capitalize on future market dynamics.

Driving EBITDA Margin Expansion and International Expansion

Delving into the specifics of EBITDA margin expansion, the company outlined key drivers and growth catalysts to achieve the guided 50 basis points expansion. By honing in on gross margin optimization and operational efficiencies, the company aims to achieve sustainable margin growth while carefully navigating international expansion challenges.

With a keen eye on sustainable growth and strategic investments, the company remains poised to capitalize on the pet industry’s evolving landscape, promising a tail-wagging performance for investors in the upcoming quarters.

Chewy Inc: Navigating Growth and Competition in 2024

Riding the Wave of Expansion

Chewy Inc, the online pet retailer, is charting a steady course through the tumultuous waters of the business world in 2024. CEO, Sumit Singh, highlights the company’s focus on expanding into healthcare, pharmacy, and services as part of their strategic growth plan. This diversification not only enriches Chewy’s business offerings but also adds strength to their corporate margins.

Switching Gears: Sponsored Ads and Profitable Growth

One key area of focus for Chewy’s growth strategy lies in sponsored ads. With a significant uptick in sponsored ad investment announced in the fourth quarter of 2023, Chewy anticipates continued growth in this sector throughout 2024. This strategic move is projected to contribute positively to Chewy’s overall expansion and profitability.

Competitive Landscape: A Noteworthy Terrain

When it comes to the competitive landscape, Sumit Singh emphasizes that while promotional intensity may have heightened recently, competitive pressure remains within expected bounds. Despite the rise in Cost Per Clicks (CPCs) by 14 to 16% in the last quarter, Chewy’s market presence and focus on nondiscretionary categories provide a sturdy foothold against competitors like Walmart and Amazon.

Even with intense competition, Chewy’s differentiation stems from its holistic approach to serving pet parents, strong customer loyalty, and a robust ecosystem of pet health services and products. Such differentiation positions Chewy favorably for the challenges and opportunities that 2024 may bring.

Financial Fortitude and Forward Momentum

Chief Financial Officer, David Reeder, delved into Chewy’s financial performance, noting a 40 basis points expansion in gross margin year-over-year. The company’s ability to translate this gross margin growth into EBITDA margin expansion reaffirms Chewy’s commitment to profitability amidst ongoing investments.

Despite some challenges with year-end expenses impacting Q4 adjusted EBITDA, Chewy remains optimistic about their ability to deliver profitable growth. Sumit Singh echoes this sentiment, highlighting the successful self-funding of growth initiatives in 2023 and outlining continued investment in future growth prospects for 2024.

Steering Towards Success

With a firm grip on their growth trajectory, Chewy Inc’s outlook for 2024 is one of resilience, adaptability, and strategic innovation. By leveraging their existing strengths, investing in new avenues, and maintaining a keen eye on the competitive landscape, Chewy aims to not just navigate but thrive in the dynamic markets of the new year.

The Chewy Chronicles: Unveiling a Promising Financial Future

Financial Prospects Shine Bright

In his recent address, Chief Financial Officer David Reeder painted a picture of immense promise for Chewy, emphasizing the alignment of business performance trajectory with his initial expectations. Delving deep into the guts of the financial machinery, Reeder lauded the consistency, predictability, and repeatability of Chewy’s revenue stream, identifying them as crucial markers that validate his investment thesis. The CFO’s excitement was palpable as he highlighted the world-class infrastructure and the company’s forthcoming potential to churn out more volumes without significant capital expenditure, hinting at a future brimming with increased free cash flow.

Exploring Margin Opportunities

Reeder’s enthusiasm further extended to the significant margin opportunities that loom on Chewy’s horizon. As the company diversifies its business beyond healthcare, there lies a wealth of untapped potential waiting to be harnessed. The roadmap ahead, adorned with avenues to penetrate direct vet care, expand internationally, and introduce new services, looks promising, projecting a landscape ripe for the picking.

CEO’s Vision of Growth

Chief Executive Officer Sumit Singh, while acknowledging the challenges posed by weak household formation, exuded confidence in Chewy’s ability to sustain customer growth through various avenues. Singh pointed to the migration of customers in burgeoning categories like pharmacy as a testament to the company’s resilience and adaptability. The CEO also shed light on Chewy’s continuous endeavors to innovate and capture new markets through the introduction of novel marketing channels and the launch of service verticals, all aimed at bolstering customer acquisition and retention.

Building on a Strong Foundation

With unwavering focus on both macroeconomic factors and controllable variables, the leadership at Chewy remains steadfast in their commitment to leaving no stone unturned. The incendiary amalgamation of visionary strategies, operational prowess, and customer-centric approach propels Chewy toward a future where growth and profitability intertwine, sculpting a narrative of triumph in the competitive landscape of pet e-commerce.