Ladies and gentlemen, thank you for standing by, and welcome to the Chewy Fourth Quarter and Full Year 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [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, Bob LaFleur, Vice President of Investor Relations and Capital Markets. Thank you. Please go ahead.

Thank you for joining us on the call today to discuss our fourth quarter and full year 2019 results. Joining me today are Chewy’s CEO, Sumit Singh; and CFO, Mario Marte. Our earnings release and letter to shareholders, which were filed with the SEC on Form 8-K earlier today, have been posted to the Investor Relations section of our Web site, investor.chewy.com. A link to the webcast of today's conference call is also available on our site. On our call today, we will be making forward-looking statements, including statements concerning Chewy's future prospects, financial results, business strategies, industry trends and our ability to successfully respond to business risks, including those related to the spread of COVID-19, including any adverse impacts on our supply chain, workforce, fulfillment centers, other facilities, customer service operations and future plans. 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 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. For further information, please refer to the risk factors and other information in Chewy's 10-K and 8-K filed with earlier today, and in our other filings with the SEC. 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 Web site and in our earnings release and letter to shareholders which were filed with the SEC on Form 8-K earlier today. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, as a reminder, prior period results this quarter include an extra week. So on an as reported basis, Q4 2019 results reflect 13 weeks of operations while Q4 2018 results reflect 14 weeks. Likewise, full year fiscal 2019 results reflect 52 weeks of operations while full year fiscal 2018 results reflect 53 weeks of operations. In our reported results for Q4 and full year fiscal 2018, the extra week contributed $82.9 million in additional net sales, which included $49.1 million of Autoship customer sales. For comparability during our call today, all year-over-year growth rates discussed regarding net sales, Autoship customer sales and net sales per active customer reflect comparable 13 or 52-week periods. Finally, this call in its entirety is being webcast on our Investor Relations Web site. A replay of this call will also be available on our IR Web site shortly. I'd now like to turn the call over to Sumit.

Thanks, Bob, and thanks to all of you for joining us on the call. Before I get started, I want to welcome Bob to the Chewy team. He brings extensive experience on both the sell side and Investor Relations areas and we are excited to have him on the team as we enter our second year as a public company. While 2019 closed on a high note and 2020 got off to a similarly strong start, suddenly the world changed in a big way. As we have seen, the COVID-19 outbreak has caused significant disruption to global commerce and financial markets. Our hearts go out to those directly affected by this disease and those suffering from the economic and social dislocations that have followed in its wake. It is in times like these when our mission to be the most trusted and convenient online destination for pet parents everywhere rings truer than ever. As pet parents, we know how special and comforting the bond is between humans and pets, especially in these stressful times; how soothing a simple act like a game of fetch with your dog or curling up on the couch with your cat can be. We devote ourselves everyday to supporting these special relationships. We are here for our pet parents and their pets, working 24/7 to meet their needs while caring for the safety and well being of our team members. Our shop-at-home business is proving resilient amidst the current economic disruption. Our volumes have increased as customers have chosen to stay at home and take advantage of the shopping convenience that we provide. We will discuss the financial impact of current trends and our guidance a little later in this call. Taking care of our team members’ health and well being is essential to all…

Thank you, Sumit. Good afternoon, everyone. Our fourth quarter results highlight our disciplined execution and the power of a customer-centric model combined with the convenience of e-commerce in the pet category. Fourth quarter net sales reached $1.35 billion, bringing our total fiscal 2019 net sales to $4.85 billion. Removing the impact of the extra week in the fourth quarter last year, this represents 35% growth in the quarter and 40% growth for the year driven by continued growth in our customer base and net sales per active customer. Autoship customer sales growth outpaced overall net sales growth for both Q4 and full year 2019. Autoship customer sales for the fourth quarter 2019 were $954.2 million, representing 70.4% of total net sales and reflected 40.8% growth compared to the fourth quarter of 2018. Autoship customer sales for the full year were $3.36 billion, 69.4% of total net sales reflecting 37.9% growth compared to 2018. We ended the fourth quarter and year with 13.5 million active customers, an increase of 2.9 million customers versus the end of fiscal year 2018. The increase in active customers is new customers added in the period minus any customers who have not made a purchase in the last 364 days. Net sales per active customer for fiscal 2019 increased 10.4% year-over-year to $360. As a reminder, net sales per active customer for any period equals that period’s trailing fourth quarter net sales divided by the number of active customers at the end of set period. Net sales per active customer in fiscal 2018 and first three quarters of 2019 benefited by approximately $7 to $8 dollars from the inclusion of the extra week in Q4 2018 without any corresponding increase in active customers. Q4 gross margin increased 320 basis points to 24.1%. For the full year,…

[Operator Instructions]. Your first question comes from Lauren Cassel with Morgan Stanley. Your line is open.

Great. Thanks so much. I wanted to ask about the acceleration that you’ve seen since late February. Maybe give us some color on what the key drivers of that acceleration have been? Has it been existing customers placing large orders or ordering more frequently or have you actually seen an acceleration in new customer growth over the past four to five weeks?

Hi, Lauren. It’s Sumit. I’ll take that. So, first of all, I think as we anticipate, our business continues to be recession resilient during this time and we’re proud to be serving millions of customers who are relying on us. We’ve seen – the acceleration in demand and the elevated demand patterns are coming from both sides. We’ve seen our existing customers, 13.5 million of them, order in but we’ve also seen a meaningful lift in new customers coming in through the platform. So at this point, it’s a combination.

Okay, great. And then just any incremental color on – not specific numbers, which is sort of the cadence of the acceleration, was there a peak maybe two weeks ago when things had moderated a bit? Are you still seeing really strong demand even this week?

We are continuing to seeing strong demand through – as Mario mentioned in his script – through the end of February up until as of yesterday.

Great. Thanks so much.

Your next question comes from Doug Anmuth with JPMorgan. Your line is open.

Thanks for taking the questions. First, I just wanted to ask about gross margins. We saw the 320 basis points of year-over-year expansion. Can you just update us where you are on private label and how big you think that can become? And then anything to specifically point out in terms of where you saw some other leverage and scale with partners? And then just on the COVID-19 impact, just trying to understand kind of your view and confidence in your ability to handle the extra demand? I understand why you wouldn’t give guidance for the full year, but given the fact that you’re two-thirds through the quarter, as you pointed out, why not give a 1Q profit guide? Thanks.

Hi, Doug. This is Sumit. I’ll take that one. So private brands continue to be a strategic vector for us. We continue to see private brands grow at the rate of 1.5x. We also continue to see private brands improve their profit margin roughly 500 basis points year-over-year. And most of that was led by our focus on hardgoods, because as you remember from our strategy we are careful about going into market not creating one-for-one SKU where customers might have loyalty to certain brands but where product lines are commoditized or where we can find differentiated value proposition, we are opportunistic about offering that assortment and convenience to customers. So that’s how I would look at that. In terms of COVID – your second question was – handling the extra demand. Can you repeat the second question, Doug?

Confidence in handling the extra demand that you’re seeing in terms of fulfillment in the warehouses and then why not at least guide at profitability for fiscal 1Q.

Okay. So super proud of the internal team at Chewy at this time coming together in the way that we have. We continue to take care of our team members and our team members continue to take care of our customers. Of course, demand requires executing to it and we’re executing to our demand. We don’t have concerns. All of the controllable factors which we control and maniacally focused on and we believe our ability to execute is – and confidence towards executing that demand remains high. In terms of not guiding to profit, we believe that we’re still in a rapidly evolving situation. We’re seeing headwinds and tailwinds that might – that do not provide us the full clarity at this time. For example, we’re making meaningful investments in personnel to make sure that our employees feel valued at this time and we’re also investing in making sure that we are hiring 6,000 to 10,000 more people during this time. So our level of operation and investment is as you would expect to see during peak periods. We’ve also invested in elevated sanitization and cleaning procedures. On the flipside, if you look at the demand side, we’re seeing increased AOE [ph] and increased participation from customers but we’re also seeing an increased meaningful lift in new customers that actually – where we have to provide first time discounts and ownership discounts that are going out. And then finally, we’re just not sure of any kind of disruptions that might occur from this point onwards. So at this point we don’t believe it’s prudent to provide proper guidance.

Is that 6,000 to 10,000 you mentioned, is that all in fulfillment centers or is some of that in customer service as well?

It is primarily in fulfillment centers to handle the demand shock that we’ve seen, we’re seeing slightly elevated levels of backlog and to handle that backlog we’re upping our forecast at this point for labor, which we’re proud of. Supporting employment at this time in the marketplace is something that we’re proud that we’re doing.

Great. Thank you, Sumit.

Your next question comes from Brian Fitzgerald with Wells Fargo. Your line is open.

Thanks, guys. I wanted to ask about stock-outs and extended shipping times, what impacts that’s having on demand? It does not seem to be dissuading purchases. We’ve done some simple polling and it says, hey, I may not be getting the beef but I’m switching over to chicken, that type of thing. Can you talk about is it dissuading purchases or causing breakage or is it instead a substitution maybe into more private label, can you unpack that a bit for us?

Sure. So we’ve seen no material disruption to supply chain or customer ordering behavior. Our conversion for the most part remains intact. And the reason for that is as you intuited. Even though a small percentage of our portfolio is out of stock, most customers – two points here. One, we preempt and protect and reserve inventory allocation for Autoship customers. And then two, most customers are able to either switch into a different pattern, design or brand. So the overall loss at this point is minimal driven by other stocks. We’re also jointly deep with planning and recovery efforts with our suppliers and vendors who are being super supportive at this point.

Thanks, Sumit. I appreciate it.

Sure.

Your next question comes from Mark Mahaney with RBC. Your line is open.

Thanks. Two questions please. First, the increase in the – is it APPA estimate of pet sales, Sumit, do you have any details behind that? What would it cost them to increase their estimates, any color there? I assume you probably have a little bit of background on that. And then in terms of new customers that have come on, you’ve talked about the acceleration in growth, greater than expected growth whatever this quarter being both existing and the new customers. Do you have any read into what the quality of these new customers is like in the first four, six weeks? Are they acting like new customers have in the past? Is there anything to suggest that they are going to be less loyal, less spending in the future with you, that they are migrating faster or slower, is there anything to suggest that they’re going to act differently than your prior cohorts or is it just too early to tell? Thank you.

Hi, Mark. Both good questions. I’ll take the second one first. It is too early for us to tell. We know that we are offering the same great service and similar value proposition. Some of the core input metrics of AOE and units per order and basket size and the mixing seems very similar to our existing cohorts. But then again, we’re acquiring these customers during duress and an unprecedented time and so it’s hard for us to really calculate at this time how sticky these customers are going to be or how much similarly they’re going to behave to our existing cohorts. That being said, we are going to work very hard on our side to ensure that we have – we engender long-term loyalty from this particular cohort that we’re acquiring during this time. So that’s sort of the checks and balances that I was talking about when I was answering Doug’s question earlier as well. In terms of the first question, I think the increase is driven by a couple of different trends. One, there’s a lot more awareness about pet. And as millennials come into the marketplace, there’s a higher degree of pet ownership that we’re seeing from that segment. Number two, we’ve always known and talked about the premiumization in this space, which is actually pushing up ASPs for newer and fresher categories that are entering the marketplace right now that might mature over the next few years. Likely combination there we continue to monitor and watch this one.

Okay, that’s very interesting to hear. Thank you, Sumit.

Your next question comes from Eric Sheridan with UBS. Your line is open.

Thanks so much for taking the question and thanks for the updates, Sumit, from you and team. I hope everyone’s family and friends are well with what we’re dealing with. I want to ask a question about the data-driven marketing push. There’s been a lot of dislocation in digital and offline advertising over the last four to six weeks. You guys have made a lot of investments around data-driven marketing. Is there anything you guys are doing in terms of changing the channels where you might be allocating investments to drive positive ROI marketing decisions? Are you arcing [ph] any changes in the way you’re making investments or are you seeing any changes in ROI in the current environment? Thanks so much.

Hi, Eric. Thank you for the question. Hope you’re safe and well as well. I won’t speak to the specific channels for competitive sensitivity reasons. I will provide overall color. We have seen a strong influx of organic demand and we’re utilizing and doubling down on our relationship and content-driven marketing in this time to be able to reach consumers and utilizing those channels to be able to educate consumers not only on the benefit of health and wellness, but also on how to engage with pets during stay at home. So what that’s done to us is it’s driven – we’ve taken advantage of this period and actually scaled back on marketing where we believe it’s not prudent to overspend during this time and are banking on those efficiencies during this time fully realizing that we don’t really, really, really know the quality of the cohort that we’re acquiring, so we might have to go back and actually invest a little bit of that back into retention. But we’ll continue to be data driven and disciplined around that as well.

Thank you.

Your next question comes from Erin Wright with Credit Suisse. Your line is open.

Great. Thanks. How big is your pharmacy segment now? Does that include prescription as well as over the counter therapeutics? And are you seeing more meaningful traction just in the current environment? Are veterinarians more willing to work with you in light of the COVID disruption?

Hi, Erin. I’ll start with the second one. We’re not seeing material disruption at this point. There are a couple of things that we’re observing in the environment and the field right now. We’re seeing vets more and more either reduce their hours or reduce the availability of services to more critical type services. That being said, parasiticides and heartworm that drive primarily the share in the category, we haven’t seen – we actually have seen continued growth and acceleration across the pharmacy business for us during this time fully realizing we’re in peak. I think another thing that we are benefitted by is our scripts that are on Autoship continue to be fulfilled and we haven’t seen a drop in approval rates during this time. So on a macro level, we’re not seeing much. Heartworm prescription is where you do need to go see the vet. And if the vet is closed, if there was any impact we wouldn’t be seeing it right now because there’s a bit of a lag, because only the scripts that are expiring in the last few weeks would be subject to that particular condition. So hopefully that provides a little bit of color. Overall, we continue to see strong demand and the same acceleration in our Rx business as well. And then in our pharmacy – when we talk about pharmacy, we speak only specifically prescription. We don’t consider – we’re not counting OTC drugs as part of that.

Okay, great. And then we also noticed – this is another healthcare question, but we also noticed you had a meaningful presence at VMX this year for the first time. Are you seeing material traction when establishing those formal relationships with veterinarians and utilization of your prescription management platform? I guess, can you speak to sort of the economics behind some of those relationships directly with the veterinarians where you’ve been able to establish those?

Good question. We were at VMX because we continue to believe that we are a brand that can drive meaningful penetration into the category by educating consumers and driving more and more consumers to visit vet clinics which then expands the overall share of the TAM that is currently available, not only by increasing the visits but also increasing repeat purchase rates for prescription. On the basis of that, we were there educating – displaying our products that essentially go towards educating customers. We were also showcasing our products that we’ve developed for vet offices and for vets to be able to increase their productivity in office and also to invite them to write for PetMD, which is a tremendous asset that they engage with that provides benefit back into our customers and the vets actually are compensated for that. So there’s a lot in the evolution right now. We were pleased to be there. We will continue to talk about how we can add meaningful value and also find opportunities where we can meaningfully partner with veterinarians, but still early in the journey there.

Your next question comes from Deepak Mathivanan with Barclays. Your line is open.

Hi, guys. Thanks for taking the questions. Two questions from us. So first, Mario, can you elaborate a little bit on the first quarter guidance? March accelerated nicely compared to Feb. Are you expecting acceleration in April in your outlook? And is there any way you can kind of maybe quantify the March trends versus Feb? And then a big picture question for Sumit. Where do you think online/offline mix would be in the post COVID-19 world? Do you expect any meaningful disruption to the offline channels that could accelerate the online penetration gains in the next, say, 12 to 18 months?

Hi, Deepak. Good to talk to you. To your question on what we expect in April? Look, we just provided guidance and the fact that we are operating in an unprecedented time, and this situation is evolving as we speak. So at this time, I think we’re comfortable providing the guidance that we just shared a few minutes ago and there’s probably nothing more to add in terms of speed or velocity for April.

Deepak, hi. This is Sumit. In terms of the second question, we’ve always maintained that the data that we’ve known is that the online penetration should get to north of 20%, 25% over the next couple of years. We’ve remained bullish on that trend. We don’t know why online penetration cannot get north of 35%, 40%, 45%. And occurrences like the one that we’re in right now provide motivation and tailwinds to shift in consumer pattern and behavior. We are yet to obviously see how much of that is going to be sticky over the long term, but there’s definitely going to be an impact here over the long term.

Got it, okay. Thanks, guys. Very helpful.

Thanks, Deepak.

Your next question comes from Mark Kelley with Nomura. Your line is open.

Great. Thanks, guys. Two quick ones. The first one just on the acceleration that you’re seeing, curious if it’s concentrated in that hardest hit areas, like in New York City area or is it broader than that? And second, I’d love to hear what you guys are seeing on the advertising front given that your ad budget is fairly broad. You gave some good color on the D&P, but curious where are you seeing the biggest opportunities with less demand on the advertising front? Thank you.

Hi, Mark. Good to hear from you. No, we’re not seeing any major concentrations in the way that demand is right now segregated. We’re seeing a fairly uniformed lift across the country and we’re fulfilling that across our fulfillment centers all across the country. In terms of advertising channels, I will refrain from speaking specifically to the advertising channels again for sensitivity reasons. But we – as you would expect, people are – folks have more time to be able to engage with content-driven channels and we are fairly observant of that and we’re adapting to our strategy in a similar manner and also pulling back on channels where we don’t believe is optimal due to the organic nature of people translating their queries and therefore being able to find us in an organic fashion. Hopefully that provides some color.

It does. Thank you so much.

Your next question comes from Brent Thill with Jefferies. Your line is open.

Thanks. Just on the headcount side, if you took the midpoint of your headcount hiring, that would be a 67% increase from the February. And I’m just curious how you think about the efficiency of those hires and there’s been a lot of conversations around the cost of hiring right now. Give us a sense of how you’re able to build that out with controlling the expense scale?

We continue to see headcount leverage across our businesses that are stable and mature across corporate headcount, and we’re very prudent and very disciplined in the way that we invest for that headcount. To give you a perspective, we’re a company of somewhere between 13,000, 14,000 employees and our corporate even at this point, at being the scale that we are, is roughly 1,200 people. So most of our investments are in fulfillment and customer service and we are continuing to invest in our fulfillment capabilities and customer service to be able to service customers because that really is our moat in the way that we earn trust and maintain long-term loyalty.

And when you think about the positive momentum you’re seeing, does that give you more conviction to experiment and look at adjacent spaces where you’re out or you say in this period just stay focused on your core mission right now which is the core products you’re serving today?

We continue to remain focused in making sure that experience is protected and our services are coming across to customers in a high-fidelity, high-accuracy manner.

Great. Thanks.

Your next question comes from Nat Schindler with Bank of America. Your line is open.

Yes. I think my question might have been touched on at several other places, but as you’ve seen an acceleration in Q1 particularly as we’ve come into stay-at-home and work-at-home environments, are you also seeing a drop in the marketing costs to acquire those customers both from the fact that there are more customers coming in the door? But additionally, have other companies pulled out of marketing channels that have allowed you to now make less expensive options available?

Both of those assumptions are correct. I won’t go into quantifying each of them versus the other, but yes there is a higher degree of marketing efficiency and a greater yield and the dollar invested is going much farther. But then again, remember we are not sure of the quality of the cohort that we’re acquiring. So we stand ready to ensure that we’re engaging with customers and reinvesting for long-term retention purposes.

Well, I know you said that there was a little bit of what you think of this kind of panic buying or hoarding mentality that people were building up supply. Of your new customers coming in, were they of the similar percentage that were signing up for your Autoship as normal?

More or less, yes.

Okay. Thank you.

Your next question comes from Oliver Wintermantel with Evercore ISI. Your line is open.

Thanks very much. Just on the existing customers that are now spending more, is that more ticket or traffic? So in other words, is it more – do they spend more or do they just come more often right now? And the related question to that is of the sales, is that mostly consumable or do you also seen hardgoods and pharma sales?

Hi, Oliver. This is Mario. I’ll take that one. It’s a combination of both; so existing customers buying up some bigger baskets and also placing orders. In terms of what we’re seeing in the mix of what they’re buying, it is as in the past we see a larger uptick – greater percentage of the sales being on the consumable side is the kind of behavior you would expect if you’re stocking the pantry.

I can provide some more color there. So you’re seeing essentials as number one. We’re seeing – with also the pet adoption trend that’s up, so a lot of new pets being brought home we’re seeing a healthy uptick on the hardgoods side, everything that a pet parent would need to service that need. And then the category that might be really impacted at this time across the industry is truly discretionary spend, such as pet tech.

Your next question comes from Dylan Carden with William Blair. Your line is open.

Thanks very much. Just curious, reading some things to suggest things, particularly like fostering and adoption is maybe up in this environment. Are you seeing – of the new customers coming in, can you tell how many of those are actually new pet owners as well? And then can you just remind us sort of what happened in the last recession as per the acceleration in this space, sort of what drove that and what maybe you’re expecting from here?

Could you repeat the question please? We didn’t quite catch it.

Sorry about that. Just curious if you’re seeing any – of the new customers coming in, in this environment, if you can tell how many are – is also new pet owners and if there’s any sort of reason to suggest that might be a stickier long-term customer? And then why the industry itself accelerated in the last recession, what was sort of the driving force behind that?

So we haven’t really gone back to the drawing board and pulled that data. It would be dependent upon customers creating a pet profile and telling us really how many are new pet parents or – it’s a little bit harder to sort of really get at that right now as we’re focused on really handling the demand shock and making sure that our experience and fulfillment remains intact. On the increase, the fact that the nature of this business is recurring staple purchases and during this time attention and care for pets actually goes up, a combination of all of that is what in our mind maintains and drives the spending patterns during times like these.

Ladies and gentlemen, we have reached the end of the allotted time for the question-and-answer session. I would turn the call back over to management for closing remarks.

Thanks all for the continued interest in Chewy. Please stay safe, stay healthy and we will talk to you again in June. Thank you.

This concludes today’s conference call. You may now disconnect.