Good afternoon, and welcome to the Chewy Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Bob LaFleur, Vice President of Investor Relations. Please go ahead.

Thank you for joining us on the call today to discuss our second quarter 2021 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 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 future prospects, financial results, business strategies, investments, industry trends, and our ability to successfully respond to business risks, including those related to the spread of COVID-19. 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-Q and 8-K filed 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 website and in today's SEC filings. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise noted, results discussed today refer to second quarter 2021, and all comparisons are accordingly against the second quarter of 2020. Finally, this call in its entirety is being webcast on our Investor Relations website. A replay of this call will also be available on our IR website shortly. 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. We have now crossed the halfway point of 2021, and our results once again demonstrate the strength of our business model and the incredible bond between pets and pet-parents. Our business remains healthy, customer engagement continues to grow, and we are confident in our ability to build upon the strong results we delivered last year, while navigating the uncertain market conditions due to the ever evolving COVID-19 pandemic. Let's start with our second quarter results. Q2 net sales rose 27% to $2.16 billion. To gain an even greater appreciation of our top line momentum, we believe it is also insightful to look at our net sales growth on a two-year stack basis. Through this view, Q2 2021 net sales grew at a two-year CAGR of 37%. We ended Q2 with 20.1 million customers, a year-over-year increase of 21% or 29% on a two-year CAGR. Gross customer adds are running higher than pre-pandemic levels, but below the record levels we saw last year during the peak of the pandemic-driven lockdowns. In fact, year-to-date, we have acquired approximately 20% more new customers than we did in the first half of 2019 prior to the pandemic. Our retention rates remained stable as well. In addition to the number of customers we add, customer spending is equally as important to our growth equation. Second quarter net sales per active customer or NSPAC increased 14% to $404. This is a meaningful acceleration over the growth we reported in the first quarter and the first time in the Company's history that NSPAC has surpassed $400. We have increased share of wallet from every cohort we've added to our platform over the past 10 years, and our long-term revenue retention levels from each…

Thank you, Sumit. I am happy to share our results as the execution of our long-term growth strategy continues to bear fruit. Beginning with our top line results, second quarter net sales were $2.16 billion, representing 26.8% growth. On a two-year stack basis, Q2 2021 sales were $1 billion higher than the second quarter of 2019. Out of stock levels remained elevated in the second quarter, but they improved modestly versus the first quarter, resulting in a smaller drag on net sales in Q2. This is a result of supply chain conditions improving in some areas as certain vendors reduced backlogs. However, other areas like wet dog food are still being affected by industry-wide production capacity limitations. Second quarter Autoship customer sales increased 30.3% to $1.51 billion or a 37.6% CAGR over the last two years. Second quarter Autoship customer sales as a percentage of net sales increased 200 basis points to 70.3%. This improvement in Autoship penetration rate reflects maturation of the 2020 customer cohort in AutoShip's growing value proposition. Active customers were 20.1 million at the end of Q2, an increase of 21.1% year-over-year. As a reminder, net customer adds are a function of new customers added in the period and the retention of customers acquired in prior periods. As Sumit mentioned, year-to-date gross customer adds are running 20% above the comparable pre-pandemic period in 2019 and retention rates are stable. To better demonstrate the dynamics of new customer adds and retention as they relate to net active customer adds, we have included a supplemental section on this topic in our shareholder letter this quarter. Second quarter net sales per active customer or NSPAC increased $48 or 13.5% to $404. This was a $16 sequential increase over Q1. On an absolute dollar basis, both the year-over-year and sequential…

We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Steph Wissink with Jefferies.

Thank you. Good afternoon everyone. We have two questions. One is more of a technical question just on your comments on the wet food still being limited. If you could just talk a little bit about what you think that might have been as an impact to Q2 sales? And then maybe if you could talk a little bit about the NSPAC, it seems like it's coming in much stronger than we would have expected even at this point in your maturation. So talk a little bit about how you're thinking about NSPAC contribution? I think you mentioned balance across net adds and NSPAC. But how are you thinking about NSPAC over the back half of the year and then maybe as we think about 2022?

Hi, Steph, this is Sumit. I'll take the first one. Mario will take the second one. We estimate the impact to be lower than Q1 and in the range of $25 million to $30 million for wet food production.

Steph, this is Mario. I'll take the second part. So NSPAC, you're right. The strength in NSPAC is meaningful. In fact, if you look at the $404 that we reported in the second quarter, and you look back sequentially and year-over-year, that is the fastest growth we've seen in dollar terms for that metric. But let me sort of give you color around what's happening around NSPAC. So if we start with the cohort that joined us in the first half of 2020, since that's been a topic of conversation in the past. We now have at least one full year of data for the cohort. Those customers now have a NSPAC in the following four quarters since joining of over $400. That's higher than cohorts in 2019 and the first year following their acquisition. So what it tells us is that the hypothesis we had, that not only were those customers were going to spend more upfront, but their spend was going forward would be higher holds. Think about it in terms of the NSPAC curve that we've shared with you in the past, we believe that curve has shifted upwards for that cohort. So that's very positive, right? We also had a hypothesis that -- and we shared this with you last year that the 2020 cohort will develop LTV profiles that were as good, if not better than predecessor cohorts. And so far, that's also proving out to be the case. Now if we think about customer behavior more broadly, the average spend per new customer in the second quarter was higher than last year. So that the average spend per new customer in the quarter continues to rise year-over-year, and we've seen that trend in the last few quarters. Autoship sign-up rates remained strong and they're running higher than last year, and the average basket size remained above pre-pandemic levels. And the sales mix within our basket size is supporting the gross margin expansion. So, all those metrics and all those factors are helping in the various line items. Moreover, I think if you go back longer trend customer behavior, again, going back to what we shared with you in the past, remember that customer spend more the longer they stay with us -- they stay with us. And those trends have repeated themselves year after year after year since our launch. And to give you an example of that, every cohort that we acquired in 2015 and prior to 2015, has a NSPAC in the last 12 months of over $800. So again, all the trends, all the metrics that we're seeing are still pointing in the right direction.

Our next question comes from Mark Mahaney with Evercore ISI.

Okay, thanks. Let me ask a couple, please. First is, you talked about leaning more into some -- leaning into some new marketing channels, but I don't think you described what those were. Any color on those?

Hey, Mark, this is Sumit. No, we haven't provided color on those, Mark. Just on the basis of sensitivity and information that we're still kind of experimenting and don't want reveal publicly at this point.

Okay. Understood. Then let me switch. These elevated costs you're seeing in labor and marketing, there's no particular reason why you have visibility and to when those would change. Like as you think about it, to the extent to which they're temporary or permanent, I don't think there's a way to answer that, but do you have a strong point of view as to whether those elevated costs in both of those areas are things that are they permanent? Or is it after three or four quarters, those should abate, any opinion on that?

When you say both areas, you mean labor and which one is the second area?

And Mario, you talked about rising ad costs, price per ad.

Okay. Let me provide color on both. So on labor, no, we don't have perfect visibility. What we are is we're triangulating data across markets where we have fulfillment centers and the forecasted -- our forecast and the fill that we are getting as a result of that, both in terms of short-term and long-term fill rates. And we've triangulated data to understand the impact of where the pandemic or the Fed benefits have retained versus where they have expired. And the correlation to what labor inflow or increase they provided to us on an index basis. So what we have seen so far, Mark, is that the states where pandemic or the Fed benefits have expired, have provided us somewhere between a 25% to 35% improvement in labor fill rates. And -- but the data is not -- it's empirical data, and we're triangulating across a couple of different sources, but we are tracking it closely. We don't have full confidence on how the situation might evolve, but we are waiting for labor markets to kind of reveal themselves in terms of data points a bit stronger over the next couple of weeks, so that we can move into Q3 in the appropriate manner. For now, we're maintaining the level of investments that we've committed to make sure that there is business continuity and customer experience preservation in terms of managing our shipments. Coming to marketing, marketing is an area where the landscape evolved rapidly in Q2. And a part of this was expected in terms of add cost recovery and participation rates improving from all players, online and retail. The rate, of course, as Mario mentioned, was unprecedented, and I'll give you a little bit of color there here in the next one minute. And then -- and…

And sorry, one last quick question. Thanks a ton for that page -- that's Slide 17 -- Page 17. I appreciate the simple math behind that. When in your press release in the shareholder letter, you talked about retention rates being consistent. That's the same thing as saying that the churn rates are relatively consistent, that you're using the same terminology there?

Yes. Yes, we're.

Our next question comes from Doug Anmuth with JP Morgan.

Thanks for taking the question. I have two. First, just on customer additions, would you still expect 2021 to return to pre-COVID or 2019 type of levels, which would suggest bigger sequential pickup in the back half? Or is the composition of how you get that revenue a little bit different with customers somewhat below that and then just the higher NSPAC that you're seeing? And then secondly, Sumit, if you can talk a little bit about Chewy Practice Hub for vets, curious on your view of how that opens up the addressable market for prescriptions? Any early feedback you can provide from vet partners and just what you've learned from the 8,000 clinics that you've been working with on the back end so far? Thanks.

Doug, I'll take the first part of the question, and then Sumit will address your second part. But when you think about the active customer adds this year -- and this is why we included a supplemental in the shareholder letter to show you the math behind it. I would expect the impact of the very large, I would say, record-size cohort in 2020, to still moderate or mask the number of adds we have this year. Said more plainly, I would expect our net active adds this year to continue to pace at a lower rate than we saw in 2019. Now that is a one-year phenomenon. So by next year, by 2022, we expect the -- this very large cohort and the attrition that happens naturally in absolute terms to work itself through the sort of the cycle, let's call it that. On the flip side, what you have is NSPAC that is growing very quickly. So that means that the customers that we're retaining and the customers we're acquiring are spending more and more on the platform. That's a very good sign. So not only have we acquired and are retaining a very large number of customers, in fact, adding more gross adds this year than we did in 2019, those customers are spending more and more with us over time. So those are very good dynamics that lead to expanding -- growing top line that lead to expanding gross margin, because repeat orders are more profitable than the first orders. And also lead to more efficiencies in the supply chain and therefore, expanding bottom line as well. So those are good inputs in terms of netback and active customer adds.

Okay. That's very clear.

Doug, I'll take the Practice Hub. So this one we're very excited about. The way -- if you recall in previous earnings calls, I've shared that our research indicates 1/3 of pet parents do not take their pet to the vet or don't do so at a recurring frequency. So compliance is constrained or compressed in the industry that actually holds back TAM. Secondly, as this allows us to work with veterinarians more closely as direct partners, right? And we've always been clear about the fact that we're building an ecosystem where the pet, the vet and the pet parent, are all very much in the center of the equation and Chewy becomes an enabler to improve experience and complete that journey. So Practice Hub essentially allows us to accomplish both, right? That's it offers veterinarian because veterinarians offers are directly listed at chewy.com, the vets get access to 20-plus million Chewy customers and they also get the benefit and not only access to our powerful Autoship program, but they get the benefit on earning revenue on all repeat Autoship orders. So it incentivizes improvement in compliance and working with a partner like us that actually understands customers and can build on those relationships from an education and awareness and driving repeat traffic point of view. And so it just -- with this type of a proposition, it just creates a lucrative flywheel for the veterinarians to be able to effectively participate and it opens up both the marketplace for not only the TAM for the veterinarians to participate, but also consumers in the way that we will improve compliance. And then your second part of the question was the exposure. So today, we're working across several independent clinics and also a very well-known nationally recognized vet group, who have so far been onboarded and they're helping us perfect the product, which is presently available on a curated and on an invite-only basis. But as the year plays out, we are rapidly looking forward to working across the 8,000 clinics or 8,000 veterinarian practitioners that we have a partnership with, who are already using Petscriptions. So excited about what's to come next.

And what's the timing for when you think this will be kind of fully open to all that?

Yes. So we will have more to share, Doug, in Q3, but we are actively working with our vet partners, and we believe we will be fully ramped over the next couple of quarters here.

Our next question comes from Brian Fitzgerald with Wells Fargo.

I wanted to follow up on Doug's question. And it's -- in the mechanics of the Practice Hub marketplace. It sounds like it could evolve into a lead gen platform for vets eventually. And Sumit, I think you mentioned a couple of days ago on the CNBC Evolve, you said, look, we're -- the tele-vet is acting as a triage and we're at a point right now where vets are being outpaced -- their capacity is being outpaced by demand. And so it almost acts like a triage situation. Is -- Is this a situation where you could eventually parlay this into a paid product for vets, that's helping them get leads, that's helping them manage and triage things and making them more kind of productive to getting the type of work that they need to do versus kind of sorting out stuff that really didn't demand a visit?

Brian, yes, in short, we have a big bold vision for what we can do with Practice hub as we continue to develop and improve the product. We're starting out with the concept of a curated marketplace and backed by the power of Petscriptions. But your intuition and the way that we're thinking big, there are many -- yes, there are many ways that we're thinking about expanding the product and the service in the future.

And then if I could ask a quick question. Do you have a rough figure for what percentage of the pharma business or the health care business is really akin to subscriptions like antiparasiticals that heartworm pills show up every so often, you have to keep giving them to the pet?

Our Autoship subscriber rate is equal or better in the pharma space. Is that sort of where -- what you were asking? Or did I misinterpret your question?

Yes. No, that's helpful. I just -- I wasn't sure what percentage of the TAM antiparasiticals make up of that $35 billion.

I see between heart and preventatives, it makes up 80% of the total $12 billion TAM that exists between OTC and pharma medication today. So, extreme pain medication and such makes up roughly 15% to 20% of pharma.

Our next question comes from Seth Basham with Wedbush Securities.

Good luck and good afternoon. My question is on your gross add commentary. You talked about being up 20% year-to-date versus 2019. What's your expectation for the full year 2021 versus 2019?

Yes, Seth, this is Mario. I'll take this one. So look, we -- no, we don't guide to active customer adds in the year. I think the best way to think about the pacing is that -- it will -- the effect of the cohort that we acquired last year, you'll see that continue to have an impact, a masking of the gross adds we're adding this year. So -- but from a breaking down gross adds and active adds in 2020 -- 2021 that is, we don't do that.

Okay. That's fair enough. And then secondly, as it relates to the customers acquired in this second quarter, what type of LTV do you expect to add as those customers versus the customers acquired in the last year, given the record high CAC that I think that you guys are incurring this quarter?

I'll start again and Sumit may add something to it. LTV to CAC, you have to think about it in both terms. So yes, the -- potentially, there were some input costs that were higher in the second quarter, and therefore, leading to a higher CAC potentially in the second quarter. But the margin is amongst the highest we've ever recorded at 27.5%. They're also spending more upfront. So they've joined the platform and immediately started spending more and the dollars are producing at a higher margin level. So there is an indication that the LTV to CAC should be in line with historical levels. So I would say that.

The customer of today in the way that they're exposed to expanding and broad choices and offerings from us, which we've incredibly expanded over the last three years, LTV expands by several hundred dollars on an annual basis. We haven't yet put a number to it, and it's hard because we're still graduating customers through different offerings that we've developed. And some of these offerings are early stages that we're actually maturing into. But when you look at it from a maturity point of view, there are several hundred dollars of LTV to be added up top, which actually provides us a nice cushion at the expanding contribution margin to be able to tolerate CAC and to be able to participate very effectively in the marketing environment, whether it be the marketing environment of today or the future as we continue to acquire more customers and add them to our platform.

Our next question comes from Lauren Schenk with Morgan Stanley.

This is Nathan Feather on for Lauren. Can you just talk through a little bit more some of the puts and takes on gross margin expansion in the quarter? And where do you think that could have ended up without the short-term impact in terms of discounting and other?

Sure. So Mario alluded to gross margin expansion, and we've provided the details in the script, not much more to provide there. Customers continue to robustly engage across the verticals that we've built out. We continue to see our work in improving discovery search and graduating customers into buying more cross-category as well as higher-margin verticals come to fruition, combined with the benefits of our scale is how we're driving the gross margin improvements. And we saw -- we estimated a 50 basis point uplift or a 50 basis point addition to gross margin as a result of the muted pricing environment or promotional environment that we're seeing currently.

And Nathan, I would add that back to the point that Sumit made in the opening remarks, but we are implementing this technology, what we call the ORS 2.0, our order routing system, that we estimate could lead to another 30 to 50 basis points of gross margin expansion. So there are puts and takes to gross margin expansion. We see the results in the second quarter. There is -- there are some initiatives that are in place that should expand that. And also, if you look at the mix of sales, consumable versus hard goods and other, there is opportunity to continue to move some of those sales to some of the more profitable mix in the future.

Okay. Great. Thank you. And then on top of that, on the marketing side, did you see any shift in channels within the quarter in terms of where you're marketing outside of the introduction of some of those new channels? And was there any potential impact from IDFA in the quarter? Thank you.

Our marketing mix is dynamic, and we spend relative to the returns that we're getting. So we don't have a predefined budget for a predefined channel or a fixed go-to-market strategy. So it's a bit of a hard question to answer because depending upon the dynamic nature and the volatility that we saw in Q2 reacted accordingly. And then what was the second part of your question?

Just did you see any impact from the Apple App Store or the Apple fee changes IDFA?

Yes. No. We've been actually working to sort of mitigate that from the beginning in the way that our architecture is built. So no, we didn't see a material impact on that so far.

Our next question comes from Peter Keith with Piper Sandler.

Thanks and good afternoon. Maybe a follow-up on the gross margin. It looks like you're seeing continued healthy mix shift. So with all of the new engagement with pet health, I think in the past, you've talked about health running about 500 to 800 basis points above your core business. When we think about like Practice Hub and Compounding rolling in and presumably growing very quickly, does that gross margin lift change in any way for better or for worse?

Sure. It's Sumit, I'll take it. So we've said at scale, we expect health care to be 300 to 800 basis points higher gross margin than the base business. And we're on track to deliver that. And you can see some of that starting to come through in the gross margin uplift that we've continued to deliver on a year-over-year basis. And then from here on out, as I've said in the past, we have many initiatives that we're working on to complete the road map that builds out towards our long-term guide of 25% to 28%. And so far, we've reserved the right to update that guidance, because there's so much more interesting stuff for us to work on and reinvest dollars in where we see the long-term return taking place. So in terms of building out our road map, we still have a full non-health care. We have health care to build out that we are starting to open up more and be more candid with here and starting to share with all of you. We still have non-healthcare services to build out, and we still have a lot of work to do in connecting the dots to be able to engage the customer holistically across these three or four verticals that connect the pet life cycle. And at the same time, we're thinking boldly about not just end consumers in the space, but also about the community that services pet, which is also embedded in our mission statement of being the destination for pet parents, but also partners. And a few of the examples that you've seen us bring to life so far are Compounding medications, which are today a B2C offering; and now with our telehealth, where we're working with veterinarians collectively and now with Practice Hub that we've actually opened up to veterinarians. So you should continue to expect us to innovate robustly and at pace and keep you apprised of gross margin expansion in the future.

Okay. Very helpful. Separately, I was wondering if you could address the growth for small animal. I know dog and cat gets a lot of attention, but we've been hearing rumblings out there that it's actually small animal adoption that remains white hot. I was wondering, if you're seeing that in your business? And maybe is it too small to matter or any quantification of sort of the ex-dog and cat business as a percent of sales would be helpful.

Yes. Your long-term trend is correct. Overall, in the United States, we believe somewhere between 30% and 40% of pets are small pets, and they are growing at slightly higher rate than large pets. It actually makes sense as a lot of Gen Y Zs and millennials adopt pets and at least pre-pandemic, city living and dwelling was a much more or continuing to become a popular option. And when you look at the density of space and the pet type that might be more suitable, it does give a little bit of a tailwind to the small pet data point. But it's not materially shifting or has shifted to the point where we need to update our planning assumptions or educate customers in a different way so far.

Our next question comes from Chris Bottiglieri with Exane BNP Paribas.

It was helpful to see the illustrative curves. I wanted to drill a little bit deeper. I think your overall consolidated attrition rate just naturally benefits from cohort maturation, as you have more overall customers. So it just naturally blends down at least historically anyway. If we look at your two attrition rates in '21 versus 2019, were the attrition rates better in '21 than '19? If you can comment there would be helpful.

Chris, this is Mario. I'll take it. The attrition rate, no matter how we look at it, and we do look at it from many different angles, has remained -- they've all remained at the historical levels. It doesn't matter if we're looking at the 2020 cohort, or we're looking at the 2018 or 2015. The curve of -- and the high levels of retention over time for those customer cohorts, almost regardless of the size of the cohort, remains steady. So I think that's the best way to answer that.

Got you. Okay. That's helpful. And then I wanted to check in on the Freshpet offering, with your own private label product and then with Freshpet selling their products now. Can you give us a sense for like what the early -- you gave us some growth rates, was nice to see, but can you give us a sense -- are you finding that your own customers are migrating up from kind of wet food and dry food into this? Or are you conquesting new customers from other channels with this initiative? And then just lastly, there's like a perception in the market that this might be lower contribution margin just given the elevated shipping costs again with us? Like what's been your experience been so far from a contribution margin perspective? Is it similar to other consumables at a similar price point? Or has it been diluted thus far?

Sure. So for the first part of the question, it's still a very new business, and we're ramping it up with limited assortment so far. And so the customer base isn't large enough to have an interesting conversation so far. It is ramping very quickly. And so far, we are seeing both, a lot of customers migrating. So, existing Chewy customers migrating -- either fully migrating or actually using these as a topper, which I will use again in my second -- in the second part of your question. We're also seeing a lot of net new customers being acquired directly into the vertical itself. So it's supporting the investment hypothesis of existing and new customer acquisition channels. And then to answer the second part of your question, yes, it has -- from a shipping point of view, okay, shipping supplies, when you utilize dry ice or cold chain, yes, you have a little bit of a higher burden on the shipping supplies cost. But at the same time, we are very good at building baskets with consumers and being able to drive repeat purchase using our Autoship program that allows us to plan better, forecast better and control all inputs that drive operational efficiency in a much, much more efficient manner. So, on the whole, at scale, we expect this business to be contribution profit positive and accretive to the base business.

Our next question comes from Justin Kleber with Baird.

Thanks everyone. Good afternoon. Just wanted to follow up on the active customer add questions. Can you give us a sense how those gross customer adds flowed across the quarters in 2020? Were they meaningfully different than the net adds that you reported? Just trying to understand if you've already cycled over the peak period of gross adds and how that might influence the pace of net adds as we look to the back half of this year?

Justin, it's Mario. The gross adds last year were even throughout the year, almost the same number of gross adds in Q1 versus Q4, Q3, Q2. So you won't find any discernible pattern there.

Okay. And then just lastly on -- as it relates to your outlook, what are you guys assuming from a promotional perspective in your guidance? Are you embedding a gradual return to a more normalized promo environment, particularly as we head into 4Q in the holidays?

So far, yes, this is actually directly correlated to the way supply chain and out-of-stock issues and overall freight conditions improve. And so, so far, we are continuing to assume a stable and relatively muted promotional environment as we move into the back half of the year.

Okay. And if I could just sneak one more in. Just wanted to ask about new pet parents and the maturation of their spending, particularly how it evolves in year two as you cycle some of those initial purchases associated with the new pet, picking things like a crate or a catcher? If you look at spending on an annualized basis, do those new pet parents do they grow in year two in terms of overall spend? Or do you see them take a bit of a step back?

No. On a -- whether on a customer basis -- per customer basis or on a cohort basis, revenue retention improves year-over-year. And unlike a traditional e-tailer or retailer where revenue dips from year one and year two, we see a steady, predictable increase from year one into year two. We provided the shapes back in the S-1 document in 2019. But when you look at it for eight years of cohorts, very predictable, the first year is at $150 to $200, the second year jumps to $350. And with Mario's recent comments today, we're actually seeing consumer spend higher earlier. So no, we don't see a compression. If you're buying full baskets for us, yes, generally, hard goods purchases are discretionary and the buying cycle is a little bit longer. So -- but on a consumables basis, we're able to forecast repeat purchase and frequency pretty accurately. And on a net basis, the spend actually increases from year one and year two.

And our final question today comes from Steven Forbes with Guggenheim.

Good evening. Sumit, I wanted to follow up on Chewy Health. You mentioned in the release that veterinarians can now earn revenue when a customer places an order. I was curious if you could provide any context around how this revenue share compares to other options that may have today and/or whether you think the improved value proposition has now neutralized the fulfillment preference, enabling the customer to truly drive the decision process as we think about the potential for market share gains into the future?

Our offering is very competitive, and we believe that it should allow the veterinarians to be -- the vets control part of that equation in the way that they price products with us. And we might charge a small fulfillment fee and that fulfillment fee is lower than what we currently see in the marketplace. So from that standpoint, we believe this should be accretive and the vet should be very happy with the equation that -- or the overall equation when they engage with Chewy and our customers in a holistic manner. And then I'm sorry, I did not follow the second part of your question. So would you please repeat that for me?

I think you answered. I was just curious whether you think the offering, right, that you're putting forth here really neutralizes the fulfillment preference among the vets enabling your customers, right, to really drive the decision process.

Practice Hub. Yes, sure, sure. Sorry. Yes, Practice Hub is -- we believe it's completely different than any other product or service in the marketplace currently. First, the service sits on chewy.com with 20 million active customers, who now have immediate access to buy from their vet. Secondly, Chewy owns the entire customer experience. We ship for free over $49. We don't charge them for life-saving items like insulin, which currently are being charged. You could expect to pay $30 plus on a single order with services that are available out there right now. We ship fast. It gets to you in one to two days, relative to the current delivery experience is somewhere between four and six days, the way that we've benchmarked it. And then Chewy customer care team is accessible to you, which is available 24/7 on top of us delivering tremendous value proposition on a P&L basis as well as customer base. So when you say neutralize, I actually believe that this is a really compelling superior product and an industry-defining, industry disruptive product that we're bringing to life here. We're very proud of it.

Super helpful. And then just a quick one for Mario, if I may. Just regarding the software enhancements that you discussed in the prepared remarks, any timeframe behind the recognition of the benefits that were mentioned? And are there any incremental scaling benefits that we should be considering?

For the software, S-1 is fully deployed and fully ramped. There's no specific time line that I can provide you on that. But it's something that we've begun to roll out through the network. And then your second part of the question was about additional scaling benefits. Continued sale, as mix of sales shifting from -- into the higher-margin verticals that we've talked about, the simple math of increasing our repeat order base because repeat orders tend to be more profitable than the first order and then scale alone, which should provide us additional benefits over time in the supply chain efficiencies. So, there's a few tailwinds there.

What we find very encouraging and it is the fact that we continue to improve customer engagement and develop our customers and achieve the -- combined with the benefits of our scale, we continue to deliver incremental gross margin, which is tremendous. Because the work that we're doing there is structural and customer-centric and P&L centric. At the same time, the -- when you flow this down, presently, there are macro environments that are hopefully temporary in nature that are holding back kind of the flow-through that goes from the gross margin all the way down to the EBITDA line. And even with the current constraints, we've delivered roughly $300 million on a stack basis over the last two years into the P&L. And on a year-over-year basis, we will deliver 2x the EBITDA this year relative to last year. So the scale and the efficiency and the work that we're doing with customers, we believe we're on the right path and the strategy is intact.

This concludes our question-and-answer session. I'd like to turn the call back over to Sumit Singh for any closing remarks.

Thank you very much. Stay safe. Have a great evening.

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