Chewy, Inc. (CHWY) Q1 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Jesse and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Chewy First Quarter 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] We ask that you state one question and one follow-up question. Thank you. Kelsey Turcotte, you may begin your conference.

Thank you for joining us on the call today to discuss the results of our first quarter fiscal 2019. Joining me on today's call are Sumit Singh and Mario Marte, Chewy’s CEO and CFO. Our earnings release in a letter to shareholders, which we filed with the SEC on Form 8-K earlier today have been posted to the Investor Relations section of our website, investor.chewy.com. A link to the webcast of today's conference call can also be found on our site. We would also like to remind everyone that we will be making forward-looking statements on this call, including statements concerning Chewy’s future prospects, financial results, business strategies and industry trends. Such statements are 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 materially differ from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance. Also, note that the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements, except as required by law. For further information, please refer to the risk factors and other information in Chewy’s final prospectus filed with the SEC on June 17, 2019, the Form 8-K that we filed earlier today and other filings with the SEC. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the earnings release and the letter to our shareholders on our IR website, which were filed with the SEC on Form 8-K earlier today. These non-GAAP financial measures are not intended to be a substitute for GAAP results. Finally, this call in its entirety is being webcast on our Investor Relations website. A replay of this call will also be available on our IR website shortly. And now, I'd like to turn the call over to Sumit.

Thanks, Kelsey, and thanks to all of you for joining us on the call today. We are excited to report our first quarterly results as a public company. I want to extend special thanks to our new investors for their confidence in our team and our company. I'd also like to thank the Chewy team for the support during the IPO process. Since we've provided significant detail in the shareholder letter, I'll address a few highlights from this quarter, but will maintain my comments on trends in our business. As this is our first earnings call, I also want to take some time to share the Chewy story and tell you about our operating philosophy. After that, I will turn the call over to Mario to discuss our financial results and guidance and then we will take your questions. Net sales for the quarter grew 45% year-over-year to $1.1 billion, reflecting our focus on customer experience and the strength of our underlying business model, including growth and spending among existing customers. Q1 marked our second quarter, with greater than $1 billion in sales. Active customers grew 3.5 million year-over-year to 11.3 million active customers. Net sales per active customer increased approximately 9% from $315 dollars to $343 dollars. Autoship customer sales, as a percent of net sales, represented 67.1% of our revenue. Gross margin for Q1 was 22.9%, up 330 basis points year-over-year and the highest level in the company's eight-year history. This margin improvement is a result of our disciplined execution to improve product margin and supply chain efficiencies. Finally, our adjusted EBITDA margin of negative 1.4%, improved 530 basis points versus Q1 2018 as a result of gross margin expansion and leveraging off our operating expenses. The core inputs of our business are trending positively as we continue to innovate with a keen focus on growth and on delivering the best possible customer experience. We are pleased with our Q1 results and believe we are in the early stages of our growth. Now, turning to the Chewy story. We're on a mission to become the most trusted and convenient online destination for pet parents, offering a broad assortment of pet products, supplies, and prescriptions at competitive prices coupled with a high-touch personalized customer experience and fast, reliable delivery. There are currently more than 10,000 Chewy employees known as Chewtopians across the country, who are united by a goal to provide each customer with best-in-class service every day. From our headquarters in South Florida and Boston, to our customer service and fulfillment centers across the country, we are passionate about our work and are constantly thinking of new ways to make the customer experience even better. The pet industry is a large and growing market with approximately $70 billion in annual spend in 2017. In addition the pet care market is resilient during economic downturns, because of the nature of the pet parent/pet relationships and is experiencing a secular shift from offline channels into online. Pet humanization and the increased focus on pet health and wellness are also notable trends that are driving growth in the pet industry. The momentum of our business is rooted in innovation and we are always identifying new ways to enhance the customer experience. We are bringing customers the convenience of e-commerce along with the expertise and personalized service of the best local neighborhood pet store. From our convenient Autoship subscription program, to our personalized shopping features, to our wide selection of products including our proprietary brands, we are leveraging key opportunities to drive repeat and recurring purchases, and ultimately build brand loyalty and long-term growth. We believe our personalized, high-touch customer service is what sets us apart in the industry. Over the past eight years, we have successfully created a customer-centric culture with 24/7 access, where pet parents can reach our knowledgeable award winning customer service team at anytime to interact with a live team member in either our Hollywood, Florida or Dallas, Texas customer service centers. As part of our customer service, we create special moments that wow and delight our customers from sending handwritten welcome cards, to new customers, to surprising pet parents with hand-painted portraits of their pets. Our experiences build memories and customer engagement, which fuels long-term loyalty for our company and our brands. In addition to our high-touch customer experience, we make shopping easy and enjoyable for pet parents, and that makes finding and buying the right product an amazing start to the customer journey. We are proud of what we have accomplished thus far in 2019 and look forward to executing on our strategy for the remainder of the year. And now, I'd like to highlight a few milestones. This month marks one year, since we launched our online pharmacy Chewy Pharmacy, complementing our healthcare offerings of veterinary, which I will refer to as vet moving forward diet products. These offerings reflect our commitment to the health and wellness of pets and is another step in our mission to become the most trusted and convenient destination for pet parents to fulfill all of their pet needs. Improving pet health and wellness is a common goal that we share with the vet community. We also enjoy a deep connection with our customers and are continuing to raise awareness on pet health and preventative care by utilizing our marketing abilities. This, along with our Autoship program, helps drive increased compliance for vet prescription diets and medication benefiting pets, customers, and vets alike. To further that goal, we now offer a new product feature My Prescriptions, which is akin to a human medicine cabinet and provides customers a convenient and transparent way to view and manage all of their pet prescriptions like tracking refills and prescription expiration dates. To accommodate the growth of Chewy Pharmacy, in Q1, we launched a new pharmacy co-located within our fulfillment center in Phoenix, Arizona and we operate this new location under our own licenses. As we celebrate our first anniversary, we have been pleased with the customer response thus far. We are still early in the pharmacy offering and will continue to look for opportunities to deepen our engagement with veterinarians and pet parents as we expand in this area. Keeping pace, with our continued top-line growth, we opened our eight fulfillment center this one in Dayton, Ohio, which began operations last month. Growing our physical capacity and extending our delivery network is an important part of our operational strategy. We continuously improve our logistics processes and drive efficiencies every time we open the new facility. Each fulfillment center has been ideally positioned in key locations throughout the country to provide our customers with fast delivery times on their orders. Last but not least, we continue to innovate and improve customer experience through product and tech initiatives. For example, in Q1, we launched a new notifications platform, one that is more robust and customer friendly and enhances our ability to communicate with our customers with push notifications. Furthermore, our mobile app continues to be an important tech development, providing our customers with an even more convenient and personalized shopping experience. We continue to improve functionality and usability, including enhanced shipment tracking and notification, a unique Q&A feature allowing pet parents to directly engage with Chewy’s customer service, improvements in customization features and touch and facial ID functions for increased security. We have also recently rolled out improvements to the app, such as voice search and search auto complete, product searches enabled by UPC codes and enhanced Autoship management, which delights our customers and have resulted in a significant improvement in our mobile apps ranking. Product and tech innovation remain a key priority for us as we strive to make the product discovery, purchase and post purchase experience across all platforms easy and enjoyable for our customers. Now, I would like to transition to our operating philosophy. I'll note that our IPO in June was an important milestone for Chewy, but it's only one step in our journey. We believe that we are positively transforming an industry with a superior value proposition that delivers customers an exceptional and personalized care and service at the scale and convenience of e-commerce. This is a mission that will continue to require us to keep both a long range mindset as well as a maniacal focus on day-to-day execution, understanding our customer's need and then innovating, investing and flawlessly executing on their behalf to earn and to retain their loyalty. To maintain a long range focus, implies making decisions, which maximize value for customers and shareholders alike, because over the long-term these are the same. With this in mind, we have chosen to invest in building the best customer experience for our customers and to maximize our growth while keeping cash flow as the governor of our growth. We will continue to act in this manner and make big bold bets that satisfy the above criteria. Last but not least, our success and getting to where we are today has come as a result of the hard work of a talented team of which we are incredibly proud to be a part. Our team while delivering growth at scale and customer experience has also demonstrated an execution rigor that has resulted in expanding gross margins and improved operating losses, while at the same time showcasing a highly disciplined cash flow management approach. In this way, we are focused on building an enduring franchise. We will continue to be relentless regarding this. Thank you for your attention today. It has been an exciting few months and we are pleased with our Q1 results. More importantly, we look forward to continuing to strengthen our operating performance and serving even more pet parents as we execute on our long-term roadmap. Now, I will turn the call over to Mario, who will provide a more detailed review of our Q1 results and walk you through our financial outlook, which calls for continued growth and scale and improvement in EBITDA. Mario?

Thank you, Sumit. Good afternoon, everyone. I would also like to thank you for your support of Chewy throughout the IPO process. Given that this is our first call as a public company, I want to start this afternoon by giving you some insights into how we operate Chewy from a financial perspective and some of our key financial takeaways. We use cash flow as the engine of growth and invest cash and profits generated from our existing and profitable customer base to acquire new customers. We retain these customers over long periods of time by offering them a superb value proposition comprised of a broad selection of great products, the convenience of e-commerce, competitive prices and what we believe is an unrivaled customer experience. Our first quarter results highlight our business philosophy and focused execution. Net sales exceeded $1.1 billion, an increase of 45% compared to $763.5 million in Q1 2018. And Autoship customer sales continue to grow faster than overall net sales, reaching $743.9 million, an increase of 56%, compared to $477.4 million in Q1, 2018. We ended the first quarter with 11.3 million active customers, up 3.5 million year-over-year. Gross margin for the quarter was 22.9%, a 330 basis point improvement driven by our disciplined execution to improve product margin and supply chain efficiencies. Q1 operating expenses of $284.2 million, or 25.6% of net sales, decreased 190 basis points versus Q1, 2018. SG&A was $181.9 million, or 16.4% of net sales. As we have shared previously, SG&A for us includes all fulfillment and customer service costs, as well as credit card processing fees. The year-over-year increase was primarily driven by higher sales, expansion of our fulfillment network and additions to our corporate team. Advertising and marketing was $102.3 million, or 9.2% of net sales, scaling year-over-year, even as we continue to grow our active customer base. Q1 net loss was $29.6 million, $30.3 million better than Q1, 2018. Our net margin was negative 2.7%, improving 510 basis points year-over-year. Q1 adjusted EBITDA loss was $15.8 million, an improvement of $35.7 million compared to Q1, 2018. Our adjusted EBITDA margin was negative 1.4%, improving 530 basis points year-over-year, improvements in both adjusted EBITDA and adjusted EBITDA margin demonstrate our ability to continue to grow at scale, while also improving the margin profile of the business. Free cash flow of negative $63.4 million in Q1, 2019, or negative 5.7% of net sales is a result of our net cash used in operating activities, coupled with capital investments of $12.2 million, which were mainly associated with the launch of a Dayton, Ohio fulfillment center and capacity expansion of our Kentucky and Phoenix pharmacy locations. Cash from operations of negative $51.1 million was consistent with prior cycles. We ended the first quarter with $29.3 million in cash and cash equivalents. The closing of our IPO added an additional $117 million of cash to our balance sheet prior to underwriting and other IPO related expenses and will be reflected in our Q2 Statement of Cash Flows. Now turn to guidance. First, a few comments to help you understand our reporting calendar and seasonality. Please note that fiscal 2018 was a 53 week year, while fiscal 2019 will be a 52-week year. This will impact year-over-year growth for both full year 2019 and Q4, 2019. You should also note that historically, we build our inventory levels when we launch a new fulfillment center and in the third quarter, as we prepare for Q4 sales. This coupled with our favorable cash conversion cycle may lead our cash from operations to fluctuate from cash use to cash production between quarters. As we begin life as a public company, we want to ensure that we provide clarity and transparency to our shareholders into how we operate the business, while maintaining our long-term focus, as well as our ability to move quickly to capitalize on growth opportunities, or to make the right investments which will maximize value for our customers, company and shareholders. Balancing these two priorities, we are taking a thoughtful and deliberate approach to provide annual guidance on net sales and adjusted EBITDA margin in quarterly guidance on net sales. We are committed to being transparent about both our performance as well as our investments in the quarters and years to come. So, shareholders are informed and understand our operating decisions. For Q2 2019, we expect net sales between $1.12 billion to $1.14 billion, representing growth of 39% to 42% year-over-year. For fiscal year 2019, which ends February 2nd, 2020, we expect the following; net sales between $4.675 billion to $4.75 billion, representing growth of 32% to 34% year-over-year. Adjusted for the extra week in fiscal 2018, year-over-year growth is expected to be between 36% and 38%. Adjusted EBITDA margin for the fiscal year is expected to improve 400 to 450 basis points versus fiscal 2018, including our EBITDA guidance, our costs related to being a public company, which will begin to impact us during the second quarter of fiscal 2019. We are pleased with our Q1 results and our guidance demonstrates that we are still in the early stages of our growth. We are very excited about our future and look forward to reporting on our progress in the quarters to come. With that, I'll turn over the call to the operator for questions. Operator?

Thank you. [Operator Instructions] Thank you. Your first question comes from Doug Anmuth with JPMorgan. Your line is open.

Great. Thanks for taking the questions. I have two. First, Sumit, Can you just talk more about Autoship customer revenue? You talked about how to increase to 67% in 1Q. Do you have any kind of targets or thought on where that can potentially go over time? And then, how do you utilize the initial order discount given the seemingly temporary increase that we saw during the past week by Chewy? And then the second question, can you just help us understand drivers of the revenue guide for 2Q and the full year. We know you are not specifically laying out anything around active customers in the net sales per active customer, but are there any puts and takes that we should be thinking about through the year? Thanks.

Hi, Doug, it's good to hear from you. The first one, we -- first of all, the Autoship, I mean, net sales of 67.1% itself is a pretty high bar for e-commerce. Two, I think the other point I would make there is for the number of customers that are subscribed into Autoship, there is a reasonably large number outside of that will behave like Autoship. So, the number -- the contribution is actually larger than that. Third, I think areas that we invest in to be able to make sure that number continuously increases are possibly a couple of different areas. One, we're always looking to increase assortment, always looking to make sure that what part of our assortment actually Autoship eligible, and if there isn't we're incrementally sort of upping that investment. Two, launching complementarities, so healthcare is a good example where the numbers that we're projecting do not contain any kind of numbers or Autoship synergies that we're starting to see from our healthcare vertical, because it's still pretty small, but the hypotheses is that those complementarities build in. And the third one is, of course, as we continue to improve our algorithmic signs around personalization and recommendation to be able to offer customers an ability to build more relevant baskets than they already are. That actually also contributes to the increase of that Autoship number. So those are the three areas that we're focused on. And the second part of your question was around general trends or projections for our focus on the rest of the year. It's do more of the same -- its three things, Doug. One is, do more of the same, so I continue focus on customer acquisition as well as offering customers a tremendous service to be able to engage them, retain them, drive, repeat purchases from the active customer base; two, continue to focus on growing our private brands; three, thoughtfully right, we always do it thoughtfully in the way that we go to market and in the way that we find the opportunity in the market to pack bag into how we think about private brands. And then three, of course, continue to invest and grow our healthcare offering, so we'll broadly attack all of these together.

Great. Thank you.

Your next question comes from Brian Nowak with Morgan Stanley. Your line is open.

Thanks for taking my questions. I have two. The first one is on active buyer growth. You've done a good job of growing the buyer base so far. Did you just talk to us about some of the high level hurdles you think you need to clear to continue to bring new customers on the platform, what is the biggest gaining factor you found? How do you overcome that? And for customers you lose, what's the top reason mainly. Even how do you bring them back? And then also, I was wondering, is there any update on the steps that we should be looking for? Did you start to build out the vet in the pharmacy side? Thanks.

Hi, Brian. It’s good to hear from you. We are -- so customer acquisition, a couple of different ways to think about it. One, we're playing in a large industry itself, e-Commerce penetration is low. Not only are we enjoying a secular shift from offline channels into online, we're obviously creating that shift as well. We utilize our plus -- our marketing techniques are both a combination of classical and digital. So, you should expect us to continue to initiate that. We're launching newer offerings and newer vertical. So healthcare is an example of that where now we've got pharmacy not only as an acquisition channel, but active customers are engaging with pharmacy. You should expect us to continue to fire on these cylinders as we go out and broadly acquire customers from all channels, because the proposition that we're bringing to the table is offering that high class personalized customer service that you see in a local neighborhood pet store, but at the scale and convenience of e-commerce. So, fishing from a wide net in that perspective. The second part of your question was the top customer's – top bringing customer leave. First of all, I think helpful to remind that our engagement customers are highly engaged with us and we retain them for a long time, fueling their loyalty and we never take that loyalty for granted. The reasons when they do leave, you know, primarily there is nothing really insightful to discuss there. Unfortunately, sometimes a pet passes away. That would be a reason when we temporarily see customers disengaged from the platform, but our data suggests that a large number of high, brought over 80% of pet parents bring home another pet within six to nine months of a pet passing away. The other one could be, if you literally live right next door to a pet store, you may actually just be able to get that transaction, transaction lead, something like that. The third part of the question was, what should we be looking out as you build out pharmacy? I think we're early in this innings. We are out there building assortment, offering the experience, we're looking to partner, enhance the proposition of health and wellness and keeping Chewy in the center of the pet parent in the vet community equation. We believe this is a tripod of an equation and utilizing the tools and techniques that we have, the compliance that we can drive, the education and awareness that we can create. We believe, we're going to fire on multiple cylinders here as well.

Great, thanks.

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

Yes. Hi. Thank you for taking my questions and congratulations on your first public quarter and your IPO. Could you just go in a little bit more detail into the gross margin ramp that you saw this quarter. If we look at last year trends to actually trended up through the year, and I was -- I would expect that your mix of other goods, hard goods to food would be highest in Q4 around the Christmas sales. So I would expect that gross margin would go up into -- in Q4 be the highest of the year. But you were up 200 basis points over Q4. You did that also the previous year, but then trended up through the year. Is there anything you can talk to us about the seasonality here and what's driving this up and what we should expect for the rest of the year?

I'll talk to you broadly about that. A couple of different factors drive gross margin. It's a combination of the fact that we're getting more sophisticated and helping people build larger baskets, and that is a function of us adding assortment and really knowing what our customers need and want and -- which we do, because we have that amount of data with them, plus we -- our customer service actually comes in really and plays a large part of that. Number two, our economies of scale allows us to be able to not only drive supply chain efficiencies, but we're also using a lot of data science in our supply chain to be able to make sure that our cartonization principles are intact that are -- our density is maximized within the cartons that we're sending out. And, overall, predictability of the business allows us to level-load the demand and lower our overall cost structure and all of that flow through gross margin. So it's a combination of multiple things that jump from -- and we've been on a path here. So nothing specifically to talk about jump from Q4 into Q1, there might be a little bit of a timing in play there, but that's how I would answer that question.

And would you expect to see the sequential improvements occur from throughout the year?

Yeah. You should expect us to continue to be -- yeah, you should expect us to continue to maniacally focus on the above principles, the three principles that I've talked about; A, helping customers build bigger baskets; two, continuing to optimize our operations and our supply chain to be able to extract costs out. We are focused on gradual and incremental improvements.

Great. Thank you.

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

Hey, guys. Thanks for taking the questions. Two questions from us. So first on the marketing spend for the quarter. I mean, I know that you guys have been testing out your marketing programs related to building out brand on that side, rather than just purely performance. Can you talk about how much of that is factored into, sort of, that 2Q guidance? And then, how should we think about the expected ramp through the year? And then, secondly, on the fulfillment center, you guys just opened the new one and it's about a month in operation. How much of the cost to ramp the fulfillment center is in the 2Q? And then, what should be the expected investment period before it sort of reaches max efficiency levels? Thank you.

Hi, Deepak. It’s nice to hear from you. On marketing, you're right in your observation, most of our spend is primarily accusatory spend, direct response spend. So, we spend in a muted fashion on brand marketing. One of the reasons we also do that is because our -- the high level of engagement and care that we provide and the valve mechanisms that we deploy allow us to be able to obviously create that network effect and get the halo of a little bit of building the brand. But generally, our brand awareness is something that we will invest in. For Q1, Q2 it was still primarily accusatory, because there's a little bit of a ramp that you need to be able to build out your upper funnels and your middle funnels in that way. That's how we think about that. So, it will gradually increase as we move forward into 2019 to 2020 that kind of stuff. Fulfillment center, how much of the cost of ramp is in Q2. And then we look at this as a pretty tight -- we plan our fulfillment center network two, three years out, but we invest very tightly in six to 12-month increments. And that is because of the predictability that we have. That's also because of the industrial engineering teams and the science that we deploy there. So, our payback is also fairly consistent and tight there.

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

Good afternoon. Maybe you could just talk a little bit about the pathway to profitability, what gives you conviction over time that the bottom-line can look a lot like what you're doing on the topline and share with us perhaps it would seem that some of these new businesses seem to be potentially even higher margin that you're moving into than you're in currently, if you can highlight what you're seeing there? Thank you.

Sure. I'll say a couple of things there. So, first of all, you've noticed our ability to -- as we're getting big fast, we're also focused on getting fit fast and that's evident from the fact that we're delivering not only the topline or growing the topline, but also improving our margin profiles. And that's a function of the previous disciplined approach that I've spoken about. Number two, we have clearly identified growth in margin vectors that we are going to continue to execute on as we move from today into the longer term. You should think about those in two different buckets or three buckets I would say rather. The first bucket is doing more of the same, which is our active customers that engage with us, the longer they stay with us, the more share of wallet or net sales that they actually spend with us. And that base to us is a profitable base and that defines the power of the Chewy business model. Number two, you should think about as two other vectors that we fired which we are focused on growing and investing and offering a tremendous value proposition on these are healthcare and private brands. Private brands typically portfolio, we are currently exiting 2018 we were about 5% of our sales and we aspire to play very typically large retailers or mature consumables players play a north of 15% over the long-term. And at that scale, we expect private brands to be profitable over our base business. And then, the third one is vectors that we have not fired, which is in our effort to build the destination for pet parents. When we are ready and when we're ready to talk about it, you could think about services, type of models that are inherently high gross profit verticals. So, combination of those are how we're thinking about it. Last thing I would say is look at our guidance, we've provided adjusted EBITDA margins improving 400 to 450 basis points year-over-year, which would lend you the confidence that we're -- while we execute our strategy, we are also focused on the bottom-line.

Great. Thanks.

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

Thanks. Two questions, please. Sumit, I think you've talked about -- when asked about Autoship, you said you had customers that acted like Autoship that were actually worked on Autoship, i.e. they purchased pretty frequently. Does it matter to you and to the business whether they stay where they are? Are there any advantages to incentivize those kind of quasi or shadow auto shippers have actually become full auto shippers. Is that an opportunity? And then second, just generally, I know you were asked about a lot during the IPO Roadshow but anything new in terms of thinking on international markets? Thanks a lot.

Hi, Mark. It's good to hear from you. When we study our Autoship customers that are not on Autoship, it isn't necessarily a defect that we're out to fix. They've chosen not to remain on Autoship for a variety of personal reasons. For example, they could be – they could have been burned by a previous subscription services. So they just like to retain control, although ours is completely no tax attached, easy to subscribe, into subscribe, out of super intuitive, super easy, but just a personal preference. Other things that we've heard from people are look we travel so much that we'd rather just maintain control of that ordering pattern rather than putting it on an Autoship type subscription. So not really a defect that we are out to fix. But, if they want to convert at any point, we'll be happy to take them. International, the way I would answer that is, the same as we had in the roadshow, which is, we are currently focused on the United States. We have a large opportunity in front of us. While I fully believe that the merits of our business model as well as platform are extendable to anywhere where pet parents live Mark. Today, we are focused on the U.S. when I'm ready to talk about international. We'll definitely come back and speak to that.

Okay. Thank you, Sumit.

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

Thanks very much for taking the question maybe two if I can as well. Obviously, we were getting a lot of questions on the competitive landscape given some of the pricing and discounting moves in the space of the last very short period of time. Just philosophically, can you help us understand sort of the way you approach competition? And how you think about reacting to competitive moves especially around price that you see across the broader industry? That's number one. And number two, maybe driving back to some of the questions from earlier. Can we talk a little bit about where you're seeing some of your better returns on marketing dollars and how you think about aligning those marketing dollars against ROI, whether it'd be on driving increased spend or increase buyer and user initiatives around the platform? Thanks so much guys.

Sure. The first question about pricing environment and that kind of stuff, look e-commerce pricing and promotional space is always dynamic and that's just the nature of the beast, some months more than others. We have the ability to monitor and effectively respond and that's what we do. We're constantly monitoring to make sure that we are competitive. We feel we have a good ability. We feel confident about our ability to execute in that space. And overall, we just remain focused on delivering the core value proposition. Pricing is a part of it, no more, no less meaty or rated there. So our ability to execute, ability to respond to that keeps us whole. Number two, I think it's important to remember that, our partners, our suppliers our brands do a great job in really demonstrating responsible price leadership with minimum advertised price, or map principles in the marketplace. That also allows us -- allows a general pricing discipline in the industry. Second part in marketing, we are -- we're very data driven. We are direct response marketing, we invest broadly across classical and digital techniques, but at the same time, we are -- we measure the efficiency on sort of attractive LTV to CAC ratios, right. And lifetime value for us, we don't just look at it on a gross revenue basis, we take it down to profitability and then we super load our customer acquisition costs to be able to make sure that our ratios remain attractive to us as we go out and invest in these channels. And because we are direct attributed and direct response and data driven, we're able to effectively attribute and change our strategies when we want to or as we need to. And that's how we think about marketing and that's what we will continue to do.

Thank you.

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

Great. Thanks very much, guys. I kind of want to follow up on the last question about the competitive environment and discounting. Assuming you pointed out that it's always been a dynamic, pricing environment in e-commerce and I think perhaps investors focus is squarely on you guys, because you're such a new public company and we don't have all the history and context. But it seems like the majority of discounts are usually getting new Autoship customers in your case, or some of products to Amazon and that's where the big discounts come in. And given that you’re already have 67% plus of sales from Autoship customers, the incremental customer discounts really don't move the dial for margins. It doesn't appear to be the case in your outlook and certainly over the last handful of quarters. Can you maybe give us just some context around that dynamic competitive pricing environment over the last several years? Just to give us some comfort that, your margin outlook in the long term margin structure really won't be impacted by a discounting like that? And then second, in terms of spend per active customer, how much do you think the healthcare piece of your business will drive some of that growth? And what's the right way for us to think about percent of customers that will use your healthcare products? Thank you.

Okay. There is a lot in your first question. I was trying to sort of deconstruct it. But I think what you're trying to get at is, how resilient is the general industry on pricing dynamics and pricing fluctuations. I would point back to the point that I just made a few minutes ago, perhaps didn't come across as clearly as I wanted to. But the industry is generally map compliant. So there's a minimum advertised price. And there's a little bit of a fluctuation that happens around the map above and to it. And that's the kind of space that we effectively monitor and respond on. So that's how we look at the pricing dynamics. The other question was on healthcare. Healthcare share of wallet I think was the question. We -- if you look at the industry and break it down, I believe the share of wallet for healthcare is somewhere between $400 and $700 per household. We're really early stages right now, so too early to comment on how -- what the numbers are there, but we do believe that greater than 90% of that particular vertical is addressable by Chewy. And then last, the percent of customers that will use healthcare. Again, too early to sort of comment on that, but we don't see why it's not a uniformly applied proposition to our customers.

Got it. Thanks guys.

Your next question comes from Robert Coolbrith with Wells Fargo Securities. Your line is open.

Hey, thanks guys. [Indiscernible] on. Sorry, I cut out on my line before. A couple of quick clarifications around the pharma business. You call in your letter that the new Arizona Pharma facility operates under your own licenses versus the Kentucky facility is. Is that operation, operational arrangements still in place for PetSmart for the KentuckyOne? Can you remind us of the details there and then kind of walks through the development process? And then one more quick follow-up, any color on how prevalent Autoship is amongst pharma maybe relative to consumables and in any dynamic to call it how that penetration is ramping Autoship penetration is ramping among pharma or cross-sell dynamics? Thanks.

Sure. So, yes, we have retained the ability to operate out of our traditional facility that has the PetSmart licenses. In the pharma space, the license is actually physically attached to a building. So, when we launched Phoenix, it also allows us the ability to ship from two sides of the country, and therefore offers a better proposition for our customers in terms of bringing them faster delivery, just like we do for the rest of our network. And then, how prevalent is the second part of the question with Autoship around pharma. Look it's also tremendously attractive, right. In some cases, you would say that, it's more and our ability to actually drive that compliance is even stronger, because we have a targeted relationship with the customer. We are able to do monitor and effectively approach them and help them convert to become Autoship customers, and remind them with our newer launch that we just launched with the medicine cabinet type feature, the Rx Manager, it actually allows the customer to even track and reminders, which should actually increase compliance. Humans are bad at feeding humans medication. We sometimes forget to feed our pets, and that's where the power of an Autoship program comes in, and we're excited about what this could -- what this could hold for us in the future.

Great. Thanks Sumit.

[Operator Instructions] Your next question comes from Dylan Carden with William Blair. Your line is open.

Thanks very much. Just sticking with pharmacy here. Curious how year in so to speak your conversations are going with vets and sort of how your positioned here in the competitive landscape and others a handful of other companies doing something not dissimilar. And are you making sort of making a big marketing push either directly or more broadly to kind of shift customers over, shift their wallets spend over to that business, and how you kind of see it growing organically and whether or not how much of that's embedded in your numbers thus far? Thanks.

Yes. I'll start answering from those from the -- from the back. We are currently more focused on growing pharmacy organically. The reason for that is, because we are building out the customer experience, and perfecting it as we continue to expand that offering with our customers and into the marketplace. Number two, going back to the first question. So, we are -- we believe we are in the mission of health and wellness, alongside the vet community. And so from that standpoint, the pet parent, the vet community and Chewy together can deliver a tremendous value proposition in the industry benefiting health and wellness propositions. The vet community sits in the center of the equation. The pet parents need to be advised and the encouragement -- a reliable partner that can help drive compliance that can help create education and awareness that can actually provide them the convenience of e-commerce at the same time. And so there's many innings to be played and we will continue to do that over the next couple of years. That's how we're thinking about it.

Thank you very much.

That's all the time for questions that we have. I'll turn the call back to Sumit Singh for any closing remarks.

Thank you for all your attention and participation today. We intend to be active with regard to our Investor Relations and look forward to seeing investors and analysts in the coming quarters. Have a nice evening, guys. Thank you.

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