Chewy, Inc. (CHWY) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Chewy First Quarter 2020 Earnings 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] I would now like to hand the conference over to your speaker today, Bob LaFleur, Vice President of Investor Relations and Capital Markets. Please go ahead.

Thank you for joining us on the call today to discuss our first quarter 2020 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 on our website, investor.chewy.com. The link to the webcast of today's conference call is also available on our site. On the 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 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 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 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. Finally, this call in its entirety is being webcast on our Investor Relations website. A replay of this call will 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. Shortly, after we spoke in April, three-fourths of the U.S. population was under shelter-in-place orders. Two things became clear very quickly. First, the pandemic put Chewy in a unique position to provide essential services to pets and pet parents. And second, we needed to prepare for a significant change in operating conditions. Over the past two months, we have continued to adapt and respond rapidly to service millions of new and existing customers while caring for the safety and well-being of our team members. I'm proud of the incredible spirit of innovation that we have sustained across the Company as well as our team's ability to adapt and respond to COVID-19. For instance, in Q1, Chewy's busiest quarter ever, we launched gift cards for pet parents. This is a virtual product that customers have been asking us to offer for years, and the early adoption signs are encouraging. Our teams also built and led campaigns with shelters and rescues across the United States, raising awareness about this community and making over $7 million in charitable contributions. And then, we also quickly developed effective work-from-home technology solutions from scratch that enabled us to move our entire customer service operations from zero to 100 work-from-home in a matter of weeks. The pandemic has tested and proven our ability as a company and as a team to move rapidly and deliberately and to plan, communicate and innovate on behalf of our employees and customers. Now I will discuss our Q1 results and then share some insights about the new customers we have acquired in the first quarter and our ability to retain them over the long term. After that, I will share updates on our supply chain and fulfillment network. Finally, I will turn the call over to Mario to discuss our first quarter results and guidance in more detail. As anticipated, our shop-at-home business proved resilient amid the current economic disruption. First quarter results reflect the significant change that occurred in customer shopping behavior as the pandemic spread. First quarter net sales increased 46% year-over-year to $1.62 billion. We ended the quarter with 15 million active customers, an increase of 3.7 million compared to the end of first quarter 2019 and the fastest acceleration of new customer acquisition in the Company's history. Autoship customer sales exceeded $1 billion for the first time in a single quarter, totaling $1.1 billion or 67.9% of total net sales. Net sales per active customer grew 6.6% to $357 when adjusting to exclude the extra week in 2018. Q1 gross margin expanded by 50 basis points year-over-year to 23.4%. In addition to the scale benefits from overall revenue growth, our private label business contributed 60 basis points to the year-over-year expansion in gross margin. Our healthcare Rx business continued its robust growth in Q1 despite clinic closures and/or reduced clinic hours due to the pandemic. And lastly, incremental freight and logistics investments that we made to protect the customer experience due to COVID-19 decreased our gross margins by 120 basis points in the quarter. I am also pleased to report that for the first time in Chewy's history, we delivered positive adjusted EBITDA of $3.4 million, improving margins by 160 basis points year over year. This marks a significant milestone achievement for our company. Our sales momentum, combined with the marketing efficiencies, more than offset incremental COVID-related costs in the quarter, leading to positive adjusted EBITDA. We believe that the volume-related cost pressures are temporary, and we expect those to moderate as we look ahead. We further believe this combination of scale revenues and cost discipline will accelerate us along our path of sustainable profitability. Now let's shift our focus to customer acquisitions in the quarter and insights into their purchasing behavior. We collected data on five customer cohorts. Our control group consisted of customer cohorts from six weeks, six months and one year prior to the COVID-19 outbreak. We then looked at Q1 March and April customer cohorts after the outbreak. For the purposes of clarity, we've blended the three control group cohorts into a single pre-COVID cohort and the March and April cohorts into a single post-COVID cohort. Unless specified, the results that I will talk about reflect comparison of the blended cohorts. First, we added a record 1.6 million net active customers in the first quarter, which was more than double our average quarterly pace of net active customer adds in 2019. Second, and equally as important, the behavior shown so far by these new customers is promising. Initial orders were up 11%, larger in value than our pre-COVID-19 customers. In the first four weeks since their initial purchase, a higher percentage of our new customers returned to make a second purchase, and the average value of those repeat orders was as much as 5% higher than the pre-COVID customers. Finally, we analyzed their Autoship sign-up and cancellation risk. And on a net basis, they were within historical ranges. These insights bode well as a sign of future customer engagement. And although we cannot predict the future, currently, we're expecting these customers to become long-term Chewy customers. We also observed encouraging signs from our existing customers. In the quarter, we saw nearly double the number of customers coming back into active status versus previous quarters. This means more customers who had not made a purchase with us in the previous year returned to an active status, providing us an opportunity to reengage them. Also, after the COVID-19 outbreak, our existing customers started creating bigger baskets. These baskets had a higher mix of consumables in them. We believe these larger baskets with a higher mix of consumables were evidence of pandemic-related pantry stocking, and we estimate this benefited first quarter net sales by approximately $70 million. We view this as one-time benefit that we have not seen reverse in the second quarter, and we do not expect to see it reverse going forward. All in all, we see these as positive data points as we look ahead into the second quarter and the rest of the year. Now let me share some observations for Q1 across our supply chain and fulfillment network. The surge in orders increased our shipping volume in March by over 50% compared to February. Although our supply chain remained resilient through the quarter, the unplanned nature of the demand surge related to COVID-19 created temporary stress points in our supply chain, as well as customer service and fulfillment operations. We typically spend months preparing for our annual Q4 holiday cycle. But in this situation, there was no advanced warning or preparation. The demand shock, which was also felt by our supplier network, caused elevated out-of-stock levels for certain product categories and led to some temporary conditions of suboptimal inventory placement across our fulfillment network. We were able to quickly react to this by updating our recommendation engines so customers could easily sub-select different brands, sizes or patterns if their original choices were unavailable. Our private brand portfolio categories like crates, litter and hard goods offered customers attractive alternatives and experienced strong year-over-year growth in the quarter. These actions helped reduce abandoned orders and maintain customer engagement and conversion levels, which kept sales momentum strong throughout the quarter. However, inventory imbalances in the fulfillment network led to a higher rate of split customer orders and led us to ship more orders in multiple boxes and ship more orders over longer distances. For a portion of our volume, we increased the use of express shipments as a way to ensure timely deliveries and protect customer experience. This deviation from our standard playbook increased first quarter freight and packaging costs by approximately $20 million and negatively impacted gross margins. The elevated volumes also led to a sizable increase in order backlog across the fulfillment network, which we tackled with a multipronged strategy. Our first priority was the well-being of team members, so we did everything we could to make fulfillment center workspaces as clean and safe as possible. In Q1, we also hired 4,600 new hourly associates, most of whom were dedicated to our fulfillment centers. Since the end of the quarter, we have achieved 100% of our original hiring target of 6,000. These new team members, along with thousands of other dedicated Chewtopians helped us work through the backlog and tackle the increase in customer demand. Now that fulfillment center staffing is properly aligned with our elevated order volumes, we are better positioned to maintain equilibrium going forward. The process here is similar to hiring up around the holiday season. We add positions as demand ramps up and then balance out our ongoing staffing needs by calibrating our replacement hiring rate against natural attrition, depending upon volume requirement. We also opened our ninth fulfillment center in Salisbury, North Carolina on April 6 and immediately accelerated its volume ramp to further help reduce backlog. I would like to thank the Chewy team members who came together for this opening under exceptionally difficult circumstances. It is a demanding task to open a fulfillment center, and it is even more challenging to do so in the middle of a pandemic. Our next fulfillment center in Archibald, Pennsylvania remains on track to open later this year. In closing, we are proud of the way the team executed through this milestone first quarter of 2020. We experienced strong revenue growth, record new customer acquisition and generated positive adjusted EBITDA for the first time. 2020 will be a pivotal year for Chewy, and we plan to remain true to our mission of being the most trusted and convenient online destination for pet parents and partners everywhere. Now more than ever, we are focused on execution through communication, innovation and perseverance. I will now turn the call over to Mario who will provide the details on our first quarter results and walk you through our current second quarter and full year financial outlook. Mario?

Thank you, Sumit. Our first quarter results provide further proof of how our operating discipline and customer focus drive long-term shareholder value. First quarter net sales reached $1.62 billion, increasing $513 million or 46.2% year over year. This is the fastest year-over-year growth in absolute terms in the Company's history. Excluding the estimated $70 million benefit from pantry stocking in the first quarter, net sales grew 40% year over year, which, in itself, represents a meaningful acceleration in our growth rate compared to fourth quarter of 2019. Autoship customer sales for the first quarter totaled $1.1 billion, another company milestone, or 67.9% of total net sales. Autoship customer sales growth again outpaced total net sales growth, increasing 48% year over year or 180 basis points faster than total net sales growth. In the first quarter, we added 1.6 million active customers, bringing our total active customers to 15 million. On a year-over-year basis, we added 3.7 million active customers, an increase of 32.6% year over year. As we have shared previously, our active customer count at the end of the quarter is equal to the active customers at the end of the previous quarter plus any new customers added in the quarter, minus any customers who have not made a purchase in the last 364 days. Net sales per active customer for Q1 2020 increased 6.6% year over year to $357 when adjusting Q1 2019 results to exclude the benefit of the extra week in Q4 2018. As a reminder, net sales per active customer equals trailing four-quarter net sales divided by the number of active customers at the end of the quarter. In this case, and through the third quarter of 2020, we will adjust out the impact of the extra week in Q4 2018 when presenting year-over-year growth in NSPAC versus 2019. Our first quarter NSPAC shows a 1% decline quarter-over-quarter, this is a function of the magnitude and timing of new customer additions in Q1 2020. Nearly 80% of the new customer acquisitions in the quarter took place in March and April. While we include all of these new customers in the active customer count, the relative impact on revenue over the past four quarters is small. The true value of these new customers is the cumulative positive impact of their purchases on our revenue in future quarters as their repeat purchasing activity ramps up and they direct more of their wallet share to Chewy over time. Q1 gross margin increased 50 basis points year over year to 23.4% in spite of increased freight and packaging costs, which negatively impacted our gross margin by approximately 120 basis points in the quarter. Q1 operating expenses, which include SG&A and advertising and marketing, were $426.2 million or 26.3% of net sales, scaling 70 basis points year over year compared to Q1 2019. SG&A, which includes all fulfillment costs, customer service, credit card processing fees, corporate G&A, corporate payroll and share-based compensation, totaled $320.1 million in the first quarter or 19.7% of net sales. On a fully loaded basis, this represents a 130 basis point improvement versus the fourth quarter of 2019. And excluding share-based compensation, SG&A as a percent of net sales improved 50 basis points to 17.1% in Q1 versus 17.6% in Q4 2019. The primary driver of this accelerated quarter-over-quarter scaling we saw in SG&A was a surge in sales. As part of our COVID-19 mitigation efforts, in the first quarter, we updated employee benefits and policies, invested in temporary pay raises and bonuses for our hourly team members and materially raised our cleaning and sanitation protocols to keep our network operational and our employees safe. Additionally, starting in mid-March, we hired 4,600 hourly associates into our fulfillment network. All of this combined led to approximately $10 million incremental expenses or 60 basis points to SG&A as a percent of net sales in Q1. These investments were prudent in size, scalable in nature and highly focused on protecting our customers and employees. Q1 advertising and marketing was $106.1 million or 6.5% of net sales, scaling 270 basis points year over year. The increase in organic, or said another way, customers who come to our site without the aid of acquisition and marketing spend, allowed us to thoughtfully reduce our overall media buys in the quarter. Additionally, our team was quick to capitalize on the lower media costs that we observed across digital and off-line channels, thus creating a tailwind that resulted in lower cost for all other customer acquisitions. These twin benefits allowed us to optimize our investments in advertising and marketing in the quarter and acquire a record number of new customers. First quarter net loss was $47.9 million as net margin declined 30 basis points year-over-year to negative 3%. Excluding share-based compensation of $42.3 million, our first quarter net loss was $5.5 million, and net margin improved 170 basis points to negative 0.3%. In the first quarter, we also marked a milestone as Q1 was our first adjusted EBITDA positive quarter in the Company's history. Q1 adjusted EBITDA was $3.4 million, and adjusted EBITDA margin improved 160 basis points year-over-year to 0.2%. Improvements in both adjusted EBITDA and adjusted EBITDA margin reflected our ability to grow the top line, improve gross margin and scale advertising and marketing despite the challenging operating environment and incremental costs brought about by the COVID-19 outbreak. More than ever, we believe that our disciplined data-driven operating strategy, coupled with a secular shift to online our category, will propel us faster along our trajectory of long-term sustainable growth and margin expansion. Turning now to free cash flow, Q1 free cash flow was negative $21.8 million as $42.5 million in capital investments offset $20.7 million of positive cash from operations. Q1 capital investments were primarily driven by cash outlays for our new fulfillment centers in North Carolina and Pennsylvania, in IT projects and equipment. Now to guidance. As we navigate Q2 and full year 2020, our team remains aligned on our mission, and we continue to execute our growth strategy. The inputs in our business remain in line with our expectations and are reflected in our Q2 guidance. Some ongoing costs related to the residual impact of COVID-19 are expected to carry over to varying degrees into Q2. Our cleaning and sanitizing tempo will remain elevated, and we continue to see some pressure on packaging and freight costs. SG&A in Q2 will also reflect the full quarterly cost of the 6,000 newly hired fulfillment center workers whereas Q1 SG&A only reflect the proportional costs during the hiring ramp-up. On balance, we believe we have sufficient visibility on the revenue and cost sides of the business to again provide quarterly and full year guidance for net sales and full-year guidance for adjusted EBITDA margin. This guidance assumes no material changes or disruptions in the current operating environment, our supply chain or our fulfillment network. For the second quarter 2020, we are expecting net sales to be between $1.62 billion and $1.64 billion, representing year-over-year growth of between 40% and 42%. Recall that we provide profit guidance at the annual level, not quarterly. For the full year 2020, we are expecting net sales to be between $6.55 billion and $6.65 billion, representing year-over-year growth of between 35% and 37%, and full year 2020 adjusted EBITDA margin to be approximately breakeven, plus or minus 30 basis points. While we're not guiding to full year SG&A, I will share a few thoughts that may provide additional context in this area. As I mentioned earlier, we expect to incur ongoing COVID-related expenses in the second quarter as we remain committed to safeguarding our team members' health and well-being and protecting the customer experience. On a fully loaded basis, we expect full year SG&A as a percentage of net sales to be lower than fiscal 2019. I will conclude by saying that we are pleased with our Q1 2020 results and look forward to Q2 and to the rest of the year. And with that, I'll turn the call over to the operator for questions. Operator?

[Operator instructions] And your first question comes from Doug Anmuth with JP Morgan. Please go ahead.

Thanks for taking the questions. First, just given the 1Q strength and your views that 1Q is not a one-off event and that e-commerce adoption has accelerated and that new customer behavior is promising, can you just talk a little bit more about your guidance in the back half and the decel that's implied? I think it's about 31% at the high end in the back half. And then just related to that, you talked about $70 million of one-time benefit in the quarter from pantry stocking and mix toward the consumables, but yet you don't expect it to reverse. Can you just help us understand those comments better? And what gives you confidence that, that behavior may be permanently shifted here? Thanks.

Doug, thanks for the question. This is Mario. I'll take the first question, and Sumit will answer the second part. What I think you're getting at is what is our guidance philosophy, how do we think about the guidance that we provide. And so a couple of things, one is we are very data-driven. When we create guidance, we look at a variety of metrics: macro, micro factors and trends; things like customer behavior, including Autoship, and that's a factor for us; the strength of our catalog; competitive data; and we take into account also our projected marketing spend and resulting customer acquisition. So the guidance that we provide is based on lots of data. And currently, the guidance we provide is based on the best available information we have as of right now.

So let me add to that a little bit. Hey, Doug, this is Sumit. As we look at our business to the balance of the year, we see a few variables at play on top of what Mario has said. So on net sales, we have a good understanding of the pre-COVID customer behavior and expect limited variability in their behavior. We also have early conclusions about the post-COVID new customers that we've written in the earnings script. And although we expect them to behave similar to previous cohorts, their behavior could vary, right, relative to expectations, either up or down slightly. And then there is the new customer acquisition piece, which could actually get a second tailwind from COVID, which is currently not baked into our assumptions. And then on the cost side, we could see incremental cost pressures in areas like media costs. It's an election year, competition reengaging in the back half of the year. We may also have incremental expenses associated with the second wave that we believe we have a comprehensive plan, and we're going to be better prepared to meet that potential need. So netting these factors out, we feel good about the guidance that we're providing today. And as these evolve, we'll continue to update you and the rest of the audience as the year plays out. So hopefully, that provides a comprehensive point of view. Your second question is about pantry stocking and the comment that we're not seeing it reverse. So what we mean by that is we're not actually seeing customers hold their purchases back as they step out from Q1 into Q2. So we continue to track repeat order behavior. We continue to track subscriber rates to our Autoship program, and we continue to track metrics such as AOV, attach rates, order attach rates, etc., etc. And so far, we're seeing behaviors that are promising and mirror previous cohort behavior. That's the context of the comment there.

Your next question comes from Brian Fitzgerald with Wells Fargo. Please go ahead.

Thanks. A quick clarification on, Sumit, what you just said to that. The post-COVID Autoship customers, you said the sign-ups and cancellations are within historical ranges, but you're also seeing basket sizes increase faster with the new cohorts. Have you seen anything with propensity to use additional hard goods or attach rates or private label or pharma with those newer post-COVID cohorts? And then second question is just around adoption rates. And we've seen indications that the pandemic had initially sent adoption rates up, but then they reverted back to normal maybe as shelters emptied out. We did see a spike in fostering though. So any color you can give us on net-net? Is that more pets in the household? Is that good for you? Or are you seeing the shelters start to open up and fill back up? That would be great. Thanks.

Yes. Hey, Brian. Okay, lots of questions there. I'll take them one by one. Let's talk about the shelter adoption and foster sort of rates that we're seeing. There's not perfect data available in the space. However, the data that we're tracking that essentially shows that in March and April, fosters and adoption on a year-over-year basis were up 60%. And you're right, coming into May and June, they've sort of reverted back to sort of pre-pandemic levels. Net-net, what we saw on our side was an increase on pet profile sign-up. Over 2.5 million customers signed up for pet profiles with us in Q1. And the encouraging data point there is one in every four customers who signed up was a new puppy or a new kitten. And so we're trying to correlate this back into shelter and adoption as much as possible, and there's some correlation, but I think there's an overall trend that we're winning with here. And when you look at that type of customer, the type of baskets that they build are richer baskets because you require a full array and an assortment of essential food and supplies but also a lot of hard goods and the combination. So I hope that provides a bit of a color into the type of customer behavior and connecting it back to the shelter, foster, rescue sort of trends.

Our next question comes from Mark Mahaney with RBC. Please go ahead.

Okay. Thanks. I know you touched on two things, but you didn't quantify them, so I'm going to try to draw you out on that. Private label and pharmacy, anything about the growth rates, their contribution overall to revenue, and is there any particular reason why this COVID crisis would have been a catalyst to one of those, maybe the pharmacy products? Do you happen to see -- just throwing it out as an idea that you would see a greater interest in pharmacy products for pets during this environment? Thank you.

Hey Mark, good to hear from you. So overall, the pharmacy business had another strong quarter, and we remain pleased with this young vertical's progress. Young being the operative word and, therefore, I'll stay away from kind of providing specific contribution to the business today. We saw increased demand from customers who no longer had direct access to their vet's office during the lockdown. We also saw -- and this was driven by either clinic closures or reduced clinic hours. And at the same time, there was a competing phenomenon where we experienced delays in processing prescription approvals due to those trends of office reduced hours or closures. It did not, however, in our opinion, impact conversion. And on balance, we believe that the pharmacy business saw a net benefit from consumer changes during the lockdown, supporting the intuitive or the hypothesis that you led with. On private brands, we continue to treat private brands as strategic. You can kind of observe from the comment, this was an opportunity for us to really test out substitutability and the value that we provide with private brands, and we led with those in many categories opportunistically and deliberately. And we saw our private brand portfolio hold up strong in this regard. So we continue to fuel growth with these two new verticals, and they continue to provide us the complementarity and net benefit of overall basket value.

Our next question comes from Oliver Wintermantel with Evercore ISI. Please go ahead.

Yes. Good afternoon guys. I had two questions. One is inventories. They were up about 77%. Now that probably has to do with the opening up of the new FC. But from your commentary in the prepared remarks, there was also some hiccups with your vendors or fulfillment, so maybe a few comments on inventory and how that is shaping up for the rest of the year. And then just the other one was on gross margins. I know the fulfillment cost had some impact on the gross margin here and how you would think about that going forward in the next one or two quarters.

Oliver, this is Mario. I'll take that question. So in regards to the inventory build, you're right that it grew versus the start of the year at the end of Q4 2019. And I think your intuition is right as well that part of the growth is because we launched a new facility, our Charlotte fulfillment center on April 6. Now the other reason why inventory would grow is simply the fact that our sales grew. So as our sales grow, we have more inventory to maintain levels of our customer experience that we aim for. Hopefully, that answers your question on the inventory itself. In terms of gross margin going forward, let me point you back to our Q1 results and the fact that we increased gross margin year-over-year and, otherwise, would have been higher than when we report it had it not been for the impact of COVID that drove an impact of about 120 basis points in the quarter which, obviously, we don't believe it's a recurring cost in terms of gross margin.

Oliver, just to clarify, freight and logistics hits gross margin for us, fulfillment expenses hit below the gross margin line into contribution profit.

Yes. That's actually fulfillment new expenses, meaning fixed fulfillment, like the rent and the like. That's all in SG&A.

Yes. Got it. Thank you so much.

Your next question comes from Seth Basham with Wedbush. Please go ahead.

Thanks. Congrats on some great results. My question is on customer acquisition costs. If you could give us some quantitative insight into how they trended in the first quarter and your expectations for Q2 and the balance of the year, that would be really helpful.

Sure. Seth, so as we had anticipated when we met in April, we saw efficiencies in marketing in Q1, both the input costs across media marketing mix change and lowered, in fact, the change was in favorable condition in this way. And we also saw a boost on organic traffic toward our site, combination of which drove marketing efficiencies that we've mentioned in the earnings today. For Q2, we are gradually and opportunistically ramping up marketing starting now. And as we've anticipated, we are observing an increase in channel input costs across an array of media mix channels, digital and mass media, driven by businesses ramping up spending on these channels or marketing channels. Our marketing teams continue to work smartly to balance investment levels to maximize acquisition against customer LTV and the resulting overall marketing yield as an output of that equation. Net-net, we expect advertising and marketing costs to be higher in Q2 than they were in Q1 driven by these higher input costs, as well as greater participation from retailers in the space.

That's helpful. And just to clarify, from a year-over-year perspective, are you expecting as much leverage in sales and marketing in the second quarter as you experienced in the first? I gather now.

We will continue to drive efficiencies. I will stay away from commenting on the specific amount of the efficiency at this moment.

Fair enough. Thank you.

Our next question comes from Lauren Cassel with Morgan Stanley. Please go ahead.

Great. Just one follow-up on that. I guess are you assuming any increase in marketing or advertising costs in the back half of this year and maybe the first half of '21 to retain these new customers? Or do you sort of expect that their behaviors will remain sticky without any incremental spend? And then my second question, just sort of a big picture question. I guess what are sort of the one or two key learnings from the COVID period? And has that changed any of your long-term strategic priorities or plans for the business?

In terms of marketing, no. As long as the inputs in the customer behavior continue to align with the output behaviors of purchase rate and subscribe rate that we are observing, we do not plan to spend incremental marketing, and that's not something that we've baked in. Number two, in terms of learning from the COVID period, I think thematically, looking back, if we were to summarize the playbook that the team executed, I would summarize it as communicating, innovating and really persevering. We've needed the agility of a sprint and the stamina of a marathon as we have come into this and as we come out of it. We have continued to innovate on our customers' behalf, and we will continue to do so. We are focused appropriately in making sure that priorities that hit growth, profitability and customer experience are top of mind for us. And we've been able to appropriately prioritize others below the line. And last, but not least, we continue to communicate and overcommunicate with our teams to make sure that we're totally aligned.

Your next question comes from Brent Thill with Jefferies. Please go ahead.

This is John Colantuoni on for Brent. Last quarter, you mentioned plans to hire 6,000 to 10,000 new employees. It looks like you're now at 6,000. Are you planning to continue hiring more? Or have you reached your target for the year? And if not, was your decision to hire at the low end the result of seeing slightly less pickup in demand than you originally had expected? And also, can you give us a sense for what portion of these employees that you hired are part-time versus full time?

Sure. You might have to clarify one part of your question, but there were several in there I'll start and then maybe we can go back to the second part of the question. So we've met our target. We are not continuing to hire more people. As we've articulated in the script, we believe that we have reached a point with variable labor where our demand and supply equilibrium has been achieved, and we essentially will follow the playbook that we always do. We will let natural attrition take care of kind of maintaining those equilibriums. To handle the elevated demand that we continue to knock out of the park, we are continuing to utilize that labor. And if demand levels fall off at any point, then we'll let natural attrition take care of it, which is very similar to the way that we actually plan our holiday cycle. So there's nothing unique that is going on with this specific time. It's just that the demand shock happened before we could actually align the labor, so now the labor is aligned. What was the second part of your question, if you don't mind repeating?

Well, you pretty much answered it, but I did also just have a question about whether you can give us a sense for what portion of these employees are part-time versus full time?

Yes, sure. So you have to think of these as hourly team members, right, who are full-time employees. And they flex up and down in maintaining the equilibrium of demand and labor plan.

Our next question comes from Deepak Mathivanan with Barclays. Please go ahead.

Hey guys. Thanks for taking the question. So two quick ones from us. First, Sumit, can you talk a little bit more about the reactivation trends? Do you have a large base of customers who historically bought just hard goods, just toys and kind of churned off after a one-off purchase? Anything you're doing to engage with them more? And how much of the new customers, the 1.6 million in 1Q, is reactivation versus first time to the platform? And then second question, does the strong demand that you're seeing recently give you some flexibility to leverage maybe with vendors better at this time, perhaps in terms of funding first Autoship orders or any other forms of vendor rebates at this time? Thank you.

Sure. So getting to the second question, our relationship with suppliers, we view that as strategic, and we also view our participation levels as an ongoing strategy not driven by opportunistic or changes in events. So as we've continued to scale, you've seen that our scale and market share has produced leverage to be able to drive efficiencies across product margin, as well as overall supply chain. I think with the acceleration in the trends that we're seeing here, we continue to be bullish that we can continue to drive that scale and, therefore, fitness in the bottom line. On the first part of the question, reactivation trends. So the reactivated base of customers is a small portion relative to the overall customer base that we're talking about, which is also natural for us because our retention rates are multiple is higher than traditional e-commerce cohorts. And also recall that our attrition is de minimis year two, into year three. So these kind of trends are encouraging where, when we bring customers onto our platform, we have the ability to retain them for long periods of time, and they ship their share of wallet over to Chewy the longer that they stay with us. So their net sales per active customer or share of wallet grows with us. And it's the same behavior that we're observing with our current customer base. So we're not taking any unnatural measures standing on the side to drive excess reactivation or we're not seeing any kind of change in pattern there.

If I can add one more thing to that, Deepak, because I think the point that Sumit mentioned earlier in the earlier remarks is that not only do we see new customers join the platform but to the question of customers reactivating, we have customers coming back to the platform all the time. But in the first quarter, what we saw is that, that rate doubled. So we had a lot more new existing customers who hadn't purchased from us in the last year come back to the platform. So that's a very good, very positive sign for us.

[Operator instructions] And your next question comes from Eric Sheridan with UBS. Please go ahead.

Thanks for taking the question. Mario, I want to come back to something you said in your part of the prepared remarks where you said this could accelerate -- if I'm paraphrasing right, accelerating the path to increased levels of profitability over the next couple of years. Is there any way to give a greater sense of how you're thinking about the exit velocity on profit margins coming out of 2020, '21 and thinking about what that means for pulling forward levels of profitability in the next couple of years? And what are some of the levers you're thinking about seeing leverage in the business versus investing back in the business? And maybe part two, if I can, as you see increased levels of profitability in the business as you've built it in the U.S., Sumit, does that make you rethink maybe looking beyond the U.S. and thinking internationally for Chewy as a company over the medium to long term? Thanks so much.

Hey Eric, it's Mario. I'll try to answer the first part of that, I'm going to see if I remember the pieces and unpack it. What I think you're getting at is how do we look at our path to profitability. And the fact is that in Q1, you saw our results. We were able to achieve, for the first time, positive EBITDA, $3.4 million, improving year over year. We expanded gross margins. We scaled the P&L lines like marketing SG&A. And the guidance that we provided just a few minutes ago was approximately breakeven for the year, plus or minus 30 basis points. So I think those are proof points that executing against the strategy that we've laid out and we've communicated, it works. The specifics of the exit rate on this year versus next year and the timing of when we expect to achieve some of our long-term targets, that I think -- what I can say is that we are closer now, having seen this shift in demand and this increased volume sales, we're closer now than we were just 90 days ago. But specific to timing, I'll refrain from addressing that.

Eric, this is Sumit. I'll add some color to that, which will also answer the international question. We're not coming off of our strategy, which we've been very clear about from the beginning and continue to execute on with rigor and with discipline. So acquiring new customers and growing share of wallet for existing customer base, combined with focusing on new verticals, private brands, healthcare, remains our priority. On top of this, we're not taking our foot off the gas as it pertains to innovation or launching newer types of businesses. We launched gift cards in Q1. We'll continue to seek out business ideas that can augment our sales and profits while also delivering value to our customers. And as we do that, we'll, of course, keep the audience updated. So our road map on our thinking on international also hasn't changed. We believe that there are three trends going on right now that meaningfully accelerate our position to play in this space. One is we're observing pet spending per household going up, and we anticipate a 5% CAGR on that over the next three to four years. Two, we've also observed U.S. Pet household ownership is going up at a rate of 1% to 2% CAGR. And then three, what we've seen with this pandemic is that the online penetration projections have increased from 25% penetrated through 2024 to now north of 35% penetrated. And we're well positioned to capitalize on this because we've been planning for it. We're preparing for it. We have 17,000 people focused on it. So from a people, process, infrastructure and tech point of view, we're aligned and focused squarely on the United States with this massive opportunity in front that we'll continue to execute on. And our international thinking remains the same, greater than one year out, less than five years out.

There are currently no further questions at this time. I'll turn the call back to management for closing remarks.

Thank you all. Have a nice evening.

This concludes today's conference call. Thank you for participating. You may now disconnect.