Good afternoon. And welcome to the Chewy Second Quarter 2020 Earnings Call. At this time, all participants are in a 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, Investor Relations and Capital Markets. Please go ahead.

Thank you for joining us on the call today to discuss our second quarter fiscal 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 the site. On our call today, we will be making forward-looking statements, including statements concerning Chewy's future prospects, financial results, business strategies, industry trends and our ability to successfully respond to business risks, including those related to the spread of COVID-19, including any adverse impacts on our supply chain, workforce, fulfillment centers, other facilities, customer service operations and future plans. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements. Reported results should not be considered 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. The strong demand we observed in the first quarter carried over into Q2 and once again thanks to the high-quality execution from the Chewy team, we achieved record net sales growth and customer additions. In recent months it has become clear that the retail industry in general and e-commerce in particular is going through a period of transformative change; growth curves that were supposed to play out over years have been compressed into quarters and even months. Over the past few years, we have invested in technology; new businesses, fulfillment capacity and in building an extraordinary team. This has prepared us to quickly adapt to the acceleration of our own growth curve and to provide top-notch service to the growing millions of pet-owning households in the U.S. who depend on Chewy. We built Chewy by putting the customer at the center of everything that we do. In a world of uncertainty, qualities like trust, convenience and customer service really matter; especially when it comes to caring for family or loved ones, whether they're people, pets or both. We have taken these millions of customer relationships and built a large base of repeat business that enables our rapid scaling and fuels our profitability on an accelerated timetable, as empowering as all of this is we are just getting started. In the next few minutes, I will discuss our Q2 results and then share some updates on the purchasing behavior of our newest customer cohorts, as well as how we interpret their lifetime value potential. I will also update you on our fulfillment center network and distribution strategy, planning for the upcoming holiday season and then wrap up my remarks with some closing thoughts about Chewy's market share…

Thank you, Sumit. Second quarter net sales reached $1.7 billion increasing $546.3 million or 47.4% year-over- year. This marks the second time we have added more than $0.5 billion of net sales year-over-year in a single quarter. Altogether, we added over $1 billion to the top line in the first half of 2020 as we attracted more customers to our platform, expanded the catalog and help our customers build bigger baskets. Autoship customer sales for the second quarter totaled $1.16 billion or 68.3% of total net sales and again topped $1 billion in a single quarter. Autoship customer sales increased 45.3% year-over-year continuing the program's uninterrupted growth since launch. In the second quarter, we added 1.6 million active customers; bringing our total active customers to 16.6 million. On a year-over-year basis, we added 4.6 million active customers; an increase of 37.9%. Growing our customer base is a key long-term driver for top and bottom line expansion, and we are pleased with the results so far this year; having added more active customers in the first six months of 2020 than we did in all of 2019. Net sales per active customer or NSPAC as of Q2, 2020 reached $356, an increase of 3.2% year-over-year when adjusting the second quarter of 2019 NSPAC to exclude the benefit of the extra week in the fourth quarter of 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 adjust out the impact of the extra week in the fourth quarter of 2018 when presenting year-over-year growth versus 2019. NSPAC was virtually flat quarter-over-quarter as a result of the large influx of new customers in Q2.…

[Operator Instructions] Our first question today comes from Mark Mahaney with RBC.

Thanks. I want to ask about the NSPAC outlook and could you just detail how that NSPAC goes from whatever $350, $356 now to the $500 to $700. I know you just -- I know you're talking about that with particular cohorts as the overall customer base ages; you'll inevitably drive up there but just talk about how that happens? Is it greater frequency? Is it spending across different categories? I'm sure it's all of the above, but what have you typically seen in terms of the drive up of that NSPAC? Thank you very much.

Hi, Mark. This is Mario. So I'll take the question; what would happen is like in the first quarter we had a record influx of new customers that diluted NSPAC in the second quarter. So it was basically flat quarter-over-quarter but up 3.2% year-over-year. And I think you have the dynamics right that as we add more new customers that affects NSPAC in the short term but over time those customers mature and they ship their spending to us. And so then your question of how does that evolve over time; it's a mixture as you said all of the above, not only do they find the selection, convenience; price, customer service to be so appealing that they move their spending to us. But we also continue to expand the catalogue and the categories that we serve them and that increases their spending with us over time. And you're right to think that as we have shared with in the past; first year tends to be about $150 -$200, by year three that grows a $100 - $200; by year four or five, you're in the $500 -$600 range. So the longer they stay with us the more they spend with us, but it's a combination of all the things you mentioned.

Mark also, this is Sumit. I think helpful to remember that the number that you're quoting, right, the number, the NSPAC number that you are quoting is a weighted average number. And when we look at the number of customers that we've acquired, so the net additions that have happened in the last three-four years form a bulk of the customers on the platform; so just by the mathematics of it, the cumulative weight gets dragged down by the maturity of the cohorts that we bring on. But when you look at our older cohorts that have been active with us over four, five, six years; those are the cohorts that are spending north of $500, $600, $700. And so that's I think that's an important consideration which is why in the past we've said, it's really important for us to bring customers online and then what we gain confidence as we build relationships with these customers and they spend -- the more they spend the more -- the longer they stay with us the more money they shift from their share of wallet from their basket over to Chewy. And so you take that dynamic and you take the dynamic of let's say the food and supplies market in the North American space and you take $100 billion pet space; you take 65% of that is just food and supplies and you take 90 million households that math is roughly about $700 per share of wallet per household just attributed to food and supplies. And so when you start putting these two together and you see the results in the way that we go to market and engage these customers and the offerings that we're offering that Mario suggested that's how the math works out.

Our next question comes from Brian Fitzgerald with Wells Fargo.

Thanks guys. A couple questions; the first one is you seem to continue to acquire customers very efficiently in the quarter. Anything you could tell us about the media pricing environment during the quarter, exiting the quarter. And then channels giving you the best leverage or color on the media mix there. And then I had one follow-up. Thanks.

Sure. Hey Brian, Sumit here. So not much to break that down but what we are continuing to see is as anticipated channel input costs across an array of media began to increase from the lows that we saw in Q1. And so our marketing team has had to smartly pivot to make the level of investment and one thing that benefits an engine like ours is that because we are efficient in going to market on the performance side; we're able to also attribute spend on short-term basis and change that spend if we don't see the yield coming back in. So for us, it's all about guiding ourselves to the LTVs to CAC metric. And then on top of that we're continuing to find the efficient frontier. So for example as you move out Mario alluded to media cost due to election year and typically what happens is that you should expect TV costs to start going up, but also visibility goes up or viewership goes up during this time. And there's a headwind and a tailwind that actually brings to the equation. I think what's a little bit murky this year is how due to pandemic if the viewership is scaled back how that actually impacts media cost. So we're watching all of this but at least on the performance side where we spend the bulk of our money; we're more targeted and we have the ability to dial back or dial up as the yield comes in.

Got it. And the other one I just had was on that the new automation. And I want to know if you kind of compare or contrast the CapEx and the OpEx footprint of those facilities that the new automation ones versus the rest of the network. Is there an opportunity to upgrade or augment some of your existing facilities with some of this automation you're talking about? Thanks.

Yes. I mean absolutely; we've built in the last few years we've built our existing network with the point of view of if the data comes in to our expectation like where the data points that we're providing; we have an opportunity to go back and retrofit or upgrade our existing facilities. And automation for us is a strategic choice and we believe that now more so than ever we have confidence that we're making the right choice in investing in automation to be able to get out the benefits across safety, variable cost as well as full customer, full cost per unit for the network.

Our next question comes from Doug Anmuth with JP Morgan.

Thanks for taking the question. Sumit, I was hoping you could just talk a little bit more about the services, marketplace potentially just if the pandemic has perhaps accelerated your thinking there at all. And just how you think about what a potential product could look like and then also monetization around that product. Thanks.

Hey, Doug. Good to hear from you. When we think about services first of all and the concept of a marketplace; we think about it broadly. So we're not really pegging ourselves to a product oriented marketplace or a particular retail environment of a service oriented marketplace. We believe us helping customers in the health and wellness space where a lot of customers are migrating towards finding more and more information especially due to vet clinics close is a service that we could provide. We believe offering up our assortment to small business providers at a time when they needed the most could be a service that we could provide. Pet insurance could be a service that we could provide; so services for us is a broad term, Doug, and there's not much to share regarding our progress other than the fact that we continue to evaluate ideas and put our thought behind it. And when we have something more to share I'll come back and share it with you.

Our next question comes from Lauren Cassel with Morgan Stanley.

Great. Thanks so much. I just wanted to ask about strategies that you're thinking about to retain these new buyers that you've acquired in the back half of the year and into 2021. And then sort of on the same vein, how are you thinking about marketing spending in the back half of the year given some of the efficiency that you've seen in the first half.

Hey, Lauren, Smith, I'll take that one. So first of all, we are encouraged by the fact that the new customer cohort is displaying behavior which is consistent to our older cohorts which then tells us that we don't have to do something unnatural to engage them. What we are also encouraged is the fact that we have different choices for them to engage with. For example, if you look back a couple of years; you had the choice of either buying food or buying your supplies from us. Today you have as a customer you have a much broader array of choices and so when you really think about how we deploy marketing now for engaged customers; it's about understanding their lifecycle and at what point do we expose them to these offerings and how do we smartly convert them from one vertical or complementary offerings to their portfolio to accelerate their basket size relative to older cohorts. So that's how we're thinking about it. Your second part of the question is efficiency in the back half of the year or how we look at marketing outlook. As I alluded, we expect channel input costs across an array of media to begin to increase and our team, one; we expect organic traffic and customer acquisition trends to remain elevated relative to pre-COVID levels. Then is the notion of how paid marketing should be executed. And there we're going to continue to spend money with the operating philosophy of either driving the business to cash neutrality or until we hit the efficient frontier and keeping LTVs to CAC ratios is our guarding point. Overall, we expect net customer adds to be higher than pre-COVID levels and overall we expect to deliver marketing efficiency from a year-over-year point of view.

Our next question comes from Dylan Carden with William Blair.

Yes, hi. Thank you very much. Just curious if you could touch on the behavior you're seeing with the pharmacy customers, if there's anything different as far as attachment rate. And then also, as you look to the back half, kind of keeping the least the earnings guidance relatively in line on higher sales, if that's just maintaining some sort of conservatism just given the visibility or if you're seeing kind of incrementally higher costs or reason to be cautious? Thank you.

Hey, Dylan, Sumit, I'll take the first one and Mario will take the second one. On pharmacy not much different to report; we are encouraged by the way pharmacy continues to resonate with our customers and we continue to be pleased with the results. As we've noted, pharmacy made positive contributions to the companies due to revenue and margin expansion goals. And we continue to benefit from the efficiencies provided by the expanded network of our RX fulfillment centers that allows us to deliver an even sharper experience and faster delivery times. So we continue to expand the proposition which will make Chewy a stronger proposition for customers either wanting to adopt pharmacy for the first time or existing customers who want to try out our pharmacy platforms and we're happy about that.

And Dylan this is Mario. For the second part of your question; I'll start off by saying that we feel good about being able to provide guidance. And like always we weigh the risks and opportunities and our guidance reflects the balanced view of optimism versus what's less clear and in the environment that we're operating in. So you ask specifically about the bottom line but let me just give you the top line and the bottom line, so you can see how we arrive at it, but for the top line autoship and the predictable customer behavior that we've seen over time is what gives us the visibility to be able to raise the guidance by $200 million and guide to almost $2 billion increase year-over-year. For the bottom line, though we held the EBITDA as you mentioned flat to the to the last call and that's for two main reasons. One is there are some potential cost headwinds as Sumit had mentioned variability and media costs, higher logistic expenses and potentially short-term costs related to COVID-19. And it's how much of these headwinds materialize in the second half that will drive us to one end or the other end of the range. And of course we're going to continue to manage, to actively manage the headwinds using all the data available to us. But the second portion is that we may choose to make some short-term investments in customer experience, marketing and other areas that may impact profitability in the short term, but are exactly the kind of strategic decisions that we make on a regular basis that drive our growth over time. So our guidance provides us the flexibility to do, to make those types of investments and decisions in the back half.

Our next question comes from Seth Basham with Wedbush Securities.

Hi. Good afternoon. Thanks for taking my question. I have a question about the behavior of the pre versus post COVID customer cohorts. You're talking about being able to expose these post cohorts or post COVID cohorts to a larger variety of purchase options, yet it seems like they're not spending more at their lifecycle point than the pre-COVID customer cohorts. Is that correct? Or if not, please correct me. If so, please provide some color.

No, Seth. Short answer that's not correct. In fact, I think Mario alluded to this in his script as well that the LTVs to CAC ratios of these newer cohorts are superlative compared to the older cohorts. And it's not just because of the CAC efficiency; it's also because of the strength in the LTVs that we're seeing.

Okay. That's excellent to understand. And then secondly, as it relates to fulfillment costs, you saw deleverage this quarter that was a little bit more than last quarter. You talked about potential headwinds going forward. Could you enumerate or elaborate on the headwinds that you might expect going forward and whether or not we should see more or less deleverage in the back half relative to the first half?

Fulfillment costs we touched on that as part of SG&A. And what we -- what I mentioned in my opening remarks is that we would see a deleveraging related to opening our new fulfillment center. That happens every time we open a new FC because at the beginning we have to recruit and train and ramp from a productivity standpoint those new team members, but over time the productivity increases; volume in that facility increases and that effect ameliorates. So, it's a temporary effect of opening up new fulfillment centers. And, Seth, point about headwinds on the labor side or the investment is essentially us trying to anticipate how playing through the back half of the year, while continuing to live in a pandemic is going to pan out. There's lack of clarity on the stimulus side and they're changing macroeconomic environments at this point. Then we just stand ready to invest in short-term wage and benefits if we need to align our labor curves with the demand forecast that we have to execute to protect customer experience.

Our next question comes from Oliver Wintermantel with Evercore ISI.

Yes, hi. Good afternoon. My question is regarding the sales cadence throughout the quarter, how you entered the quarter and how, what velocity you exited the quarter? And then if you could give us maybe like an outlook or how it's trending in the third quarter so far? And then the follow-up question would be advertising revenue opportunities on your own side. Thank you.

Hi, Oli. It's Mario. I'll take the first part and Sumit can answer -- will answer the second part, but to your -- the first question, net sales and customer acquisition in August were consistent with our Q2 exit rate. And so the best way to describe the current pace of customer acquisition is that we are running above pre-COVID levels but below the peak rates we saw in March and April. And the guidance we provided reflects it.

Hey, Oli. It's Sumit. Not much to add to the advertising revenue opportunities on our side. When we have something to share, we'll come back and share it.

Our next question comes from Deepak Mathivanan with Barclays.

Hi, guys. It's Trevor on for Deepak; two ones from us and just dovetailing on one of the earlier questions. Now that you have six months of data on the post COVID cohorts, can you give us any color on like average basket sizes, frequency and churn there? I know you gave some comments there on spend levels which is very helpful. And then second one, dovetailing on that last quarter you'd flagged about $70 million in pantry stocking contributing to revenue, any update on that metric this quarter? Have you seen that kind of stabilize or have you seen that inventory that are -- that's in pantry drawdown? Thanks.

Sure. I'll take both of these; first of all, we're not seeing pantry destocking. We continue to see high levels of engagement from our customers. And as we alluded to in the Q1 call, we don't expect the pantry destock impact to come in or at least come into perspective so quickly. So not much more to say there and on the new cohorts trends and basket size reorder, so without specifically commenting we continue to see basket sizes are bigger or larger and their other metrics such as frequency, mean time to order purchase rate, autoship subscribe rates et cetera are consistent with our mature cohorts.

Our next question will come from Brent Thill with Jefferies.

This is John Colantoni for Brent. Thanks for taking my question; when we back into implied Q4 sales using Q3 and full year guidance, we get somewhere around low 30s growth, which implies a moderation from Q3 guidance. Should we take this as conservatism or is there something you're seeing in customer trends or from competition that leaves you to believe top line growth will start to slow towards the end of the year? Thanks.

Hi, John. It's Mario. I'll take that one. Our updated guidance delivers nearly $2 billion of sales growth this year and just over half of that coming in the first half and the remainder in the second half. And that $2 billion is equal to 40% growth year-over-year which is the same growth rate we had in 2019, but off a larger base. So the growth in absolute terms is quite meaningful in the second half and right in line with what we saw in the first half. And I think the other thing you should take away is that our projected growth of $2 billion this year is equivalent to more than half of the total growth in the market for online, so pretty significant.

Our next question is a follow-up from Dylan Carden with William Blair.

Yes. Thanks for coming back in here. Just curious on the hard goods, the total growth in that category is 52%. What drove that acceleration? And am I right in that the private label hard goods is actually in the other line item? And if so, kind of if you're seeing private label hard goods grow ahead of that? And is that having sort of a benefit for the hard goods category more broadly? Thanks.

Hey, Dylan. So, yes, private label hard goods is in the other category and we attribute the hard goods growth; growing hard goods has been an important part of our growth strategy. And we've alluded to this in the past ever since our IPO and it's been an important part of the growth strategy both on the branded side as well as the central driver of our private label hard good business as well. So, what you saw in Q2 is the result of ongoing efforts in investing behind the business both in going to market, smart merchandising, assortment and higher quality products both across product lines, but also expansion of price points. In addition to some external factors that we benefited from such as increase in pet adoption and engaged pet parents, sorry if there was a second question; I'm going to have you repeat that please.

Yes. No, I was just curious; I guess I am right that the private label hard goods are embedded in the other category. So I guess I was just curious if the -- you called out private label hard goods, I think, in the gross margin comments. It would stand to reason that you're seeing private label hardgoods maybe grow ahead of your third-party hard goods. And if there's some benefit there, I guess, in the broader hard goods category growth?

Right. I mean, first of all, recall that our private brand strategy is to develop high quality customer affinity products and bring them to life. We don't necessarily -- we don't create a product that compete one-to-one head-on, that's really not our strategy. On the hard good side where product lines are commoditized or people or customers may appreciate diversity of choices, yes, we're super encouraged by the way that customers are interacting with our products; the star rating that we're receiving for these high quality products as well as the acceleration and the meaningful penetration that they're driving into overall hard goods reaching 15% at Q2 exit.

15% in total.

Yes. 15% penetration for hard goods private label.

Great. Mario, yes, sorry, I interrupt you.

Yes. I may have misheard you but I thought you -- I heard you say 52% growth in hard goods but actually it grew 72% year-over-year in the quarter.

Okay. I just have some bad numbers perhaps. Thank you.

This will conclude our question-and-answer session. And I would like to turn the call back over to management for any closing remarks.

Thanks all. Have a great evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.