Good afternoon, and welcome to the Chewy Fourth Quarter and Full Year 2020 Results Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Robert LaFleur, President of Investor Relations. Please go ahead.

Thank you for joining us on the call today to discuss our fourth quarter and full year results for fiscal 2020. Joining me today are Chewy’s CEO, Sumit Singh; and CFO, Mario Marte. Our earnings release and letter to shareholders, which were filed with the SEC on Form 8-K earlier today, have been posted to the Investor Relations section of our website, investor.chewy.com. A link to the webcast of today’s conference call is also available on our site. On our call today, we will be making forward-looking statements, including statements concerning Chewy’s future prospects, financial results, business strategies, industry trends and our ability to successfully respond to business risks, including those related to the spread of COVID-19, including any adverse impacts on our supply chain, workforce, fulfillment centers, other facilities, customer service operations and future plans. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those contemplated by our forward-looking statements. Reported results should not be considered an indication of future performance. Also note that the forward-looking statements on this call are based on information available to us as of today’s date. We disclaim any obligation to update any forward-looking statements, except as required by law. For further information, please refer to the risk factors and other information in Chewy’s 10-K and 8-K filed 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 measurements 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 and in our 10-K. 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 also be included 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. As we gathered for this call a year ago, we were just beginning to realize the scope of the COVID pandemic. Looking back, I’m incredibly proud of the way Chewtopians came together to execute through this incredibly challenging year. As a leadership team, we communicated frequently and honestly about how we would navigate the pandemic with our team member safety in the forefront. We made sure our teams had safe and healthy workspaces and implemented new team member friendly policies and benefits. In response, our teams redoubled their dedication to our customers and made sure that their pets receive the vital products and care that they needed. In the face of surge in volume, we kept our supply chains operating and our fulfillment centers or FCs open. Our corporate staff and customer service teams quickly adapted to working from home, and our tech and product teams solved challenge after challenge to seamlessly foster that transition. Despite the disruptions caused by COVID and in some cases, because of them, we accelerated the rollout of several strategic initiatives, including the launch of eGift cards and personalized products, the introduction of service innovations like our telehealth offering, Connect with a Vet and compounding services, and the opening of our first automated and first high-velocity fulfillment centers. These accelerated rollouts speak to the adaptability and the innovative spirit of our entire Chewy team. And even with the COVID backdrop, our teams remain relentlessly focused on the strong execution required to deliver a superior customer experience to over 19 million pet parents who trusted us to deliver on that promise. It is for all these reasons that 2020 will go down as a landmark year in Chewy’s history. Over the next…

Thank you, Sumit. We knew the 2020 holiday season will be unprecedented and we prepared for a range of outcomes. The season got off to an early and strong start, and market conditions remained favorable throughout the balance of the quarter. Fourth quarter net sales were $2.04 billion, reflecting 50.8% year-over-year growth. This brought full year 2020 net sales to $7.15 billion, a $2.3 billion or 47.4% increase year-over-year. Along with accelerated customer growth, we also saw sustained high levels of customer engagement as traffic and conversion metrics improved from December into January, reversing their typical seasonal pattern. Pricing and promotions are usually a reflection of the broader market environment, and both remained balanced and stable throughout the quarter. This allowed us to maintain pricing integrity and lower the volume of promotional discounts offered. Looking at customer cohort behavior, the positive trends we saw earlier in 2020 continued through the fourth quarter. Engagement levels remained high and basket size and reorder trends remained favorable, which led to a 12% increase in Q4 average spend per new customer versus the Q4 2019 cohort. Closing out the fourth quarter top line discussion, Autoship net sales represented 68.2% of total net sales and net sales per active customer, or NSPAC, increased to $372. This represented sequential growth of $9 or 2.5% and year-over-year growth of $12 or 3.3%. NSPAC growth accelerated this quarter as the mechanics of the NSPAC calculation began to reflect the positive revenue impact of the millions of customers who joined the platform in 2020. As is our usual reminder, net sales per active customer reflect trailing four-quarter net sales divided by the number of active customers at the end of the quarter. It’s also worth noting that we no longer need to adjust our year-over-year NSPAC comparisons for the…

[Operator Instructions] Our first question today will come from Nat Schindler with Bank of America.

I just really wanted to get a little bit more into deceleration you’re baking into guidance. I understand it was a pretty radical year this year in how things change. But obviously, all those customers who got pets and all that new customer growth that occurred all throughout this year is going to be additive to growth for the bulk of next year at least, well, on average half of the year. So, shouldn’t the deceleration curves, barring the 3 percentage point hit roughly that the pantry stocking did in 1Q of last year, barring that, shouldn’t be a much smoother slower deceleration in the subscription model like yours?

Hey Nat, this is Sumit. I’ll take that one. So, our guidance has us adding $1.8 billion in top line sales this year on top of a record year in 2020. And I think it’s important to, first of all, say that we remain confident in our ability to execute through the current environment, which, in our opinion, remains challenging. So, giving guidance to us contains reflecting on all of the headwinds and tailwinds and appropriately balancing the risk and opportunity to be able to provide a point of view this early in the year when we understand consumer behavior and the environment to be evolving and challenging at the same time. So overall, we feel good about these numbers and our ability to execute towards them. And I think another thing needs to be said in the way that we should interpret this. See, we believe that with this guidance of $1.8 billion incremental growth, we’re going to capture more than 50% of growth that will happen in the online channels in 2021, which is a powerful statement in itself. So, we’ll continue to sort of evaluate this and continue to keep you updated on how we -- if we update our models internally at the right time.

Just a quick follow-up on that. How much of the incremental growth in the online channel in 2020 do you think you captured?

If you do the math, the way -- we believe that online grew roughly $6.2 billion year-over-year. And this year, buy online, pickup in store, which was a popular kind of mechanism is rolled up under online. And if you back that out, pure e-commerce, pure-play e-commerce grew roughly $4 billion. And Chewy grew $2.3 billion off that $4 billion, so capturing 57% of pure-play e-commerce growth.

Our next question will come from Brian Fitzgerald with Wells Fargo.

Thanks, guys. A great quarter. The average annual increase in year one of the contribution profit at 60% over the past three years. Could you tell us what that was in 2020 and in ‘19, maybe more specifically? And then any thoughts on how that might continue to trend over the next three years? And then, I got one quick follow-up.

Hey Brian, it’s Sumit. I’ll take it. So, we haven’t broken down numbers. As you know, we don’t provide contribution profit level detail. What we are observing and why we wanted to come out and share this is because it was indicative of the results that we’re observing as a result of the -- direct result of the efforts that we’re putting in to drive consumer LTV and profitability in the portfolio. And so, when you sort of roll these back, they answer the second part of your question on a longer term basis. These gains across share of wallet and profitability as we evaluate them internally are being realized and reflect the impact of catalog expansion, improved discoverability and the incremental contributions from higher margin verticals such as health care, hardgoods and proprietary brands. As we mentioned in our in our remarks, I believe -- I believe we mentioned this. We’ve nearly doubled our total SKU count in the last three years, including executing a sevenfold increase in higher margin proprietary branded SKUs. So, when you look at sort of margin growth from here on out, we believe we’re still sort of in early innings of what remains really focused roadmap on how we plan to execute our playbook and grow margins from here on out. Less than a third or approximately a third of our total customer base is today buying a proprietary-branded product, which leaves an opportunity for two-thirds of roughly 20 million customers to be exposed to higher margin proprietary brands. When you look at health care being a newer vertical, that number is far lesser than the one-third that I mentioned, providing us even more headroom to grow. So, as we sort of continue to play out our playbook on putting more focus on innovation around products and services and the complementarity between them, you should expect us to drive incremental gradual profit from here on out. That’s how we think about that.

Great. And just kind of a related one for me is just the increase in wallet share you’ve seen during the pandemic. Just wondering if you could talk us through maybe how many new pet adoptions and new pet purchases might be impacting that -- for example, if you have a higher mix of new pet parents, how that is influencing the wallet share, the purchases of kennels and bedding? Maybe said another way, within the life cycle of a pet, right, because maybe an odd analogy, but the newborn gets no holds bar, they get everything new and fresh. And then, by the time they get old and you have you 2 or 3 or 4, you start to recycle clothes. And just wondering if you’re seeing any impact from how you think that meters through the wallet share?

I think that’s -- it’s a great question. So, for us, if you recall, a data point that we shared this round in the script, we said we’ve seen a 35% increase in creation of pet profiles for puppies and kittens. And a 40% increase in pet profiles for adoption. Well, I mean, that Chewy puppy, so sure, you might not recycle that crate as early as next year. First of all, puppies grow out of crate, so you likely have to, depending upon the kind of puppy that you brought home. But let’s assume hypothetically that you didn’t. Well, even then, I think what makes the category attractive to us is the fact that pet sales are mostly recurring in consumables and health care and the puppy is going to grow up and eat more food and shred more toys and require greater health care needs. And we are here to service all of them. So, any kind of impact that we’re seeing right now, we do believe, ultimately, there’s sustainable momentum behind these kind of profiles or this kind of data that we’re capturing. Net-net, we have -- we kind of looked at our database last week. We have over 170 million data points, across these pet profiles that are created that feed in into our recommendation and personalization services and engines and provide us a greater ability to engage customers from here on out. So, the game is very much on, and we’re very much focused on continuing to engage customers and gain share of wallet there.

Our next question will come from Steph Wissink with Jefferies.

Thanks. Good afternoon, everyone. Congrats on a great year. Sumit, I have a question for you just on the multiyear. If you look back at the IPO model, it looks like you’re running more than 2 years ahead of your EBITDA target at that time. So, I’m curious if you can contextualize for us how much of that is leverage related to the underlying gains of the food and supplies business? And how much of that is kind of the pull forward of some of the strategic initiatives that you listed in your script, like health and compounding and other things? And how should we think about the leverage in the model?

Great question. So, I would say that we are -- first of all, we’re executing exactly the roadmap, we said we would. The scale benefits provide us an ability to drive more fixed cost leverage in our investments and higher variable cost scale in our fulfillment center network, given the density of volume that we drive through that network. The shift in gross margins that you observed on top of the SG&A lever is primarily driven -- I would -- if I were to characterize the impact rate of contribution of net new verticals, I would say, 60% is driven by our work towards increasing assortment and choices across proprietary brands, health care and hardgoods and roughly 40%, just -- I’m just doing some loose math here, is driven by incremental scale across the totality of the business and the Autoship leverage that we get, given incremental sales that we push through the Autoship channel. Mario, anything to add?

I mean, I would add to the point on Autoship. But if you look at the sales for Autoship in last year alone, about $4.9 billion as we reported it, that’s greater than the entire sales -- total net sales in the previous year. So, you can see how that portion also is driving leverage. And we said how that impacts not only our ability to better plan or inside our four walls of our warehouses, but across both, our incoming vendors or our OEMs, and then our logistics partners. So, it is a point of leverage and gross margin as well.

The way we think about it, what’s most important, what’s helpful is food is a staple. So, that makes up the necessity of why you would likely visit Chewy. Well, we’re changing that also. But if you just stick with the legacy logic, that’s what attracted you plus the proposition of high-touch, high bar customer service. And then our ability to build a basket around that has significantly improved. Well, now, we’ve actually -- with the choices that we’ve expanded and improved discoverability, you’re not only discovering food, you’re actually interacting with us via content channels and figuring out that Connect with a Vet is a service that’s available to you that you might have heard by word of mouth, and health care is an area that we service you effectively in. We’ve got a Disney collection that is exclusive to us that nobody else has. I think we’re creating these sort of -- these differentiations and these advantages that we believe complement each other and ultimately go back and provide benefit to the entire basket and that that scale provides leverage to our fixed cost infrastructure.

Our next question comes from Doug Anmuth with JP Morgan.

Hi. Thanks. This is Katie [ph] on for Doug. So, hoping you can provide an update on your Connect with a Vet initiative. What have the early learnings been thus far? And how does this shape your expectations around monetization this year? And then, on pharmacy, last quarter, you laid out a target for $500 million of GMV in fiscal ‘20. Curious where you came in relative to your expectation? And then, also how your thinking about the growth potential of pharma this year? Thanks.

So, Connect with a Vet is -- we’re pleased with the progress of Connect with a Vet. As you -- just for the benefit of the audience, it’s a telehealth service, primarily tele-triage that we launched in Q3 that allows us to connect customers with licensed veterinarians to be able to service their needs on most commonly asked questions or health and wellness-related concerns. We’re pleased with the progress of Connect with a Vet. At this point, we’ve completed -- we’re very much in learning mode. So, we’ve completed over 30,000 sessions with customers, and we’re learning a ton. Our Net Promoter Score remains high, above 85. 70% of the customers who’ve interacted with the service have provided a 10 on 10 rating, which we’re pleased about. Very recently, we’ve expanded Connect with a Vet from purely a chat functionality to video capability, which we’re now leaning into progressively. And we’ve also expanded hours of operation -- or sorry, in about two weeks, we’re going to expand hours of operation from 8:00 p.m. to 11:00 p.m. to add greater availability of the service to West Coast customers. Today, the service continues to remain available to Autoship customers for free. We do believe in monetization of the service and availability of it to our entire customer base. And I will come and share that with you closer in to the time when we’re ready to do that. And then on healthcare -- or your second question was about pharmacy. Yes, overall, we did achieve the numbers that we had shared with you about the $500 million net sales for pharmacy overall. We did hit that. And your third question was our potential or future growth on pharmacy. Yes, it’s just a vertical that we continue to remain excited in, right? Pharmacy is -- when you look at prescription as a vertical, we believe it’s roughly $7 billion to $10 billion in market size, growing at 10% CAGR, which would be even in a pandemic year growing at 2x the rate that food and supplies is. And we are early stages of or early innings in that playbook and we remain excited about the upside potential here.

And Katie, this is Mario. Just to add one more data point to that. You’re right that we said about $0.5 billion gross revenue. But of course, not all that flow through our financials, about $360 million did.

Our next question will come from Oliver Wintermantel with Evercore ISI.

Mario, you just mentioned ownership and as a percent of sales, it looks like that continued to decline for the third quarter in a row. Is that just because people didn’t have yet the chance to sign up for Autoship, or is that the expansion of more verticals and more health goods. If you could give us a little bit more details on that, please?

Yes. So, you’re right, there was a small change, but that’s all within the variance that we would expect any given quarter. If you look at for the full year, it was 100 basis-point difference between last year and this year. But remember, this year, we also had a record number of active customers. And as you pointed out, that is more about timing and when we expect those customers to sign up to Autoship to discover the benefits there. But, that is certainly within range of what we’d expect.

Got it. And a quick follow-up just on the gross margin line. You mentioned half of it was structural and sustainable, the rest was less promotions. If I look into 2021, if that structural keeps on playing out and we get back to more promotion, should we -- is it that easy that we should expect another half of that gross margin expansion expected in 2021, or what are the other moving parts on that, please?

So, I’ll start and maybe, Sumit, if you want to add something to it. But, we have said that the improvement that we saw in the fourth quarter, half of it was structural. None of that is any different than 2021. When we think about the vectors that we’re firing against right now, continuing to grow our hardgoods catalog, healthcare proprietary brands, expanding share of wallet, and increasing what we sell to our customers, all those things are in place. What you may find is quarter-to-quarter, there may be some fluctuations in gross margin, and that’s simply because we do see some activity in certain times of the year in terms of promotions and maybe some more advertising in the marketplace. But the reality is, structurally, those things, we don’t expect to change.

The only thing I would add is, at this time, we’re not baking in any top line or bottom line impact related to any material disruptions in supply chain or logistics networks. So far, we’re assuming recovery, and we’re assuming a quality of recovery that does not impede the momentum of the business. And everything that we’re hearing right now seem that is an assumption that we’re comfortable with. In some instances, we have the proper amount of inventory and the inventory might be unevenly distributed through our fulfillment network. And while that does not result in any out of stock situation, it does lead to higher levels of cross shipment or split orders that result in suboptimal shipping costs that rolls up to gross margin. So, I think there is some pluses and minuses. But on the balance, we do expect customers to continue to engage and discover the higher margin verticals that we continue to focus on and therefore provide gradual structural changes to gross margin.

Our next question comes from Seth Basham with Wedbush Securities.

My question is around your fulfillment expense outlook. For 2020, with some of the additional costs that you called out, seems like you did deleverage your fulfillment expenses. Should we think about the outlook for 2021 and the moving pieces with additional investment in wages, et cetera, would you expect out to leverage fulfillment expenses or not?

Yes. So, Seth, this is Mario. I’ll answer that. We did in the -- on the prepared remarks and the earlier discussion points, we said that we were investing the $60 million in wages and benefits. Most of that is going to be in fulfillment and customer service. We also mentioned that we’re launching two new fulfillment centers this year. And so, you would expect there, the same type of investments we made in the past, especially last year, because one of them is going to be a high velocity, limited catalog fulfillment center, just like the one we launched in Kansas City last year. And the other one is going to be a fully automated or an automated facility, much like the one that we launched in October in Archibald, Pennsylvania. So, if your question is, do we expect those investments to be reflected in our SG&A this year? The answer is yes.

Got you. Well, when we think about the composition on your margin expansion for 2021, are you expecting both gross margin and SG&A leverage?

I think, Seth, we just provided guidance, and the checks and balances so far flow through the guidance that we provided for the full year. And as the quarter progresses, I think we’ll keep you updated and share more information on a granular basis.

Our next question comes from Peter Keith with Piper Sandler.

It’s Bobby Friedner on for Peter. Thanks for taking my question. I wonder if you could discuss what you’re seeing and how you’re thinking about price inflation of pet food in 2021. And how should we think about retail pricing across the entire portfolio of products in inflationary environment?

Your question is a little broad, Bobby. So, I’ll try to answer this as best as I understand it, and if not then, please clarify. As we’ve mentioned, pricing environment has remained relatively stable and prices -- the discounting levels are relatively muted on a seasonal basis. And that is driving some higher prices and inflation in the marketplace. But, pet is a category that we believe is resilient towards recession or inflation. And in that particular manner, we haven’t really seen an impediment to demand our momentum in the business right now. We expect that to continue to be the case. And as supply chains start recovering and inventory positions become healthier, we do believe this to abate and ultimately go back to the pricing environment that we were pre-pandemic.

Our next question comes from Lauren Schenk with Morgan Stanley.

Great. I guess, marrying a few of the previous questions. When we look at your guidance for the 50 to 100 basis points of margin improvement versus the revenue guidance, I think it implies a flow-through rate of around 6%, understanding the $16 million in wages, which brings you closer to 9.5%. But, can you just help us think about if there’s any other sort of onetime investment, maybe the second automated DC that is holding back flow through or potentially offsetting some of the COVID costs that I would have thought would have sort of benefited flow through this year? And then, as a follow-up, maybe this is a piece of it, but we’re hearing from a variety of different retailers about shipping delays, freight cost increases, anything that you’re seeing there on sort of a like-for-like basis heading into 2021? Thanks.

Okay. Lauren, this is Mario. I’ll take the first part. So, when you think about the guidance we provided, there are several factors that go into it. And obviously, we’re providing the guidance based on the balance of risk and opportunities we see for the year. So, if you think about the revenue, we mentioned we have positive demand trends that carry into the first quarter. Pricing promotions remain stable, which are going to be the pluses to the guidance range. On the other hand, the customer behavior itself is still -- post pandemic is still evolving. And there are some industry-wide supply chain challenges for certain products. So, those are we consider the headwinds. So, I’ll give you the plus and minus on that to the -- on the revenue guidance range. And then, to the adjusted EBITDA portion of it, we called out a few factors that we know this year or that we expect this year to be in a certain way, things like marketing, our investments there, then launch of the two new FCs that you mentioned, and then the incremental $16 million or so in wages and benefits for our team members. And it is those factors that, depending how they materialize, it’s going to determine exactly where we end up in that guidance range, and then, what is the actual flow through to EBITDA? So, as we’ve said before, look, we operate the business over the long term. So we, this year, may choose to make some short-term investments, including marketing and additional capacity. That may impact our profitability in the short-term but produce benefits over the long term. So, that’s all in the guidance range we provided.

Lauren, I think advertising and marketing is an interesting one in 2021, and it’s hard to predict sitting so far up in the year on how this line is actually going to play out. So, it’s helpful to sort of extract ourselves from the current and look at it as a 30,000 foot view. We’ve been -- first of all, we believe 6% to 7% spend of net sales in advertising and marketing to be the right range for a business like this. And the past couple of years, specifically the last three years, we scaled marketing expense from 11% of revenue in 2018 to this past -- we were 8.8% in 2019 and then 2020 was 7.2%, 7.3%. The 160 basis-point improvement, as we mentioned in the script, we believe half of that was driven by organic driven efficiency. And so that would have put the scaling at right about 8% of marketing. And so, I think starting with kind of current inputs on how we scale marketing, how we understand evolving trends, how do advertising platforms evolve and the ambiguity around that plus any opportunity that we find to be able to invest in marketing and drive scale. It’s a tough area to talk to right now. So I think as we play the quarters out, we’ll likely keep you more updated on our long term -- our yearly thinking here.

And let me just add one more item because I want to make sure that it’s clear how we think about the EBITDA for the year. But the guidance we provided would have us adding over $100 million of EBITDA to the bottom line, even while we grow $1.8 billion, both at midpoint of the guidance. So, this is a pretty significant increase, both top line and bottom line.

And then, your second question was about shipping. The variability and peakiness in demand and forecasting in a business is punitive than planning a supply chain or transportation network. And that is where we believe -- we’re proud of the teams for jointly planning our forecasts and coming through with a high degree of forecast accuracy, of course, supported by the fact that 70% of our sales, roughly 70% goes through the Autoship model. And so, in some way, we provide a predictable and stable baseload forecast to our suppliers and transportation carrier partners that then enables them to optimize their micro and macro level asset utilization. And that, combined with the strategic nature of our partnerships, I mean, it’s shielded us from any material changes in rate structure during the holiday season or present fleet.

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

Thank you very much for the questions, everybody. Thank you.

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