Good afternoon. Thank you for attending today's Chewy Q2 Fiscal Year 2022 Earnings Call. My name is Hannah, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. I would now like to pass the conference over to our host, Robert LaFleur, Vice President of Investor Relations. Please go ahead.

Thank you for joining us on the call today to discuss our second quarter 2022 results. Joining me today are Chewy's CEO, Sumit Singh; and CFO, Mario Marte. Our earnings release and letter to shareholders, which were filed with the SEC earlier today, have been posted to the Investor Relations section on our website investor.chewy.com. On the call today, we will be making forward-looking statements, including statements concerning Chewy's future prospects, financial results, business strength, investments, industry trends, and our ability to successfully respond to business risks, including those related to inflation and its effect on the economy and our industry. 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 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 these forward-looking statements 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 section and other information in Chewy's 10-Q and 8-K filed earlier today and in our other filings with the SEC, including our annual report on Form 10-K. We will also discuss certain non-GAAP financial measures today. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided on our Investor Relations website and in today's SEC filings. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise noted, results discussed today refer to the second quarter of 2022, and all comparisons are accordingly against the second quarter of 2021. Finally, this call is being webcast on our Investor Relations website. A replay of this call will also be available on our IR website shortly. I'd now like to turn the call over to Sumit.

Thanks, Bob, and thank you all for joining us on the call today. We are proud of our Q2 performance and ability to deliver double-digit top line growth and margin expansion during a period when accelerating inflation placed incremental pressure on an already stressed consumer. Across the pet category, pricing escalated throughout the second quarter. Consumers in the pet category responded to growing economic uncertainty by curtailing some of their purchase activity, leading to industry-wide declines in unit volume. Even as consumers pull back in select areas, Chewy outperformed industry trends on the strength of our market leadership in nondiscretionary recurring revenue categories like food and healthcare, the product categories that are most important to pet parents. Chewy grew Q2 net sales by 13% to $2.43 billion, reflecting our ability to drive steady demand in nondiscretionary categories. Demand that is anchored by the superior value proposition that we offer pet parents and the predictable nature of our Autoship program. Collectively, these categories represent more than 80% of our overall business, which provides us with distinct structural advantages in the current environment. At the same time, we saw softer demand in the second quarter for discretionary products with longer replacement cycles, such as hard goods, which offset some of our positive momentum in food and healthcare. Altogether, Chewy's strength and competitive advantages in the pet category were evident in Q2 as customer engagement metrics such as Autoship and NSPAC set new records at 73.1% of net sales and $462, respectively. Shifting to profitability, Q2 gross margin was 28.1%, an improvement of 60 basis points both year-over-year and sequentially. This improvement was led by pricing, which continued to strengthen in the second quarter as the favorable delta between price and cost increases widened by approximately 100 basis points compared to last quarter. Additionally, moderating fuel costs and our ongoing efforts to improve supply chain and logistics capabilities also contributed to the strong second quarter gross margin performance. Specifically, during the second quarter, we improved system-wide inventory placement which reduced average delivery distance, improved delivery speed, lowered costs, and enhanced customer experience, which I will expand on shortly. Q2 adjusted EBITDA was $83.1 million and adjusted EBITDA margin was 3.4%, a year-over-year increase of 230 basis points and a sequential improvement of 90 basis points reflecting our gross margin expansion, greater marketing efficiency, and improved execution in several SG&A functions that we will detail shortly. Moving next to our customers, we ended the quarter with 20.5 million active customers, in line with the expectations we shared on our last call. Our Q2 net adds reflect gross customer additions that have come off their pandemic highs and the retention behavior of the large cohorts we acquired during the pandemic. Once we fully cycle the effects of elevated pandemic pet adoptions and the macro environment recovers, we believe the customer acquisition headwinds related to discretionary demand levels will abate. Having said this, we are encouraged to observe that the complexion of the new cohorts that we have acquired so far in 2022 is more consistent with the long-term retention profile of our pre-pandemic cohorts. Notably, we believe that the dynamics impacting both gross adds and retention are temporary in nature. Over the long term, our business model produces incredibly sticky customers, which result in retention curves that stabilize after the first two years of a customer's relationship with Chewy. Moving on from financials, let me update you on several innovation areas across Chewy. Let's start with supply chain, logistics, and transportation. As I have shared over previous earnings calls, we have multiple initiatives underway to improve profitability and customer experience by improving inventory placement, reducing inbound and outbound freight costs, and driving incremental fulfillment cost leverage through automation. To this end, we successfully launched our third automated fulfillment center last month located in Reno, Nevada. The benefits from automation continue to expand across our network, and our pace of realizing these benefits continues to accelerate. For example, based on the learnings from our first two automated FC launches, we expect that it will take Reno half as long to ramp up to its comparable performance benchmarks as it took for our first automated FC. By this time next year, a third of our outbound volume is expected to shift from automated FCs. Combined, these automation and transportation initiatives are generating savings in cost per package and improvements in delivery performance and customer experience. Moving next, we recently launched our second import routing facility on the East Coast. With facilities on both coasts, we are now able to optimize freight distribution to our FCs and reduce inbound freight costs on more than three-quarters of our import volume. In Q2, we carried triple the volume that we did last quarter with Chewy Freight Services, leading to reduced costs and improved delivery performance. Looking forward, we will keep adding capacity to this program throughout the remainder of the year. Next, let’s move on to Chewy Health and the progress we are making in our mission to make pet healthcare more affordable and accessible. We are pleased with the initial customer response to our bespoke insurance and stand-alone wellness plans. Innovations like CarePlus that improve customer experience, increased engagement, and enhance retention are the cornerstone of our customer strategy. Our primary goal this year is to iterate and learn all we can about this new space from our customers and partners. While CarePlus won't have a meaningful financial impact on 2022, we believe it will provide us an opportunity to help grow the historically under-penetrated pet insurance market. At the end of July, we reached the $100 million mark for pet food and essential supplies donated to over 9,000 non-profit animal welfare organizations. The operating environment remains dynamic, and as pet parents pull back in some areas, they refocus their spending on categories centered on the health and well-being of their pets. The strength and durability of our value proposition positions Chewy well to compete and take additional market share in this environment. Looking ahead, we believe these strengths, which include market leadership in recurring demand categories such as food and healthcare, will enable us to keep winning in the pet category. With that, I will now turn the call over to Mario.

Thank you, Sumit. Second quarter net sales increased 12.8% to $2.43 billion. Non-discretionary categories like consumables and healthcare were the primary driver of growth this quarter, representing 83% of our net sales. While hard goods sales declined year-over-year as consumers ration their dollars towards staples and non-discretionary items, it is worth noting that our hard goods business today is up substantially from pre-pandemic levels, with net sales up nearly 70% compared to Q2 2019. Looking forward, we believe that the current dynamic we are observing in discretionary categories is temporary in nature and that demand will improve as consumer sentiment recovers. Second quarter Autoship customer sales increased 17.3% to $1.78 billion, outpacing net sales growth by 450 basis points. As a percentage of total net sales, second quarter Autoship customer sales reached an all-time high of 73.1%, increasing 280 basis points year-over-year and 90 basis points sequentially. Second quarter net sales per active customer or NSPAC reached another record, increasing 14.4% to $462. Since the beginning of the pandemic, our NSPAC has increased by over $100 as we gain an ever-growing share of our customers' pet spend. We ended Q2 with 20.5 million active customers, an increase of 2.1% year-over-year. On a sequential basis, active customers were effectively flat versus Q1 2022. Moving to profitability, second quarter gross margin expanded 60 basis points, both year-over-year and sequentially to 28.1%. Growth in pricing during the quarter exceeded escalating cost inflation. Advertising and marketing was $144.2 million or 5.9% of net sales, a 210 basis point decline over the second quarter of 2021. Looking forward, we expect advertising and marketing to remain in the range of 5% to 7% of net sales as we continue to be ROI-driven. Wrapping up the income statement, second quarter net income was $22.3 million, a year-over-year increase of $39 million. Second quarter adjusted EBITDA increased $59.8 million versus Q2 2021 to $83.1 million, and our adjusted EBITDA margin expanded 230 basis points to 3.4%. That concludes my second quarter recap. Let me cover our third quarter and full year 2022 guidance. For the reasons articulated throughout this call, we believe that we will continue to see differences in demand patterns between discretionary and non-discretionary categories throughout the balance of the year. We now expect full-year 2022 net sales to be between $9.9 billion and $10 billion, representing year-over-year growth of 11% to 12%. As you update your models, here are a few housekeeping items to keep in mind. We expect net active customer growth to remain muted for the balance of the year. We now expect full-year 2022 gross margin to expand approximately 30 to 50 basis points from our full-year 2021 gross margin of 26.7%. We continue to make investments in margin-expanding growth initiatives to further improve customer experience. As we navigate through the current environment, we remain confident in our ability to drive sustainable, profitable growth and further our leadership in the pet category. And with that, I'll turn the call over to the operator for questions.

The first question is from Stephanie Wissink with Jefferies.

This is Corey on for Steph. Thanks for taking our questions. I wanted to ask about retention still running low single digits below pre-pandemic levels. Can you break down the components of the retention headwind, maybe how much is from out-of-stocks, how much might be tied to pet owners shifting back to brick-and-mortar? And how much might be tied to issues that you can potentially solve for the coming years? And what's the outlook for retention getting back to pre-pandemic levels? Thanks.

Hey, Corey, this is Sumit. We aren't providing a detailed breakdown, but I can say that our supply chains are improving. The retention and attrition trends are starting to stabilize as we move past Q1 and Q2. We consider this typical consumer behavior as the economy reopens, despite facing inflation and other macroeconomic challenges. At the business unit level, consumers engaging with nondiscretionary categories, particularly those who are high-value customers, are showing better retention. This quarter's performance is largely influenced by changes in gross additions as we transition from Q1 to Q2. Sequentially, our gross additions have decreased between these two quarters, which aligns with historical trends. I hope this provides some clarity.

And Corey, this is Mario. Let me add to one thing that Sumit said. In terms of the mix of customers when they first joined the platform in the first purchase, the effect of the more favorable mix we're seeing in the last couple of quarters as more customers purchase consumables or healthcare products in their first order with us, you would start to see that one year out.

That's really helpful. Thank you. And then for my follow-up, I wanted to ask about the impact from out-of-stocks in the quarter, how you're thinking about the impact of out-of-stocks in the back half? And then when do you expect stock rates to recover at this point?

We're seeing what we've anticipated and forecasted in our Q1 call, which is supply chains are getting better at the rate that we expected. We do expect to come out of this year, materially improve from the way that we entered the year. But really in terms of crew stabilization, I think 2023 is a better year to look to.

Got it. Thank you.

Thank you. The next question is from the line of Brian Fitzgerald with Wells Fargo. Please, proceed.

Hello. Thank you. Is there still room for further improvement in the inventory placement? You've mentioned that it will take several quarters for the supply chain initiatives like CFS and import routing to fully take effect. So, I am curious if there are similar trends in inventory improvement and perhaps what stage we are currently in regarding that improvement?

Hey, Brian, it's great to hear from you. Let me talk about gross margins more broadly because I think the context is vital for answering your question. During the first half, we think that our efforts to enhance inventory placement and other experience initiatives have helped reduce about one-third of the headwind. We're still monitoring how Q2 develops. There are some controllable factors regarding how we implement these initiatives, making it a bit challenging to predict. At this stage, we've effectively mitigated roughly one-third of the 100 to 150 basis point impact. Would you like to address the second question, Mario?

Yes. Let me add one more thing to what Sumit said. If you think about the approximately one-third of the headwind that we said we mitigated so far this year, we expect to have mitigated most of the headwind by the end of next year.

Yes. We are pleased with the progress that we're making, and we believe it's optimal and the teams are doing a really nice job executing behind these initiatives.

Yes, very helpful. Thanks. Very clear. Thanks.

Thank you. The next question comes from the line of Mark Mahaney with Evercore. Please proceed.

This is Jan for Mark Mahaney. Thanks guys for the question. So I want to circle back on the COVID cohort. Is there any other factors that we should think about, about this cohort in terms of like Autoship penetration in terms of the trajectory of NSPAC’s growth, if you can just like talk about anything else that we should look out for?

In terms of the COVID cohorts, the good news here is that we saw the one-year rate decline by low single digits, as we said before, and that has stabilized over the last several quarters. So from that end, that's a good development on the COVID cohorts. When we look at their NSPAC behavior over time, I can tell you, we look at this on a regular basis, and there's no meaningful difference between those cohorts and previous cohorts.

In terms of your question on pricing, yes, we're pleased with the ability to manage through the inflation and effectively portfolio price just by the similar approach we were playing in Q1, where product cost inflation accelerated as Q2 progressed.

In terms of gross margin, there are a couple of factors there. In Q2, we did see a favorable gap between MAP increases and product cost inflation that boosted second quarter gross margins. In the second half, we do expect some of that gap to remain positive but start to narrow as costs catch up to price increases.

Thank you. The next question is from the line of Doug Anmuth with JPMorgan. Please proceed.

Thanks for taking the questions. I have two. First, I just wanted to follow-up on pricing. Can you just frame up again some of those puts and takes? And how should we be thinking about gross margin against your longer term goals from the exit velocity you expect to see this fiscal year? Thanks so much.

Overall, there’s more cost inflation that came through, and there was more inflation that had to pass through. What we found was given the anticipation of cost increases, we preemptively priced them in. So on a net basis was given that anticipation of cost increases, our team executed sharply in a timely manner and broadly seeking we observed strong industry-wide discipline around these pricing slopes. So generally pricing impacted

Thank you. The next question is from the line of Deepak Mathivanan with Wolfe Research. Please proceed.

First, are you seeing any capacity of trade downs or some sort of like a basket adjustments in the consumable category currently due to the broad inflationary trends? And then the second question, more broadly, can you give us some sense of the magnitude of inflation during 2Q, either as a maybe a percentage of SKUs that have seen price markups? And how should we think about the path for that in the second half? Thank you so much.

In terms of the catalog, we've seen about half of the catalog with a price increase year-over-year, not surprising. The other half is either flat or lower year-over-year. But that gives you an idea of how we think about pricing over the last year.

We did not see any trade down coming out of Q2. It's very similar to what we saw in Q1, where we did not see trade down.

Thank you. The next question is from the line of Justin Kleber with Baird. Please proceed.

First, on the NSPAC, can you size the impact of pricing or guess, like-for-like SKU inflation on that 14.4% growth? Confirm that?

We don't break down necessarily how much of it is unit versus ASP or anything like that. But as you can see, consumables and healthcare were the main drivers of our net sales growth in the second quarter.

Thank you. The next question is from the line of Chris Bottiglieri with BNP. Please proceed.

Can you talk about a couple of things? I guess, I want to get a sense on product label penetration, both to the consumables and hard goods as inflation has crept up, have you seen any increased adoption of these private label brands?

No, we haven't seen a dramatic uptick in private branded adoption, as hard goods forms the majority of our mix. Broadly speaking, the purchase cycle isn't actually favorable now.

If you look at healthcare sales and that grew the fastest of all categories, that's where our positive mix is coming from.

Our strength in healthcare offset decline in hard goods.

Thank you all. Have a good evening, and we'll see you soon.

That concludes today's Chewy Q2 fiscal year 2022 earnings call. Thank you for your participation. Please enjoy your day. You may now disconnect your lines.