Ladies and gentlemen, thank you for standing by. Welcome to the Chewy First Quarter 2024 Earnings Call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question-and-answer at the end. I would now like to turn this conference call over to our host, Jennifer Hsu, VP of Investor Relations. Please go ahead.

Thank you for joining us on the call today to discuss our first-quarter results for fiscal year 2024. Joining me today are Chewy's CEO, Sumit Singh, and CFO, David Reeder. Our earnings release, which was filed with the SEC earlier today, has been posted to the investor relations section of our website. In addition to the earnings release, a presentation summarizing our results is also available on our site. On our call today, we will be making forward-looking statements, including statements concerning Chewy's financial results and performance, industry trends, strategic initiatives, share repurchase program, and the environment that we operate in. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks, uncertainties, and other factors described in our quarterly report, 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 as of today's date. We disclaim any obligation to update any forward-looking statements except as required by law. Additionally, unless otherwise stated, all comparisons discussed on today’s call will be against the comparable period of fiscal year 2023. Finally, this call in its entirety is being webcast on our Investor Relations website. A replay of the audio webcast will also be made available shortly. I'd now like to turn the call over to Sumit.

Thank you, Jen, and thank you all for joining us on today's call. We kicked off the year with strong performance achieving solid top-line results, record-breaking profitability, and robust free cash flow. First quarter success is a testament to the unwavering dedication and hard work of every Chewy team member, collectively delivering on our mission to be the most trusted and convenient destination for pet parents and partners everywhere. With that introduction, let's dive into first-quarter results. Q1 net sales exceeded the high end of our guidance range increasing by approximately 3% to $2.88 billion. Two key factors contributed to this performance: first, our customer's loyalty in non-discretionary categories such as consumables and health remain strong accounting for approximately 85% of our Q1 2024 net sales. Second, Autoship customer sales achieved record levels totaling $2.2 billion, representing 77.6% of net sales. The convenience and value of our Autoship program continues to resonate with customers and Autoship customer sales growth outpaced our enterprise average, yet again increasing 6.4%. Our Autoship customer base remains healthy and is continuing to grow. Further, on the topic of customers this quarter, we saw some encouraging trends. The work we have been doing to sharpen our already strong value proposition, for example, through pet type personalization began to pay off this quarter. Our efforts are driving higher response rates and had a positive effect on net new customers as well as reactivated customers, which were particularly strong in the quarter and up mid-teens relative to the prior year period. Notably for the first time since 2022, both new customer acquisition and reactivations modestly exceeded our internal expectations in Q1. Progressing through the P&L, we set new records for the company across our profitability metrics. Gross margin for the quarter of 29.7% exceeded expectations as we benefited from the continued strength of our growing sponsored ads business, a higher mix shift into healthcare, and a rational promotional environment. Additionally, there were some one-time items that benefited our P&L this quarter, which we will elaborate upon later in this call. We generated $163 million of adjusted EBITDA, representing a 5.7% margin supported by our strong gross margin performance and rigorous OpEx management. Across the company, teams at Chewy are executing methodically on all the controllable elements of our business in a highly disciplined manner. Finally, we generated more than $50 million of free cash flow in the quarter. We believe that we have reached an exciting inflection point in our business. Significant free cash flow generation coupled with our strong balance sheet enables financial flexibility to deploy our capital in a variety of areas. As we have always done, we will continue to invest in strategic initiatives across our business that supports our long-term growth and margin objectives. Additionally, as Dave will describe in more detail, we believe we have the cash generation and surplus to begin returning a meaningful portion of our cash to our shareholders. Now I'd like to provide an update on some of Chewy's strategic initiatives and innovations. I'm excited to share that earlier this month, we launched a compelling paid membership program, which we are calling Chewy Plus. Chewy Plus offers a range of benefits including free shipping, cash accrual rewards, and exclusive member perks. The program is currently in its beta state, and throughout the year, we will explore different test approaches to understand how it impacts discovery of our growing products and services, wallet consolidation, and NSPAC acceleration, all while maintaining economic sensibility. We are excited about the program and look forward to sharing more over the coming quarters. Turning to Chewy Health, we are excited to share that since our last earnings call, where we announced the launch of our first Chewy Vet Care clinic, we have opened three additional clinics. With four locations opened today, we are excited to bring to market several more clinics later this year, reaching the high end of our stated range of four to eight clinic openings in 2024. We remain focused on our ability to attract talent and generate strong demand for our veterinary services. And although it is early days, we are pleased with the performance across both areas. Clinic staffing and vet NPS scores remain strong, suggesting that our unique value proposition is resonating with that community. As it relates to demand generation, we are encouraged by the early signs of success. Net new customers to Chewy and appointment utilization are both trending better than our modeled expectations. Moving to our sponsored ads business, our ads business continues to ramp well, delivering on the planned product roadmap while offering our partners a compelling channel to deploy their marketing dollars. Lastly, our expansion into Canada continues to ramp in line with our expectations. We rolled out customer-facing features such as a mobile app and additional payment options as planned this quarter. Additionally, we continue to expand our assortment, particularly in categories such as premium consumables. Customer awareness and demand continues to gradually build. Customer NPS remains high, and we remain focused on scaling a quality business underpinned by programs such as Autoship and personalized customer care. With the pet category continuing its migration online, we believe we are well-positioned to become a meaningful player in the Canadian market over time. In closing, our Q1 outperformance underscores our ability to navigate this period of normalization for the pet industry. Moreover, we are cautiously optimistic that pet household formation trends are progressing in the right direction. Based on data from our shelter and rescue partners, we saw healthy growth rates in Q1 adoption on a year-over-year basis, and for the first time since 2022, we observed a positive balance between adoption and relinquishment. While it is premature to declare an industry turnaround, we maintain our perspective that the pet industry is on track toward normalization. Meanwhile, we remain confident in our ability to execute against our strategic roadmap and deliver compelling results for our shareholders.

Thank you, Sumit. To start, I will take us through our Q1 financial results and then turn to our capital allocation strategy and outlook for the balance of the year. First quarter net sales grew 3.1% to $2.88 billion, exceeding the high-end of our guidance range. Active customers declined marginally on a sequential basis to approximately 20 million, modestly exceeding our internal expectations. Importantly to note, we believe that we are seeing early but positive signals with respect to macro pet household formation and we believe our enhanced CRM initiatives are beginning to bear fruit. Net sales per active customer at NSPAC reached $562, reflecting an increase of 9.6%. NSPAC growth meaningfully outpaced our overall top line growth, driven by our ability to increase wallet share, as customer cohorts mature and continued strong engagement, particularly in programs like Autoship. Our scaled Autoship business continues to be a pillar of strength and differentiation for Chewy, driving predictable subscription-like revenue. Autoship customer sales came in at $2.2 billion in Q1, representing 77.6% of our total net sales in the quarter, up 240 basis points on a year-over-year basis. We reported Q1 gross margin of 29.7%, representing a 130 basis point increase year-over-year and 150 basis point increase sequentially. As Sumit previewed, Q1 gross margin benefited from certain one-time items, such as the timing of vendor reimbursements, lower fuel costs, and lower-than-expected promotionality. Adjusted for one-time items, Q1 gross margin would have landed at approximately 29%. On a year-over-year basis, our sponsored ads program was the largest driver of our gross margin improvement, followed by product mix as Chewy Health and premium consumables net sales penetration expanded. It is worth a reminder that in Q1 2023, the promotional environment was operating below historical levels. Moving to OpEx, please note that my discussion of SG&A excludes share-based compensation expense and related taxes. OpEx for the quarter continued to scale nicely with revenue. First quarter SG&A totaled $533.1 million or 18.5% of net sales, representing 50 basis points of improvement on a year-over-year basis and 150 basis points of improvement sequentially. This leverage was driven by our continued disciplined management of payroll and improved cost management of G&A expenditures. First quarter advertising and marketing expense was $186.8 million or 6.5% of net sales. I would note that we expect our advertising and marketing expense to run closer to the high end of our stated 6% to 7% target throughout the balance of the year due to the timing of certain marketing campaigns. First quarter adjusted net income was $137.1 million, representing a 56% increase year-over-year and a 71% increase sequentially. Finally, we reported an adjusted EBITDA margin of 5.7% for the quarter or 170 basis points of margin expansion relative to Q1 2023 and 260 basis points of margin expansion sequentially. Overall, we are encouraged by the operating leverage we are unlocking in the business, which demonstrates the scalability of our cost structure. In the first quarter, we've reported free cash flow of $52.6 million, reflecting $81.9 million of net cash provided by operating activities and $29.3 million of capital expenditures. We ended the quarter with more than $1.1 billion in cash, cash equivalents, and marketable securities, remaining debt-free with a strong liquidity position of $1.9 billion. I would like to share an update regarding our capital allocation strategy. Reinvesting back into the business toward high ROI opportunities remains our first priority. Our strong balance sheet provides sufficient firepower to pursue value-accretive acquisitions and strategic investments if opportunities arise. Having taken all of this into account, we believe our growing cash position affords us the ability to enhance shareholder returns by way of implementing a share repurchase program. Today, I'm excited to share that our Board of Directors has authorized Chewy's first-ever share repurchase program of up to $500 million. In light of our strong balance sheet and our long-term strategy, we believe share repurchases offer a compelling and accretive use of capital, while also enabling us to mitigate the dilutive impact of share-based compensation. We intend to commence repurchasing shares this quarter and look forward to providing you with updates as we progress through the program. Now, I’d like to turn to our second quarter and updated full year 2024 guidance. While we are seeing certain green shoots and demand trends, we believe it is premature to revise our view on the pet industry's overall outlook for the balance of the year. We anticipate second quarter net sales of between $2.84 billion and $2.86 billion, or approximately 2% to 3% year-over-year growth, and we are maintaining our full year 2024 net sales outlook of between $11.6 billion and $11.8 billion or approximately 4% to 6% year-over-year growth. As noted last quarter, this range includes the impact of a 53-week 2024 fiscal year, which will be fully reflected in the fourth quarter. Moving to profitability guidance, we are raising our full year 2024 adjusted EBITDA margin guidance to a range of 4.1% to 4.3%. This reflects 20% plus adjusted EBITDA flow-through at the midpoint of our guidance ranges. We continue to expect full year capital expenditures in the range of 1.5% to 2% of net sales and free cash flow conversion to remain above 80%. Before we open the call to questions, I'd like to reiterate that we are proud of our strong start to the year. We continue to believe that Chewy is exceptionally well equipped to execute against our strategic roadmap and deliver results that drive shareholder value.

First one on the net ads improving a bit Q-on-Q versus the prior trends. Should we still contemplate a softer 1H and a back half inflection? Is that really a 2H uptick or more of a 4Q story?

Yes. Similar to the guidance or consistent with the guidance that we provided last quarter. Year-over-year, we expect active customers to be pretty flat, slightly down in the first half with some recovery in the second half, but very consistent with what we said last quarter.

And on the launch of the four vet centers, how should we think about measuring progress there? What sort of guideposts are you going to give us in the coming quarters to track that ramp? And how many quarters do you expect a typical center to get to EBITDA breakeven?

I'll start on this and Dave might add here. As we've articulated in the past, there are a few dimensions that we are viewing success from. The inputs that we will be highly focused on are customer satisfaction scores, our ability to recruit staff, and retain veterinarians. So it's demand generation, vet retention, and operational execution throughout these clinics. We are happy with our clinics being fully staffed. We have a good building pipeline for future clinics, and all initial returns are trending positive. In terms of returns, this is likely a few-quarter observation period and we'll be back with more.

I'll reiterate what Sumit said. As we're currently running ahead of our internal models, we still expect towards the end of this year to release some type of white paper after we get a bit more learning through the testing process here. But I would say cautiously optimistic on the initial clinics that we've launched.

First just on the share buyback program, I'm curious how you approach share buybacks, is it more of an opportunistic strategy or more of a consistent cadence to offset dilution?

From a share repurchase perspective, we're going to be in the market this quarter. We're pleased with our cash generation. We delivered well over 80% conversion of EBITDA to cash last year. With respect to how we'll be in the market, we think this is an attractive valuation at this stage. So we have plenty of capital, the authorization from the Board, and we will do both opportunistically as well as consistently and methodically.

Yes. Just one follow-up question. So as we look at the hard goods category, it declined this quarter. Are you seeing any green shoots in hard goods at this point, or do you expect challenges to continue in the near-term?

Yes, your observation is correct about us being able to arrest the declining trends we've been seeing. Search volume for hard goods was up, intent was up. After a long period, we saw consumers return with specific categories that they're declaring intent for. This is likely tied to the adoption and relinquishment trend that was mentioned in the script. Traffic has continued to increase every period this year, and year-to-date we're up about mid-single digits. We saw the rate of hard goods decline arresting inside the company. We're not resting, and we are putting our best talent on this type of stuff.

Sumit, you talked about sponsored ads being the biggest driver of gross margin upside. Can you just talk about the early feedback from marketers and do you have any thoughts on quantifying the impact here early on?

Sure. Sponsored ads, we're seeing good response curves. The demand that flowed through in the first quarter was stronger than our forecast. We're on track to exit the year on the low end of the 1% to 3% range that we've guided for, consistent with previous communication. Gross margin improvement has been a journey, and we're excited about the potential that might contribute in the future.

Anything you can add on how the rollout might proceed going forward? And how does that kind of interact with Autoship?

We see Chewy Plus and Autoship as complementary. We believe that a paid membership program will attract interest, and it adds benefits to those who subscribe to Autoship.

Can you give us a sense of what your priorities are on the marketing side as it relates to the acquisition of new net customers vs. retention or incentivizing behavior among existing customers?

We're focused on new customer acquisition and CRM reactivation for existing customers. These are independent efforts, and we're implementing a full funnel marketing effort. Our awareness levels have increased significantly. We want to capture that incremental traffic.

The first quarter marketing spend was slightly lower at 6.5% of sales, but we expect to be towards the higher end of the 6% to 7% range for the rest of the year.

In 1Q, you came in a bit above your guidance. Where did you see that outsized strength?

We saw improvements in product mix and scaling the business. Our gross margin and product mix improvements provided outsized strength. Continued improvement in product mix and scaling will remain our focus.

Could you speak to the customer journey for new versus existing Chewy account members and repeat trends? What's underpinning the excitement around accelerated rollout?

We believe the inputs are thoughtfully planned, and the outputs are responding positively. Customer NPS and vet NPS scores remain strong. Demand generation trends are trending positively.

We see consecutive improvements and are optimistic about our ability to sustain profitability moving forward. We think the year looks pretty similar to 2023 in terms of outlook.

Could you help us better understand how you think Chewy’s share in the consumable category is progressing?

We will take more share this year. We're seeing positive trends and premium segments, and we expect to uphold our position in the value segment.

Can you talk about how churn is progressing at this point and how you think churn should progress through the balance of the year?

Churn is down year-over-year, but the rate is still higher than our legacy cohorts. The reactivations have been strong, and we see opportunities as the market normalizes.

Churn in Q1 was a decline in absolute numbers from the previous year, and it's down sequentially from Q4 of '23. We feel these all point to early signs of normalization in the industry.

Ladies and gentlemen, this now concludes today's call. I'd like to thank you all for joining. Have a great rest of your day. You may now disconnect your lines.