Earnings Call
Chewy, Inc. (CHWY)
Earnings Call Transcript - CHWY Q2 2025
Operator, Operator
Hello, everyone, and welcome to the Chewy Second Quarter 2025 Earnings Call. My name is Emily, and I'll be coordinating your call today. I would now like to hand over to Natalie Nowak, Director of Investor Relations. Natalie, please go ahead.
Natalie Nowak, Director of Investor Relations
Thank you for joining us on the call today to discuss our second quarter results for fiscal year 2025. Joining me today are Chewy's CEO, Sumit Singh; and Will Billings, our Chief Accounting Officer and Interim Principal Financial Officer. Will is a respective leader with extensive finance and accounting experience, and we appreciate his dedication to Chewy as he takes on this expanded role while we continue to search for a permanent CFO. 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 website at investor.chewy.com. 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 in which we operate. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks, uncertainties and other factors that could cause actual results to differ materially from our forward-looking statements. We encourage you to review our SEC filings, including the section titled Risk Factors in our most recent Form 10-K for a discussion of these risks. 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 assume no obligation to update any forward-looking statements, except as required by law. 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. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise stated, all comparisons discussed on today's call will be against the comparable period of fiscal year 2024. Finally, this call in its entirety is being webcast on our Investor Relations website. A replay of the audio webcast will also be available on our Investor Relations website shortly.
Sumit Singh, CEO
Thanks, Natalie, and good morning, everyone. Q2 net sales grew by nearly 9% year-over-year to $3.1 billion, exceeding the high end of our guidance range. Moreover, against an industry backdrop of low to mid-single-digit growth, our Q2 performance demonstrates a clear share gain outcome. The strength of our Autoship program in categories such as consumables and health anchored Q2 net sales performance. Second quarter Autoship customer sales of $2.58 billion represented 83% of our Q2 net sales, reaching a new record high for the company. Growth in Autoship customer sales once again outpaced overall top-line growth increasing by nearly in Q2. We are also pleased to see the continued strength within our hard goods business, which grew over 15% in the second quarter, primarily on the back of structural volume growth. And finally, a rapidly strengthening CES program exceeded our expectations in the second quarter. I will comment more on our progress with this program in a moment. Moving to customers. We ended the second quarter with 20.9 million active customers, reflecting 4.5% year-over-year growth. Importantly, the strength and quality of our new customers continue to improve. New customer NSPAC for the Q2 2025 cohort strengthened quarter-over-quarter and is trending mid-single digits higher on a year-over-year basis relative to the comparable Q2 2024 cohort. For total Chewy, we continue to expand customer share of wallet in the quarter with NSPAC reaching $591, representing 4.6% year-over-year growth. Moving down to profitability. Gross margin reached 30.4% in the quarter, expanding on both a sequential and year-over-year basis by nearly 80 and 90 basis points, respectively. For Q2, the main drivers of gross margin were both our fast-growing sponsored ads business and favorable mix into premium categories. Pricing and promotion remained rational and did not have a material impact on gross margins in the second quarter. Continuing on the topic of profitability. We generated $183.3 million of adjusted EBITDA in the quarter, representing a 5.9% margin and a year-over-year increase of over 80 basis points. We also generated nearly $106 million of free cash flow in the quarter. Our robust profitability and compelling free cash flow generation enabled us to not only invest in our strategic growth initiatives, but also return meaningful capital to shareholders as reflected by the nearly $125 million we deployed towards share repurchases in the quarter. Now I would like to provide an update on some of Chewy's strategic initiatives. The Chewy Vet Care, or CVC network continues to outperform relative to expectations in terms of demand generation and driving broader ecosystem benefits. We are consistently observing that CVC customers drive both the highest and fastest netback curves for Chewy. Additionally, we remain on track to open 8 to 10 new practices in fiscal year 2025 to reach a total count approaching 20 by year-end, and we look forward to keeping you updated on our progress. Shifting gears, let's talk about Chewy+, our paid membership program. As a reminder, today, Chewy+ members receive the following benefits: free shipping on all orders, 5% rewards to redeem on future orders, limited-time seasonally relevant member exclusive offers, and a 30-day free trial period. At the end of the free trial period, members pay an introductory price of $49 per year and convert to paid members. As I shared in my remarks earlier, the Chewy Plus membership program is rapidly strengthening, indicating a strong product market fit. In the month of July, roughly 3% of Chewy's total monthly sales were to Chewy Plus members. Importantly, we are observing strong incrementality in spend, NSPAC and positive contribution profit per customer across Chewy+ customers compared to nonmembers. Furthermore, other key leading indicators of success are promising. These customers are buying at a higher frequency and attaching a higher number of products to their orders. Additionally, we are observing incremental Autoship adoption and greater mobile app usage from Chewy Plus members relative to nonmembers. All of this is leading to both higher as well as accelerated NSPAC curves for Chewy+ customers compared to nonmembers, which in turn is contributing positively to Chewy's net sales flywheel. As we exit this year, we expect approximately mid-single-digit percentage of our net sales to go through the Chewy P+ program. Further, we expect the program to generate positive gross profit dollars in fiscal 2025, though at a gross margin rate below Chewy overall, reflecting both the ramp that we anticipate in the second half of this year and the mix of paid versus free trial members. As we scale, we will remain disciplined in evaluating the program structure, including pricing and member benefits. Moving on. Now let's talk about Chewy Private Brands. I am excited to share that in August, we launched Get Real, our new Chewy exclusive private brand of healthy fresh dog food. The fresh and frozen segment represents a fast-growing TAM fueled by trends of humanization and premiumization in pet. Consumers believe that their pets deserve fresh and nutritious food, leading to longevity and an overall higher quality of life for their beloved pets. Get Real, a new line of minimally processed fresh dog food available only at Chewy comes in 3 different POP-approved recipes, including chicken and Brussels sprouts, beef and sweet potato, and turkey and cranberry, all available as both full meals and meal toppers made with 10 or fewer ingredients plus vitamins and minerals. Additionally, this premium product is delivered to your doorstep in pre-portioned ready-to-serve meals just tap and serve. Although the product has only been in market for a few weeks, customer reception is strong. Customers are pleased with the palatability, quality, and overall experience, which includes shopping, delivery, and consumption. I am also pleased to share that we have already built up sufficient capacity through 2028 to support our growth in the Fresh Frozen segment broadly, both for Get Real and for our national brand partners while remaining very much at the lower end of our previously set CapEx guidance range of between 1.5% to 2% of net sales. With the capital investment behind us, we are now in process of scaling to a national footprint by leveraging our existing fulfillment center topology. By the end of 2025, we expect to be ready to deliver a majority of our fresh food offering to customers within a 1-day transit time. Furthermore, Get Real is exclusively an Autoship subscription business that results in high gross profit per unit at scale, supporting both broad leverage across our operational infrastructure and our aspiration of becoming a leading profitable player in the fresh and frozen segment. While still early, we are pleased with the launch of this product and the positive response from our customers. Beyond Get Real, we are working on bringing other Chewy branded product innovations to market in the second half of 2025, and I look forward to keeping you updated on our progress. Before I turn the call over to Will, I would like to leave you with a few closing thoughts. The first half of 2025 has been an exciting and productive period for Chewy, reflecting the strength of our differentiated value proposition and the momentum across our business. Looking ahead, we expect the second half of the year to be even more dynamic given the evolving macro. As many retailers prepare to pass tariff-related costs on to customers, we believe Chewy is well positioned to mitigate these pressures. Our higher mix of consumables and health and proactive investments in onshoring incremental discretionary inventory provide meaningful safeguards. These actions will help deliver a superior customer experience by selectively evaluating pricing while protecting product margins. Additionally, instead of absorbing these pressures, we plan to lean into growth by investing behind the expansion of programs like Chewy+ and our private brands. Customers are embracing these initiatives for their compelling value proposition, and we are equally encouraged by their strong return on investment. Overall, we see the second half of 2025 as an opportunity to further accelerate market share gains in the U.S. and position Chewy for even greater long-term success.
William Billings, Chief Accounting Officer and Interim Principal Financial Officer
Thank you, Sumit, and thank you all for joining us today. Let's review our financial results and outlook. Second quarter net sales grew 8.6% year-over-year to $3.1 billion, exceeding the high end of the Q2 guidance range we provided last quarter. We reported second quarter gross margin of 30.4% representing approximately 90 basis points of margin expansion year-over-year. Shifting to operating expenses, Q2 SG&A, excluding share-based compensation and related taxes, came in at $592.8 million or 19.1% of net sales, deleveraging approximately 30 basis points year-over-year. Q2 deleverage was driven by the ongoing ramp of our Houston fulfillment center, which launched in April, coupled with the wind down of certain shifts at our Dallas facility. We also incurred higher inbound inventory processing costs, primarily within hard goods, to ensure we have the right assortment for pet parents as we head into the peak holiday periods, while also allowing us to mitigate the impact from tariffs in 2025. Additionally, a smaller contribution came from increases in wage and benefit costs within the period. Importantly, we believe these increases are primarily temporary in nature, and we continue to expect to deliver modest SG&A leverage in fiscal year 2025. Second quarter advertising and marketing expense was $200.6 million or 6.5% of net sales, in line with our expectations and consistent with our previously stated target of 6% to 7% of net sales. Q2 adjusted net income was $141.1 million, representing a 34.8% increase year-over-year and we delivered $0.33 of adjusted diluted earnings per share within the guidance range we provided last quarter. Second quarter adjusted EBITDA came in at $183.3 million representing a 5.9% adjusted EBITDA margin, which reflects 80 basis points of year-over-year margin expansion. We reported Q2 free cash flow of $105.9 million, which reflects $133.9 million of net cash provided by operating activities and $28 million of capital expenditures. For full year 2025, we reiterate our expectation to convert approximately 80% of adjusted EBITDA to free cash flow and CapEx will be at the low end of our previously stated range of 1.5% to 2% of net sales. In the second quarter, we repurchased approximately 3 million shares for a total of approximately $125 million. At the end of Q2, we had $359.8 million of remaining capacity under our existing program for future repurchases. We ended the quarter with approximately $592 million in cash and cash equivalents, and we remain debt-free with an overall liquidity position of approximately $1.4 billion. Now I'd like to discuss our third quarter and full year 2025 outlook. We expect third quarter 2025 net sales of between $3.07 billion and $3.1 billion or approximately 7% to 8% year-over-year growth, and we are raising and narrowing our full year 2025 net sales outlook to between $12.5 billion and $12.6 billion or approximately 7% to 8% year-over-year growth when adjusted to exclude the impact of the 53rd week in fiscal year 2024. This represents a $175 million increase to the midpoint of our guidance range. Moving to profitability guidance, we are maintaining our full year 2025 adjusted EBITDA margin outlook of 5.4% to 5.7%. As Sumit shared in his remarks, we believe it is prudent to remain on the offense in the second half of 2025 and invest to strengthen Chewy's share position in the pet category. The midpoint of our guidance range indicates 75 basis points of adjusted EBITDA margin expansion year-over-year. Furthermore, at the midpoint of our 2025 net sales and adjusted EBITDA margin guidance ranges, we expect to deliver approximately 15% adjusted EBITDA flow-through for the year, in line with our previously stated long-term target. Importantly, and consistent with our comments last quarter, we continue to expect approximately 60% of our adjusted EBITDA margin expansion to be driven by improvements in gross margin, confirming that we expect to continue to deliver healthy gross margin expansion year-over-year in fiscal 2025 with Q2 being the high point for the year. And finally, we also expect Q3 adjusted diluted earnings per share in the range of $0.28 to $0.33. For the full year 2025, we are reiterating our previously stated expectations related to share-based compensation expense, including related taxes, of approximately $315 million and weighted average diluted shares outstanding of approximately $430 million. 2025 net interest income of approximately $25 million to $30 million, and we continue to expect our effective tax rate to be between 20% to 22% for 2025. Before we open the call for questions, I'd like to reiterate that our strong Q2 results underscore the continued momentum in the business and strength of execution by our Chewy team members. We believe that Chewy remains exceptionally well positioned to continue to deliver share gaining growth and enhanced shareholder value.
Operator, Operator
Our first question today comes from Doug Anmuth with JPMorgan.
Doug Anmuth, Analyst
Sumit, can you talk more about the investments that are required in the back half and into 2026 just as you lean into growth, a little bit more detail on those? And then also just how are you promoting and increasing awareness of some of the new offerings like Chewy+ and Get Real?
Sumit Singh, CEO
So let's start with the second question first because it will give you a sense for the investments that we're thinking about. So as you know, we have a very large base of customers, which continues to grow. This customer base is sticky and the programs like Chewy+ allow us to enhance the process of discoverability and get customers to attach both explore, discover and then attach even a greater set of product or a greater range of products and services offered by Chewy. So our first attack strategy is to essentially expose Chewy+ to existing members. And so far, we have not spent any incremental dollar on marketing the program externally, and we don't intend to do so as we ramp the program up. We're seeing really good participation of existing members converting to become Chewy+ members. So the marginal cost of that acquisition is zero or nearly zero to us, and most of the exposure is being provided by on-site and funnel shopping experiences. Now coming to Get Real, our approach is very similar. Large audience, we have what we believe is really good recognition of what looks like premium cohorts and consumables for us. So our strategy is much more leaning into the broader value proposition of Chewy externally as the place, which is a destination for you to take care of your pets and providing food supplies, health and other services and really gearing ourselves for conversion, right, rather than consideration building when customers come to our website. And so from that standpoint, the inputs that we've been really focused on is getting the quality of the product, the palatability of the product exactly where we want it. And we're pleased to see the customer response. Number two, we're price competitive. There are many products out there that are priced much higher. And we believe the value proposition or the balance of quality and price that we deliver really provides good value to the consumer. Third, if you explore this product in the way that we've built it, this is not a standard product listing page experience. We've built a curated experience that allows customers to engage with this category in a manner that allows them to seek the education and have the content at their fingertips. We've paired that up with really high CRM capability internally. And that will be our strategy moving forward as well. So from that standpoint, you shouldn't expect us to lean very heavily into marketing dollars. Currently, we're pairing Get Real with a strong acquisition offer, but candidly, Get Real customers or fresh and frozen customers are high NSPAC customers, you're looking at plus $2,500 spend full meal customers and running into the high hundreds for topper customers. But these customers are also really prone towards health and wellness and other high spend categories. So broadly, we see tremendous potential for this category being the highest gross profit per unit category in the company. The fact that we've already spent the money in building CapEx or capacity should essentially make you comfortable to the point that we don't have incremental CapEx investments coming up through 2028. Of course, if the program exceeds our expectations in a major manner, then that's a high-quality problem to have, and we'll talk about it at that particular point. But broadly speaking, these are high-margin sales, high sales, high-margin verticals, and we're excited to be finally leaning into them and driving even stronger netback consolidation.
Operator, Operator
Our next question comes from Nathan Feather with Morgan Stanley.
Nathaniel Feather, Analyst
Could you provide some clarity on the temporary costs related to SG&A deleverage and how much we can attribute to the changes in fulfillment centers versus the costs of processing hard goods? Additionally, how should we approach the leverage path for the second half of the year?
Sumit Singh, CEO
Yes, Nathan, I’d like to provide some broader context on SG&A and directly address your question. As we've mentioned, we anticipate that about 60% of our adjusted EBITDA margin expansion will come from gross margin improvements and 40% from operational expense leverage. We do expect to achieve SG&A leverage in 2025, with the gains likely appearing in the latter half of the year, based on our performance in the first half. The SG&A leverage in 2025 will be lower than the 24% seen in 2024, but this is typical for SG&A, which fluctuates over time. During our Capital Markets Day in December 2023, we set a goal to achieve about 200 basis points, and we have already attained 100 basis points, or half of that goal, primarily due to our four automated fulfillment sites, through which over 40% of our volume is processed. By the second quarter of next year, we expect nearly half of our volume to be automated, particularly as Houston comes online. In terms of specifics for this quarter and 2025, we launched the Houston facility in April, which typically takes around six months to ramp up and start delivering leverage. I should have clarified this earlier, but the facility is progressing well and is on track to begin yielding leverage in the latter half of this year. The other aspect affecting SG&A is that our growth in 2025 is primarily driven by unit increases, marking structural growth compared to the first half, which had pricing benefits. As we grow faster, the variable costs associated with SG&A will correspondingly rise. This is a positive issue to deal with, as it helps to boost operational density and achieve better economies of scale as our facilities ramp up. We anticipate that the situation will improve significantly as we transition from 2025 into 2026. Regarding one-time costs, we opted to increase our inventory of hard goods due to anticipated price increases in the latter half of the year. This decision was made to ensure we can provide an excellent in-stock experience for our customers. Additionally, we may consider pricing strategies that allow us to gain market share while competitors raise their prices, making Chewy an attractive option for pet parents. We have incurred roughly $3 million to $5 million in higher inbound processing costs, along with about $2 million to $3 million from increased wages and expenses, which tend to be cyclical. The key takeaway is that SG&A costs are expected to moderate in the latter half of the year compared to the first half, and we are on track to achieve SG&A leverage in 2025.
Operator, Operator
Our next question comes from David Bellinger with Mizuho.
David Bellinger, Analyst
Let me just squeeze a few together here. Maybe if we could just start on the Q2 gross margin improvement. You mentioned the premium products. That seemed like somewhat of a shift also maybe talking about some of this price investment in the back half. So can you unpack all that for us and how we should think about the drivers of gross margin expansion in Q3 and Q4? And then also just on the new OpEx investments, can you help us understand, is all this fully in your control and making decisions to further accelerate the top line and share gains versus something more reactionary or something changing in the external marketplace is forcing you to do this? Can you just help us understand that split in Chewy+ and fresh and frozen, this might impact the 15% incremental EBITDA margins for the business?
Sumit Singh, CEO
Yes, it's a good question. Let's delve into it. There are a few aspects to consider. Firstly, regarding gross margin, we are satisfied with the expansion we've achieved this quarter. The factors driving gross margin have been consistent over the past few quarters and align with the narrative we have communicated. These factors include the product mix across our merchandising-led businesses, such as health and premium consumables, and now hard goods, which is beginning to see double-digit growth, albeit still a smaller contribution. We're encouraged about the future of this. The drivers of gross margin include product mix, increased autoship penetration, economies of scale, and our growing sponsored ads initiative. For the second quarter, the promotional environment remained rational, and we anticipate it will remain that way into the latter half of the year. As mentioned, we expect fluctuations in gross margin on a quarterly basis, so it's important to keep that in mind. While we maintain discipline, we also adapt our business strategy each quarter. For instance, we might focus on increasing autoship subscriptions if market signals are favorable. The ramp-up of suppliers and sponsored ads could also lead to variations in contribution between quarters. Looking ahead to 2025, we anticipate a healthy level of gross margin expansion annually. Specifically for 2025, as per our guidance, we expect around 60% of 25% EBITDA margin expansion will impact gross margin. Therefore, we do expect to achieve significant gross margin expansion this year as well. In terms of investments for the second half, our guidance indicates an increase of approximately $175 million, translating to a 15% flow-through, which you'd expect to yield an additional $20 million to $25 million on the bottom line. However, we're choosing to reinvest that back into the company's growth, whether it's through expanding the Chewy+ membership program or boosting autoship. We are also keeping an eye on the market for any selective pricing opportunities. If we don't find any, we can choose to enhance the bottom line instead. Our SG&A expenses are manageable and within our control, and while there are standard one-time elements, we are generally focused on ramping up our fulfillment facility.
Operator, Operator
Our next question comes from Rupesh Parikh with Oppenheimer.
Rupesh Parikh, Analyst
So just going back to Get Real and some of your fresh frozen efforts at this juncture, how big do you think the business can go over time? And then I know it's early, but just any characteristics of the initial customers that you're getting into the franchise. And in this sense, do you have a sense of whether you're actually getting new customers just given that launch?
Sumit Singh, CEO
Sure. If we look at the total addressable market for this category today, we estimate it to be between $3 billion and $4 billion. Over the next several years, we expect this market to exceed $8 billion, likely falling between $8 billion and $12 billion. The growth rate for this category is currently in the mid-teens, which is robust, although it was growing faster until last year. There’s considerable interest from the industry, with new players entering the market and national brands beginning to announce their product offerings. We are eager to collaborate with these national brands as they launch their products later this year. As the category expands, we anticipate obtaining a significant market share. A meaningful market share for us would be equivalent to Chewy's share in the industry. We have established the necessary capacity and infrastructure to operate efficiently in a one-day delivery network and have a sophisticated supply chain. This positions us well to convert high gross margins in this vertical into strong EBITDA as well. Regarding customer quality, it’s still early, as we've been operational for less than five weeks. Currently, around 70% of our customers are existing clients, while 30% are new customers, which aligns with our expectations. We are capitalizing on the general traffic in the industry due to marketing efforts, and we are enhancing our site experience with Get Real to improve conversion rates. We estimate that the average revenue per customer for toppers will be over $800, as they are likely to purchase additional categories. For full meals, we project an annual customer value exceeding $2,500. We are excited about these developments.
Operator, Operator
Our next question comes from Curtis Nagle with Bank of America.
Curtis Nagle, Analyst
Can you hear me?
Operator, Operator
We are not receiving a response, and so I will move on to the next question, which comes from the line of Shweta Kajaria with Wolfe Research.
Shweta Khajuria, Analyst
Okay. Let me try two, please. Sumit, could you please talk about the advertising environment and the conversations you've had through the quarter? And what is top of mind across advertisers as we think about the back half of this year and potentially even next year? And how is and how the ad revenue is trending or I guess, advertising business, not revenue is trending for you versus your expectations? And then the second question is, generally, what are your expectations as we think about the macro in terms of net household formations for the remainder of this year and also next year? And I asked because there could be inflationary pressure. So how are you thinking about the mix of customer growth versus pricing? Do you still expect it to be call it, low to mid-single-digit percentage growth rate in the back half? Or is there potential for acceleration in the back half of this year?
Sumit Singh, CEO
There are three questions to address: the state of the industry and key inputs, our composition of new customers, and pricing. Let’s go through them one by one. Starting with pet household formation trends, the trends we discussed over the past several quarters remain consistent, with no significant changes observed. In the shelter channel, net adoptions are stable, and relinquishments are decreasing year-over-year. Therefore, we anticipate that net households will be flat to slightly up in 2025. The industry's normalization seems to be holding true. Based on our supplier conversations and market analysis, we foresee that for the latter half of the year and generally for 2025, the industry will grow in the low single-digit to the lower end of the mid-single-digit range. We are clearly gaining market share, with growth between 8% and 10% on a 52-week basis and around 6% on a 53-week basis, which we find encouraging, especially given the tougher comparisons we face as we enter the second half of the year. Now, regarding our growth composition, our long-term strategy involves a combination of a low to mid-single-digit growth in active customers and mid-single-digit growth in NSPAC. We are happy to maintain these trends for the rest of the year. We have seen consistent returns in active customer growth over recent quarters and expect that to continue on a sequential basis. It's essential to note that we will be facing tougher comparisons in Q4 as we will be comparing against previous active customer growth. Despite these challenges, we expect to grow active customers at the higher end of the low single-digit range in 2025. For NSPAC, we achieved 4.5% growth in Q2, which reflects a normalized environment without significant pricing benefits currently influencing our results. We anticipate NSPAC will continue to trend in the 4.5% to 5.5% range in the coming months, supported by stronger auto-ship services, an improved product mix, and initiatives like Chewy+ that promote consolidation. This indicates that we are well-positioned to take advantage of the growth opportunities ahead.
Operator, Operator
Our next question comes from Michael Morton with Towers.
Michael Morton, Analyst
Question for Sumit. Bigger picture and then maybe a more near-term one. But Chewy has done an excellent job kind of disproving the fears around competing with retail giants and there are the obvious competitive advantages like customer service. But we were wondering if you could maybe speak to some of the aspects that are missed by us on the outside, where you think your real opportunity is to continue gaining incremental share? And then maybe just internally how this is reflected in your outlook as pet household formation continues to improve? And then just on the hard goods recovery, maybe just a little bit details on volume versus ASP would be helpful.
Sumit Singh, CEO
Let's begin with the second question. The focus is primarily on volume, as there is currently minimal benefit from the average selling price in the hard goods recovery. The main factors driving this recovery are the rapid increase in available stock and a wider range of products for customers. This year, we have added over 1,500 brands, and the positive response to our fresh inventory is promising. Our in-stock levels have remained very high, and we aim to maintain this, which is why we are investing in inventory in the second quarter as we head into the latter half of the year. Additionally, we are consistently connecting with hard goods customers through our communication strategies, both on and off-site. Overall, we are optimistic about the trends in hard goods and do not foresee a slowdown as we approach the third quarter; it's a positive narrative. Regarding differentiation, we have always seen our landscape as much wider than just food and supplies. With a total addressable market of around $140 billion to $150 billion that is increasingly moving online, we are adding significant value by effectively linking food suppliers with the health ecosystem, as well as offering B2B or B2B2C services. Our approach keeps customers engaged with us and enhances our value proposition. In the food and supply sector, we function as a large e-commerce player while providing the personalized service typical of a local pet store, which is a challenging blend to achieve. We are consistently performing well and are always striving for better results at our scale. Additionally, we have established a substantial health market, now engaging in virtually all of the $50 billion health segment, which is growing at twice the rate of food and supplies. Within this area, we offer credible products. A small fraction of our customers currently use services like pharmacy, presenting a significant growth opportunity, especially as this sector increasingly shifts online. We haven't discussed our compounding business in a while, but compounding offers a high gross margin and we are one of only two reputable compounders nationwide, making our B2C offering appealing. We are also becoming a preferred choice for veterinarians seeking compounding services. Furthermore, our B2C and B2B software business is expanding. With the CVC exceeding our expectations, we are optimistic about future projections. We are excited about the Chewy+ program, which has rapidly reached 3% of net sales by the end of last month of the last quarter, and we anticipate continued growth. We view this program alongside popular membership programs like Amazon Prime, Costco, or Walmart Plus, offering similar benefits and returns. Our goal is to establish it as the premier membership program for cat owners. With numerous opportunities ahead, we are focused on competing effectively while remaining attentive to competitive pressures, but our primary focus is on serving our customers.
Operator, Operator
We have time for one final question. And our last question today comes from the line of Dylan Carden with William Blair.
Dylan Carden, Analyst
Sumit, curious, you had some earlier comments about sort of the quality of cohorts improving year-over-year. And I was just wondering if you could elaborate on that. Is that just sort of simply the industry itself stabilizing and improving? Are you doing things to kind of stimulate that? And the growth maybe sort of a related topic, but the growth in auto ship and the outperformance there, which has been relatively sustained over the last three quarters. How long do you think that runs?
Sumit Singh, CEO
The improvement in the quality of our cohorts is driven by two main factors that work well together. First, as we increase the number of customers involved in programs like Autoship or Chewy+, we enhance our ability to retain them and engage them more, leading to better consolidation of their NSPAC and quicker netback consolidation. Within these programs, we have focused on boosting settlement rates. For instance, with Autoship, we are witnessing growth in subscription and better retention of net subscribers. Our rate of new subscription additions has risen, and our settlement rates for subsequent orders have improved, resulting in enhanced net retention in Autoship. This layering effect is effectively contributing to a larger portion of our sales through ownership. Similarly, for Chewy+, we notice that members are engaging more and adding, on average, three additional categories to their baskets compared to nonmembers. The mix of cohorts is especially interesting because it allows us to tap into lower spending segments where we can quickly consolidate purchases, while also enabling higher spending cohorts to explore and discover new products, further increasing basket size. Overall, we are seeing significant incremental growth, and the quality of the Chewy+ cohorts is strong. Additionally, we have a thriving health business and premium consumables division. It's important to note that when we discuss the lower-end value segment, which we estimate to be about 12% of the market, it may not be ideal for Chewy. However, for all other segments, Chewy remains the preferred choice. Finally, as more people shift to online shopping, we are capturing more market share from offline sales. We have improved our ability to retain these customers compared to last year, and the results are beginning to show.
Dylan Carden, Analyst
And just curious, Chewy+, I get that it's early days as far as sort of mid-single-digit revenue penetration. But for a lot of loyalty programs, you mentioned Prime, as kind of the majority of the business. Is that part of the intention here? And just from a margin standpoint, let's assume it's the majority of the business, that would be margin accretive.
Sumit Singh, CEO
I think we've mentioned before that recently conducted surveys show that three-fourths of our customers are prime members, which highlights the widespread adoption of that program. What we're seeing is that we retain a very high percentage of our customers as they enter their second year, and attrition becomes minimal after about 30 months. This is evidenced by how our pandemic cohorts have evolved. Once customers have been with us for over 30 months, they tend to concentrate their spending on Chewy, regardless of prime membership status. With Chewy+, this consolidation is occurring even more rapidly, particularly with our Autoship program, which has been enhanced. This is why we're observing accelerated growth and robust netback curves from these initiatives. Regarding margins, we anticipate that Chewy+ will contribute positively. While the program is currently in a 30-day free trial phase, and there will be a transition from new members to paid members, it may take some time for the benefits to manifest. Overall, while the program might dilute the gross margin rate, it will significantly boost dollar contributions and contribution profit. Essentially, we’re looking at a situation where we could present a business case showing an investment yielding six times the return in revenue.
Operator, Operator
Thank you. Those are all the questions we have time for today. And so this concludes our call. Thank you all for your participation. You may now disconnect your lines.