Earnings Call
Chewy, Inc. (CHWY)
Earnings Call Transcript - CHWY Q1 2023
Operator, Operator
Good afternoon. Thank you for attending today's Chewy Q1 Fiscal 2023 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, Jen Hsu, VP, Head of Investor Relations.
Jen Hsu, VP, Head of Investor Relations
Thank you for joining us on the call today to discuss our first quarter 2023 results. Joining me 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 of our website, investor.chewy.com. On our call today, we will be making forward-looking statements, including statements concerning Chewy's future prospects, financial results, strategies and investments, industry trends and our ability to successfully respond to business risks. 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 the section titled Risk Factors in our Annual Report on Form 10-K and other subsequent quarterly reports, 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. Also, during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided on our Investor Relations website and in our earnings release and letter to shareholders, which were filed with the SEC today. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise noted, results discussed today refer to the first quarter of 2023 and all comparisons are accordingly against the first quarter of 2022. Finally, this call in its entirety 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.
Sumit Singh, CEO
Thanks, Jen, and thank you all for joining us on the call today. Before we begin, I would like to thank Bob LaFleur, who after serving as our Head of Investor Relations for the past three years has decided to move on to his next chapter after Chewy. We are all grateful to Bob for his years of service and for building out Chewy's IR function following our IPO. At the same time, today, I'd like to announce that Jen Hsu, our Head of Corporate Development and M&A, has now expanded her responsibilities to include our Investor Relations team. Before joining Chewy, Jen spent 12 years in technology-focused investment banking and that background will continue to serve her well in her expanded role. Welcome, Jen. Now, let's review our first quarter results. Throughout Q1, customers remained engaged with our platform and shopping trends remained strong. Chewy's superior value proposition along with our team's focus and high-quality execution did the rest. As a result, in Q1, we reported $2.78 billion in net sales, an approximately 15% year-over-year increase, and a 4% adjusted EBITDA margin. Our active customer base steadied and net sales per active customer, or NSPAC, grew 15% to exceed $500. Consistent NSPAC growth is driven by strong and ongoing customer engagement in programs like Autoship, and expansion in cross-category purchases. Autoship customer sales represented nearly 75% of total net sales in the first quarter. Our Autoship subscription service is a powerful tool for us, driving recurring and predictable revenue and long-term customer loyalty. Net sales resulted from strength in categories such as consumables, premium and healthcare. Our customers continue to show durability and product loyalty in these non-discretionary categories with no discernible trade-down behavior, all of which translated to strength in average order size, or AOV. A healthy start to the flea and tick season further supported performance in our healthcare business. Moving to profitability, gross margin of 28.4% exceeded expectations and was buoyed by lower-than-anticipated promotional activity, overall strength in AOV, and better-than-expected leverage at the freight and packaging level. Below the gross margin line, adjusted EBITDA margin expanded to a record 4% for the quarter. Mario will provide more detail on our financial performance momentarily. And before he does so, let me take some time to walk you through our growth investments and innovation. On our last earnings call, we previewed the team's work to launch our first international market. Today, I am excited to announce that we expect to bring Chewy's superior value proposition, including our personalized and outstanding customer experience, to Canadian pet parents in Q3 of this year. Let me elaborate on a few key concepts: Why now? Why we believe we can win in Canada? And how our model will allow us to grow sustainably and profitably in this market? International expansion has long been a part of our strategic roadmap and there are several reasons that make now the right time for us to embark on this journey. First, we have strengthened our fundamentals over the past few years, both operationally and financially, and have put our U.S. business on a steady trajectory of growth and profitability. Additionally, having undergone a multiyear transition of our tech stack into the cloud, we can now leverage our platform to be reliably deployed in Canada without meaningful incremental investment. As we assessed which geography would be most suitable for our expansion plans, we honed in on Canada's large and growing market where we see a path to achieving market share and profitability akin to our U.S. business. Canada has a healthy and increasing e-commerce penetration where we can offer a differentiated value proposition relative to existing players in the market and build the same level of trust with Canadian pet parents that those in the U.S. have come to associate with the Chewy brand. Our initial launch will focus on the Greater Toronto market, which represents the largest metropolitan area in Canada, from which we plan to take a gradual and responsible approach to expanding our footprint. Our service delivery model will leverage our assets to create operational efficiency and attractive economics while ensuring a high-bar customer experience. Specifically, we intend to support our Canada strategy with a scaled, local third-party fulfillment and logistics partner. Our U.S. supply chain affords us an additional asset, and we will leverage our U.S. network in situations where it is strategically or economically advantageous to do so. Taken together, this approach allows us to launch in Canada with a focus on optimal customer experience and without any material commitment to CapEx spend until the success and scale of the business supports an investment in this area. We do not anticipate this market requiring material CapEx investment through at least 2024. More broadly, on a company-wide level, we do not expect our investments in Canada to deviate us from our projected long-term profitability, cost or CapEx targets. We look forward to sharing our progress over the quarters to come. Moving on from international and back to business stateside, I am pleased to announce that we launched our fourth automated fulfillment center, this one in Nashville, Tennessee. Our growing network of automated fulfillment centers, accompanied by our supply chain transformation, which I have discussed in previous earnings calls, are improving margin efficiency and we believe will contribute to the scaling of our long-term SG&A target. Elsewhere, in Chewy Health, we are excited to announce the official launch of Lemonade as part of the CarePlus suite of wellness and insurance offerings. With this launch, CarePlus plans are now available across a wide spectrum of coverage options and price points from two best-in-class providers, Lemonade and Trupanion, allowing us to meet the needs of a broader range of pet parents. We expect these plans to be available nationwide to the vast majority of our customers by next quarter. As we drive broader awareness and education around our insurance product offering, we continue to see a compelling opportunity to expand total addressable market in this underpenetrated and highly profitable category. In closing, I am proud of our execution in the quarter as we entered the new fiscal year. With the base business performing robustly and with several new innovations in nascent stages, I remain incredibly encouraged by Chewy's prospects to deliver long-term growth and profitability and fuel positive and meaningful shareholder return. With that, I will turn the call over to Mario.
Mario Marte, CFO
Thank you, Sumit, and hello, everyone. I am happy to share results from a record-setting quarter for Chewy. Net sales increased 14.7% or $356.3 million to $2.78 billion. Non-discretionary consumables and healthcare categories continue to support our growth and collectively represented over 84% of first quarter net sales. Autoship customer sales were $2.08 billion, up 18.6%, exceeding overall net sales growth by almost 400 basis points. Autoship customer sales have grown to represent 74.7% of total net sales. Our primary measure of customer engagement, NSPAC, grew 14.8% year-over-year to $512, driven primarily by our large customer base that spends more with us over time, growing Autoship customer sales, and increasing levels of cross-category purchases by our customers. Both NSPAC and Autoship customer sales reached new record highs for the company. We ended the first quarter with 20.4 million active customers, reflecting modest net active customer growth relative to Q4 2022. Gross adds continue to run ahead of pre-pandemic levels, and we are seeing the gradual waning of the attrition headwinds related to our outsized pandemic cohorts. As we move down the P&L, please note that my discussion of financials, where applicable, refers to metrics excluding share-based compensation expense and related taxes as well as certain other adjustments, where relevant. The same applies to my discussion of guidance and financial outlook. Gross margin reached 28.4% in Q1, expanding 90 basis points year-over-year. Gross margin exceeded expectations, and as Sumit noted in his remarks, was buoyed by lower-than-anticipated promotional activity, overall strength in average order size, and better-than-expected leverage in freight and packaging. Continuing on to operating expenses, SG&A excluding share-based compensation and related taxes totaled $529.9 million or 19% of net sales, improving 60 basis points compared to the first quarter of 2022. The main drivers of this improvement included operating leverage from higher average order size, incremental efficiencies in fulfillment costs, our team's operating discipline, and to a smaller degree, favorability in the timing of spending to support the initiatives we announced on our last call. Q1 advertising and marketing expense was $183.7 million or 6.6% of net sales, in line with our expectation of 6% to 7% of net sales. First quarter adjusted net income was $87.2 million, a year-over-year increase of $41.6 million. First quarter adjusted EBITDA increased $49.7 million to $110.2 million, and adjusted EBITDA margin expanded 150 basis points to 4%, a result of gross margin expansion and SG&A leverage. First quarter free cash flow was $126.8 million, reflecting $148.4 million in cash flow from operating activities and $21.6 million in capital expenditures. Capital expenditures were primarily comprised of investments in our new automated fulfillment center and ongoing technology projects. CapEx in the first quarter came in lower than our historical averages, but we expect overall 2023 CapEx to remain in the range of 1.5% to 2% of net sales. We finished Q1 with $803.2 million in cash and cash equivalents and marketable securities, nearly $200 million higher than the balance at this time last year. At the end of Q1, between cash on hand, marketable securities, and availability on our revolving credit facility, our liquidity stood at $1.6 billion. That concludes my first quarter recap. So, now let me cover our second quarter and updated full year 2023 guidance. Our guidance reflects a balanced view that incorporates the strength of our business model and customer engagement along with the latest views on the evolving economic outlook. We expect second quarter net sales to be between $2.75 billion and $2.77 billion, representing year-over-year growth of approximately 13% to 14%. We are raising our full year 2023 net sales outlook to be between $11.15 billion and $11.35 billion, representing growth of approximately 10% to 12%. We are also raising our full year 2023 adjusted EBITDA margin to approximately 3%. As usual, let me provide you with some further thoughts as you update your models for the rest of the year. As we have shared before, our gross and adjusted EBITDA margins may fluctuate slightly from quarter-to-quarter, driven by several factors including the timing of investments, changes to vendor contracts, and other accruals or releases as part of the normal course of business. For example, in Q2, as we begin operations at our Automated Fulfillment Center in Nashville and ramp other initiatives, including the international launch, we will incur some temporary and incremental SG&A expenses. Finally, you should expect our free cash flow for the full year 2023 to increase alongside our expanded adjusted EBITDA margin guidance. Before we open the call to questions, I'd like to recap what our latest financial results show; and that is that Chewy is built for the long term, our operating philosophy remains intact, and our team is highly committed to driving sustainable, profitable growth.
Operator, Operator
Operator?
Mark Mahaney, Analyst
Okay. Thanks. Just the sustainability of the gross margin trends, they've been kind of grinding higher now for quite some time. And I realized that there's seasonal fluctuations to it. But just talk through why we shouldn't expect kind of sustainably higher gross margins going forward? And then, just on the revenue outlook for the balance of the year, you had pretty solid results this quarter. For some reason, your guidance implies kind of a decelerating growth rate, not dramatically, but somewhat decelerating through the back half of the year. I would have thought that as you've kind of worked through all of that COVID cohort digestion that you'd be able to kind of sustain growth rates at these levels or higher. So just are there any one-time-ish factors or comp issues we should know for the balance of the year? Thank you.
Mario Marte, CFO
Hey, Mark. It's Mario. I'll begin, and Sumit might add if I overlook anything. Regarding your first question about sustainability gross margin trends, I'll say we had a strong first quarter and the year got off to a positive start. We benefited from leverage in freight and packaging due to basket sizes that surpassed our expectations, coupled with lower promotional activity during the quarter. This variability is not new, as we have seen fluctuations between quarters historically. As for your second question regarding sales for the rest of the year, I want to emphasize two points. First, we had a solid start in the first quarter, and our Q2 guidance indicates another strong quarter ahead, with mid-teens growth translating to over $300 million in absolute dollar gains year-over-year at the midpoint of our guidance. This performance exceeds any quarter from 2022 when we review last year's additions. Therefore, we remain optimistic about the second quarter. However, we do anticipate some typical seasonality in our hardgoods sales, which usually show a slight decline from the first to the second quarter, something reflected in our reported financials. We also experienced a vigorous flea and tick season in the first quarter, which should be considered when forecasting the second quarter. Our optimism for the second quarter and the rest of the year stems from the fact that more than 80% of our sales are in non-discretionary categories such as consumables and healthcare. Additionally, approximately 75% of our sales come from Autoship customers, which are solid indicators of our positive outlook for the remainder of the year. Although this response is lengthy, we project an additional $0.5 billion in top-line growth in the second half of the year based on our implied guidance, representing significant growth regardless of perspective. Currently, our priority is to ensure effective execution in the second quarter and to position ourselves well for the remainder of the year. Sumit, do you have anything to add?
Sumit Singh, CEO
No, Mark. The only thing I would add is the first half, if you look at the dynamics between year-over-year dynamics between '23 over '22, the first half is the composition of the growth. When you looked at '22, it was a combination of kind of equal weighting between price and volume. And what the second half guidance kind of implies is structural unit growth being overweighted relative to price. So, the composition of the growth is more structural in nature, as we get out of the first half into the second half. So, that's kind of baked in. And then, remember, we're not baking in any material reacceleration of the hardgoods business, which has stronger indication as we've executed in Q1 as we move through the rest of the year. What we like about the current portfolio is the strong engagement. Autoship sales continue to be strong. NSPAC continues to be strong. And so, we're baking in the checks and balances and flowing through. We'll get one more chance to update you, of course, as we play through Q2 and we're standing in the middle of the year.
Mark Mahaney, Analyst
Thank you, Sumit. Thank you, Mario.
Doug Anmuth, Analyst
Thank you so much. I wanted to ask just how are you thinking about the timing for return to active customer growth? What needs to happen there just from a macro or attrition or acquisition perspective? And then, what gives you the confidence in long-term active customer growth going forward? Thanks.
Sumit Singh, CEO
Hey, Doug. This is Sumit. I'll start by highlighting a couple of encouraging trends. First, we experienced sequential growth in our active customer count, albeit modest. Second, our gross additions continue to rise, with any weakness occurring primarily in the hardgoods category, while consumables and health categories remain stable. Additionally, we are noticing a gradual decrease in attrition among our cohorts. The overall effect of these observations is that our customer base is stabilizing, no longer in a decline as we were in 2022. With the solid execution from our marketing team and improvements in our value proposition—such as better in-stock availability, pricing, and delivery convenience—we feel optimistic about our market position, especially in the second half of the year. This outlook has remained consistent since our last earnings call. We have a substantial number of active customers still in front of us and a continually strengthening value proposition, which boosts our confidence, along with the steady customer base we have seen through Q1. Would you like to add anything, Mario?
Mario Marte, CFO
You got it.
Doug Anmuth, Analyst
Okay. Thank you.
Anna Andreeva, Analyst
Great. Thank you so much. Good afternoon, guys. Two questions from us. Mario, just a follow-up on the guide. You mentioned some incremental investments in the second quarter as you ramp international. Just any color on how we should be thinking about the expense of those? And secondly, good to see hardgoods seeing some improvement sequentially, are you expecting to see continued stabilization in the category as we go through the year?
Mario Marte, CFO
Hi, Anna. Good to hear from you. So, let me start off with the first question, which is about the investments that we talked about. So, we had said 50 to 75 basis points in SG&A and marketing, and that's across all the growth investments for this year. The largest component, we do expect that to be our Canada launch. We're still going to hold to that view of 50 to 75 basis points for the full year. Now, you saw that in the first quarter that the investment was a little smaller than that. It was about 25 basis points in the first quarter. So that means that the timing throughout the year is going to change. We're going to see that be more pronounced in the second quarter. Now, we are looking to self-fund. We have found ways to self-fund some of that investment, and that's what allows us to now raise our EBITDA margin guidance for the full year; as you heard us say, 2%, 3%. We had originally said somewhere between 25 and 50 basis points lower than that, about 2.75% to 2.5%. So, we are now looking to raise that to 2% or 3%. Specifically to the second quarter, I'll tell you the international investment is one of the things that you'll see us flow through in the quarter. But the other one is something as simple as the fact that we just launched our fourth automated fulfillment center, this one in Nashville. And every time we launch a fulfillment center, we see some small deleverage in SG&A in the quarter that we launched it in and the following quarter. And then obviously, we've talked about the benefits it provides over the long term. So that's what you would expect to happen again in the second quarter. On your question on hardgoods and when do we expect that to improve, let me make sure that I followed the question correctly.
Sumit Singh, CEO
I'll take it. Hi, Anna, this is Sumit. So, the improvement that we saw in Q1 is primarily a result of comping and lapping the years, particularly '22 over '21 and the effect in '23 year. And so that's that. We are not assuming any material reacceleration even though we are seeing trends starting to stabilize in what you would call replenishable hardgood categories. Where hardgoods are tied strictly to core pet household formation trends, for example, pet adoption or new pet in household, specifically to categories such as crates, et cetera, those trends aren't yet improving sequentially or on a year-over-year basis. That would be the right type of color to provide.
Anna Andreeva, Analyst
Okay. Terrific. Thanks so much, guys.
Mario Marte, CFO
Sure.
Rupesh Parikh, Analyst
Good afternoon. Thanks for taking my question. I just wanted to go back to your Canada expansion. So, as you look at the expansion to Canada, just curious how you think about the recognition of the Chewy brand in Canada at this point? And then, how you compare the competitive landscape in Canada to what you experience right now in the U.S.?
Sumit Singh, CEO
Sure. Hey, Rupesh, this is Sumit. We've been conducting extensive research on the market, its dynamics, and particularly customer behavior and shopping trends. A few points stand out to us. First, it's encouraging to observe that we already have some brand awareness in Canada, even though we don't operate there yet. Our awareness is in the mid-20s, which, while lower than our presence in the United States, is still significant. Second, when we assess the value proposition of the Chewy brand against consumer preferences—such as a desire for value, convenience, and a strong focus on service, especially in Canada—we are very optimistic about our ability to connect with consumers effectively. Additionally, the fundamental factors driving e-commerce growth do exist in Canada, but there's currently no large-scale, high-quality e-commerce provider like us operating in the market. Given these factors, we believe our strategy is well-informed, and as long as we maintain high-quality execution, we expect the results to reflect that.
Rupesh Parikh, Analyst
Thank you. I'll pass it along.
Mario Marte, CFO
Thank you.
Rick Patel, Analyst
Thank you. Good afternoon, and congrats on the strong execution. I wanted to follow up on the Canada question and help us to understand the opportunity a little bit better. What do you consider the total addressable market of that market? And how quickly is it growing? And it seems like you have a running start for brand awareness. I'm just curious about what your go-to-market strategy is to capture new customers in light of that.
Sumit Singh, CEO
The Canadian market is projected to reach approximately $12 billion to $15 billion over the next four to five years, growing slightly faster than the United States, which is a positive indicator. E-commerce penetration in Canada is about 1,000 to 1,200 basis points lower than in the United States, reflecting a favorable trend since it shows that we are not starting from scratch. The foundational elements are in place, and the market seems ready for a well-established, high-quality provider like us, which has a successful track record from our experiences in the U.S. We plan to align our offerings with customer needs in that market, leveraging our strong value proposition for amplified results. Regarding our customer acquisition strategy, we have a diverse set of options to attract customers, including a comprehensive approach as we enter the market, utilizing our brand recognition, effective word-of-mouth marketing, and various strategies to build trust through delivering unexpected positive experiences. We are excited about moving forward with this. Thank you.
Rick Patel, Analyst
Thank you very much.
Operator, Operator
Thank you, Mr. Patel. The next question is from the line of Corey Grady with Jefferies. You may proceed.
Corey Grady, Analyst
Hi, thanks for taking my question. So I wanted to ask about any changes in consumer behavior you've seen during the quarter. You noted in your shareholder letter that you're seeing no signs of trade down. But I'm curious if you're seeing any other changes like trip consolidation or potentially consumers trading up less. Thanks.
Sumit Singh, CEO
Hey, Corey. No, we're not seeing any signs of trade down. We are observing a strengthening in behavior concerning non-discretionary categories, which is very encouraging. If you look at Autoship customer sales growth at 75%, it's due to an improved active customer base in Autoship compared to a year ago, along with an increase in NSPAC per customer subscribed to the Autoship program. Importantly, the improvement in NSPAC is not attributed to price or ASP inflation, which is a positive aspect to highlight. When we consider that we have better inventory positions, more competitive pricing, improved delivery expectations, and the same personalized service that our customers desire, I'd say loyalty on the platform is stronger. This is helping to maintain average selling prices and average order values, leading to the high engagement we are discussing.
Mario Marte, CFO
Sure.
David Bellinger, Analyst
Hi, everyone. Thanks for the question. In terms of promotional activity, it seems like somewhat of a shift Q4 to Q1, maybe a little more intense lately, but not to the extent you are anticipating. So, can you discern whether some of your promotions are, in fact, pulling in new customers? And to what extent can you use additional promotions to get your net actives moving sustainably higher again?
Sumit Singh, CEO
Hey, David, it's Sumit. I'll begin, and Mario might have something to add. Comparing Q1 to Q4 isn't entirely accurate due to the seasonal nature of Q4, which impacts elasticity, while Q1 does not have the same effect. A year-over-year comparison gives us a clearer perspective. From that angle, we did notice an increase in promotional activity compared to last year. At the same time, we experienced less promotional activity than expected, which is a positive sign and contributed to the gross margin strength we observed this quarter, as mentioned by Mario in his remarks. That's the current situation. We're utilizing promotions through various options. Yes, part of this does attract new customers, but it also allows us to test demand elasticity and helps customers create larger baskets. However, we don't utilize promotions as a standard CRM strategy. Regarding pricing, as we've mentioned before, we are not leading with price. We're focused on being competitively priced and sharply positioned, understanding demand elasticity without causing demand destruction while ensuring profitability. Mario, do you have anything to add?
Mario Marte, CFO
I think you covered it. All right. Thanks, David.
Brian Fitzgerald, Analyst
Thanks, guys. One of your larger omnichannel competitors called out some weakness in the consumer in the second half of Q1. It was driven by macro issues. They even cited the regional banking crisis and lower tax refunds. Did you see any of that whatsoever in the consumer demand trajectory intra-quarter?
Sumit Singh, CEO
No, Brian. We're not seeing that.
Brian Fitzgerald, Analyst
And then, my next follow-up would just be on the Lemonade launch. Any view on how that helps you attack the total addressable market there? Anything you'd highlight in terms of the dynamics of the insurance market? And anything you can tell us about the existing level of awareness with your foray or your offerings in the insurance suite? Thanks.
Sumit Singh, CEO
Yes, Brian, we're really excited about this. As I mentioned in my prepared remarks, any time you can bring choice to consumer, and on top of that, expand price points available to a consumer, it directly correlates to incremental outcome in terms of revenue. And therefore, with a vertical like insurance, we actually expect a high level of flow-through to the bottom line as well. So, we're excited about the addition of Lemonade. Lemonade is a tech-forward player that appeals to a wide array of customers. And alongside Trupanion, which is obviously a high-bar provider of insurance services, we, at this point, believe that we have the full spectrum covered, both from a range of customer demographics, customer psychographics, as well as price point coverage in a way that we're going to market. I can tell you our quotes to conversion ratios are improving. Our overall traffic towards these policies is improving. And at the same time, the ramp is built towards the back half of the year into 2024, given that we've just onboarded Lemonade, and we're going to be ramping them up. And as the prepared remarks suggested, it's really a month from now when we go to market with two scale providers. Anything to add, Mario?
Mario Marte, CFO
No.
Steven Zaccone, Analyst
Great. Good afternoon. Thanks for taking my question. Sumit, I was curious for your perspective on the competitive dynamics in the pet category. If the consumer spending environment weakens, I know there's been some earlier questions here, citing some peers have talked about softening trends. How do you think you're positioned if the consumer starts to pull back on spending? How do you think about your competitive positioning maybe on price or maybe loyalty? Be curious to get your perspective.
Sumit Singh, CEO
I believe the results speak for themselves. To highlight two key points: First, over 84% of our sales came from resilient categories like consumables and health, where we have a strong offering with a wide variety. Second, we have competitive pricing. Additionally, our delivery convenience has improved year over year. Specifically, our on-time delivery is about 150 basis points higher compared to last year, and our click-to-deliver time is approximately 20% better at this point. Our in-stock positions are among the lowest we’ve seen in the past two years. When you combine these factors with the personalized experience we provide, it enhances customer loyalty. The second key point I want to mention is our Autoship program, which accounts for 75% of our sales. This generates a predictable and repeatable volume that helps us meet demand efficiently, optimizing our asset utilization and positively impacting our bottom line.
Mario Marte, CFO
I would add that Sumit just highlighted a crucial point regarding brand loyalty, supported by an Autoship program that effectively serves our customers, along with competitive pricing and convenient selection that we believe are unmatched. If there were to be a shift in competitive dynamics, we're well positioned to adapt. We've also raised our full year guidance based on everything we know, confirming our strong position.
Steven Zaccone, Analyst
Great. I appreciate the detail. The follow-up I had was just on gross margin. Because freight costs are coming down overall from an industry perspective, would you still expect freight to be a tailwind to gross margin over the balance of the year?
Mario Marte, CFO
Which part of the freight and packaging are you referring to? We have a multi-year contract with our logistics provider, and the rates are quite fixed at this point. The variable factors might include fuel prices, which can fluctuate, but that should be minimal at this stage. Our focus is on managing the logistics and the supply chain transformation initiatives we implemented last year. In our last call, we mentioned that these efforts have been very effective, allowing us to offset most, if not all, of the rate increases we experienced starting in 2022.
Sumit Singh, CEO
Steven, if we estimate the impact of the transformation on freight and packaging, we could potentially gain another 50 to 75 basis points, but this will take several years to achieve. This isn't going to happen this year. As Mario mentioned, we have already realized most of those gains over the last 15 months, which helped support our margins in 2022. Now, as we head into 2023, aside from fluctuations in fuel prices, we believe we are managing our operations quite effectively. Improving supply chains will enhance our inventory management. While this may slightly increase freight costs, we are in a good position regarding input costs.
Steven Zaccone, Analyst
Okay. Thanks for the detail. Best of luck.
Mario Marte, CFO
Thanks, Steven.
Operator, Operator
Thank you, Mr. Zaccone. The next question is from the line of Lee Horowitz with Deutsche Bank. You may proceed.
Lee Horowitz, Analyst
Great. Thanks for the time. Can you spend a little bit of time talking about the underlying pet household growth? I think in the past, you've talked about the decline in the low single-digit range. Is this still what you're seeing in the underlying market? And are you maybe seeing any stabilization here that maybe we hope that industry growth is perhaps on the horizon? And then, can you update us on how your advertising data has been progressing? Have test customers driven compelling ROAS in beta test? And what are the markers that you were looking for before you roll out the advertising product to a broader set of partners?
Sumit Singh, CEO
Sure. Regarding your first question about pet household growth, I'll provide two pieces of information. Pet household formation is currently stable. While we could view this as a positive, it's important to note that it is not decreasing as we have observed in the past; our latest findings indicate it is flat. Additionally, when examining shelter and rescue data regarding adoptions and relinquishments, we see that adoptions are stagnant while relinquishments have remained steady. This suggests that there isn't an increase in adoptions, but neither are we observing a rise in relinquishments. This information points towards a long-term resilience in the factors that drive pet growth over time. I should mention that this data isn't sourced from a single published outlet; instead, we compile these insights from our relationships with 5,000 shelters and rescue organizations we collaborate with, along with feedback from our suppliers and vendors. As for the advertising data, we are pleased with its development. To reiterate what I said previously, we are in the process of increasing our supply. There is significant demand from our customers, and we are currently managing that demand in relation to the available supply on our website. As we transitioned from Q1 to Q2, we have shifted our internal terminology from "beta" to a more gradual ramp-up. We are very mindful of how expanding our advertising inventory could affect the user experience for pet parents, and that is the standard we are adhering to. We feel confident about our ability to increase supply as we approach the latter part of the year, with the goal of fully ramping up this program in 2024. I didn't quite catch your question regarding ROAS; if you could please repeat it, I would appreciate it. If not, I will leave it there.
Lee Horowitz, Analyst
Yes. The question is sort of around the type of ROAS that you're seeing within the beta aspect? And I know you sort of answered the question.
Sumit Singh, CEO
Sure. A thing that we are at courage, which is unique to Chewy proposition, again, going back to the repeat recurring purchase nature of how consumers trend their loyalty with us is the concept of the lifetime value (LTV). And so when you consider that, you would also then consider that our approach to ROAS is slightly different from the direct ROAS that the industry is used to. And therefore, we would take into account the power of loyalty and LTV ROAS as we go to market. And by the way, that's been well understood and it's well received. And when you compare the ROAS to LTV ROAS, we're actually seeing quite healthy returns above industry standard at this particular point. So, we're encouraged by the ramp.
Mario Marte, CFO
Thanks, Lee.
Dylan Carden, Analyst
Thank you very much. Just curious, the language that you're using with gross adds ahead of pre-pandemic levels, I guess the implication there would be that the churn normalizes, you'd be back to kind of net adds in line with the 2018, 2019 period. Is that fair without asking you to put a timeframe on that?
Mario Marte, CFO
Our gross adds are currently exceeding pre-pandemic levels and are also surpassing last year's figures for the same quarter. However, I'm not ready to make any predictions about returning to those levels until we have more information. What I can say is that our outlook for this year remains consistent, and we anticipate growth in active customers during the second half.
Dylan Carden, Analyst
Okay, fair enough. And then, what's that?
Mario Marte, CFO
We are pleased to see stability in our active customer base during the first quarter.
Dylan Carden, Analyst
Right, sure. And then, the spend per customer, are you seeing that kind of return to more normalized levels? I know in the middle of the pandemic, it kind of dipped down for certain year cohorts. Is that normalized? Or is the hardgoods component of that still making that a noisy metric?
Mario Marte, CFO
The NSPAC reached a new record high of $512, reflecting an increase of about 15%, which is consistent with last year's performance. We are witnessing strong growth driven by rising prices and increased volume. Customers who remain with us tend to spend more over time, and this trend has continued into this quarter. While additional sales in hardgoods could have further boosted NSPAC and overall customer spending, we are still experiencing an increase in NSPAC even without that growth.
Dylan Carden, Analyst
Okay. And then, final one for me. I had thought kind of early on in your public history that the Autoship kind of penetration rate wasn't expected to grow too much. The 75% kind of surprised you as to where you've been able to get to. Do you think that there's more upside to that number? And are there any kind of quantifiable margin implications from adding the kind of 5 percentage points that you have over the last couple of years? Thanks.
Mario Marte, CFO
Yes, Dylan, what we mentioned earlier wasn't that we didn't anticipate growth. At that time, we were around the 60% mark, which we considered quite good. When you're selling a product, it’s essential to ship. Growth at that level was beneficial for our warehouse operations due to the Autoship customer sales. We're pleased that it has increased to about 75%. This improvement results from several factors. The program has evolved positively, with ongoing efforts to ease the process for customers. Importantly, this program is free for customers and even offers discounts funded by our vendors, so we don't bear those costs. Additionally, as our sales are increasingly shifting towards healthcare and consumables amidst a slowdown in hardgoods, we've seen this uptick to the 75% reported. Overall, it’s influenced by multiple factors, and we see it as a positive development. We're focused on enhancing the program rather than fixating on achieving specific percentage points.
Sumit Singh, CEO
The symbiotic relationship really helps. It's an effective way to foster brand loyalty for our supplier brands, and their involvement significantly highlights the mutual value we derive from it. Additionally, I've mentioned the importance of providing more choices for customers. Over the past three or four years, we've broadened the eligibility of SKUs in this program, which allows customers to engage more productively on our site, enabling them to build larger baskets and extract more value. The inputs clearly show a correlation to the growth of the program. When you consider categories like healthcare, where we are actively driving growth, everything contributes to the amplification we're witnessing. This is why I pointed out the combination of both active customer growth in the program and the NSPAC increase we're observing year over year.
Dylan Carden, Analyst
Has the healthcare component been a big part of the increase in penetration?
Sumit Singh, CEO
It certainly is significant. When we launched the healthcare category four years ago, we've built the largest e-commerce pharmacy in North America. This strong foundation allows us to serve customers who appreciate the value propositions we've discussed. For health-related customers, it’s clear that people often forget to take medication for themselves and their pets. Therefore, offering the option for recurring delivery, along with an engaged program and supportive notifications, greatly enhances compliance rates. Our compliance is notably better than the industry average. This creates a mutually beneficial relationship between us and our suppliers, fostering brand loyalty that customers appreciate.
Mario Marte, CFO
Let me add one more data point, I think, just to kind of complete that thought here. But over 95% of our consumable SKUs or products are Autoship eligible. 100% of our healthcare products are Autoship eligible. So, when you think about that and the fact that those components in our sales profile have grown over time as a percentage of total sales, you get the lift in overall Autoship customer sales.
Dylan Carden, Analyst
Yes. Really appreciate the extra time, guys. Thank you.
Mario Marte, CFO
Yep.
Operator, Operator
Thank you, Mr. Carden. Our next question is from the line of Trevor Young with Barclays. You may proceed.
Trevor Young, Analyst
Great. Thanks. First one, just what was orders shipped growth in the quarter? I think the 10-Q mentioned that it was positive year-on-year, but it didn't specifically quantify. And then, second one, we've had some questions from investors around some one-time supplier rebates that maybe started in Q4 and carried over into Q1. I'm just wondering if you could clarify if there was, in fact, some one-time rebate this quarter and how much of a lift that was. Thank you.
Mario Marte, CFO
Yes. I’ll address the first part of your question. We intentionally removed that information from the 10-Q because it was causing confusion. Our definition of orders was based on packages shipped, and as we improve our shipping by consolidating products into single boxes, this led to confusion. It’s clearer to state that overall, orders grew, and we saw unit growth as well. In fact, two-thirds of the growth for the quarter came from unit growth. However, due to our improved efficiency in sending complete orders in one package, the number of packages grew at a slower rate compared to overall sales. As for the second part of your question regarding one-time supplier rebates, we did not observe any significant occurrences of that in the first quarter. Typically, such activity occurs towards the end of the year with growth rebates, but we are not counting on that at this point in the year. So, there’s nothing to report for the first quarter.
Trevor Young, Analyst
Great. Thank you.
Mario Marte, CFO
Thanks, Trevor.
Operator, Operator
Thank you, Mr. Young. Our last question comes from the line of Lauren Schenk with Morgan Stanley. You may proceed.
Lauren Schenk, Analyst
Great. Thank you. Nice to see that the net add turned positive. Is your expectation that that will remain positive in the second quarter and then into the back half of the year? And just a clarifier on the customer growth expectations in the back half of the year. You're talking on a year-over-year basis, that should be positive in Q3 and Q4? And then, lastly, any way to think about what the customer contribution from the Canada launch could look like in the second half of the year? Thanks.
Mario Marte, CFO
Hey, Lauren, it's Mario. I'll start by acknowledging your observation about the positive net addition this quarter. We share that sentiment, but this aligns with our internal expectations. We experienced a slight increase, but a decrease would also have fit within our expectations for the first half of the year. I won't discuss quarterly specifics to avoid complications, but our outlook for the full year remains unchanged. We anticipate the first half to align with our expectations and hope to see customer growth in the second half. Regarding the Canada launch, we're preparing for that in the third quarter. We do not expect it to significantly affect net sales, gross margin, NSPAC, or active customers. The main effect will be on EBITDA as we make early investments, which we have already detailed. However, there's nothing significant to highlight regarding top-line figures or active customers at this time.
Lauren Schenk, Analyst
Okay. Thank you.
Sumit Singh, CEO
Thank you, team. This is Sumit. Have a great evening. Thank you for joining us.
Operator, Operator
That concludes today's call. Thank you for your participation. You may now disconnect your lines.