Earnings Call Transcript - CHWY Q4 2024

Operator, Operator

Hello, everyone, and welcome to the Chewy Fourth Quarter 2024 Earnings Call. My name is Emily. I'll be coordinating your call today. I will now hand the call over to our host, David Reeder, Chewy's CFO, to begin. Please go ahead, David.

David Reeder, CFO

Thank you for joining us on the call today to discuss our fourth quarter and full year results for fiscal year 2024. Joining me today is Chewy's CEO, Sumit Singh. 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 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 for fiscal year 2024 filed earlier today and in our other filings with the SEC, 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 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. Reconciliation 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 2023. 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. And with that, I'd like to turn the call over to Sumit.

Sumit Singh, CEO

Thanks, Dave, and thank you all for joining us on today's call. Our fourth quarter results mark a strong conclusion to the year. Our team's execution enabled us to successfully deliver on the strategic and financial goals that we outlined at the start of this year. Additionally, the durability and power of our highly predictable business model shined and led to another year of market share gains. We innovated at pace, made smart investment decisions and maintained operating discipline throughout the year, allowing us to deliver both results that exceeded expectations and compelling returns to our shareholders. Now let's review our Q4 and full year 2024 results. We ended the year on a high note. Top line growth exceeded the high end of our guidance ranges for both the fourth quarter and full year 2024. Q4 net sales increased approximately 15% year-over-year to $3.25 billion, resulting in full year 2024 net sales of $11.86 billion, representing 6% year-over-year growth. Fourth quarter net sales performance was underpinned by strong active customer growth, a modest return to growth for our hard goods merchandise and compelling Autoship customer loyalty across consumables and health and wellness categories. Our Autoship program represented 80.6% of Q4 net sales, delivering best-in-class service to our customers, while also providing predictable subscription-like recurring revenue streams to Chewy. Growth in Autoship customer sales meaningfully outpaced overall top line growth, increasing by 21% in the fourth quarter and nearly 11% for the full year 2024. On the topic of active customers, I am pleased to report that our active customer performance in the fourth quarter maintained the strong momentum from the previous quarter. We ended fiscal year 2024 with 20.5 million active customers, marking our first year-over-year growth in eight quarters. Our efforts to expand and refresh assortment, enhance on-site and mobile app experiences and refine our marketing strategy continue to drive outperformance across all areas of the active customer equation. Looking ahead, we believe that we have reached an inflection point with respect to active customer growth and expect to deliver active customer growth in 2025. Regarding profitability, our adjusted EBITDA margin for fiscal year 2024 reached 4.8%, the upper end of the guidance range we set last quarter and reflecting year-over-year expansion of approximately 150 basis points. This margin improvement was driven by both strong gross margin and continued operating expense leverage as we scale. We converted approximately 80% of our adjusted EBITDA in the year to free cash flow, resulting in a record $452.5 million of free cash flow in fiscal year 2024. Our increasing 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 $943 million that we deployed to shareholders in fiscal year 2024. Now, I would like to share some updates on a few priorities at Chewy. Our sponsored ads business scaled meaningfully this year, reaching approximately 1% of net sales for full year 2024, in line with our expectations and was the largest contributor to year-over-year gross margin improvement. As planned, we completed our 1P platform migration, which going forward will enable us to enhance the supplier experience, expand our ad portfolio, including offsite ads and explore additional content formats such as video. Looking ahead, we continue to believe that the upper limit of our long-term entitlement for Chewy's sponsored ads business is up to 3% of total enterprise net sales over time. Turning to Chewy Vet Care Clinics or CVC. We successfully opened eight CVC locations reaching the upper end of our target range for the year of four to eight openings. Our clinic network continues to exceed expectations in both utilization and overall ecosystem benefits, serving as both a strong customer acquisition channel and an engagement flywheel. As a result, both new and existing customers are deepening their engagement with Chewy. In fiscal year 2025, we plan to open eight to 10 new clinics, further expanding our presence in the approximately $25 billion vet services market. We are excited about the opportunities ahead and look forward to sharing our progress. Let me wrap up my section with the following comments. We believe that 2024 was an extraordinary year for Chewy, and our strong performance underscores the team's ability to successfully navigate through a period of normalization for the industry. Our entire team at Chewy, including and especially our fulfillment and customer care team members, worked incredibly hard, and I thank them for their dedication and commitment. As we move into 2025, the momentum in the business has remained strong. The team remains steadfast in executing Chewy's strategic priorities and delivering yet another year of share-gaining growth. Further, on the dimension of profitability, we are increasingly confident in our ability to reach our long-term adjusted EBITDA margin target of 10%. 2024 marks another year of strong progress towards this long-term goal and looking ahead, we expect to expand adjusted EBITDA margin once again in 2025. Overall, we remain optimistic about the opportunity ahead for Chewy and look forward to a productive year ahead. With that, I will turn the call over to Dave.

David Reeder, CFO

Thank you, Sumit, and thank you all for joining us today. Our strong year end results showcase the power of Chewy's business model and our ability to deliver increasing levels of profitability and free cash flow, while simultaneously investing in the business to deliver attractive returns for our shareholders. Fourth quarter net sales grew 14.9% year-over-year to $3.25 billion, bringing our full year 2024 net sales to $11.86 billion, representing 6.4% growth year-over-year and exceeding the high end of the fiscal year guidance ranges we provided last quarter. Fiscal year 2024 included a 53rd week, which added approximately $227 million of net sales to the fourth quarter and the full year. Excluding the impact of the 53rd week, fourth quarter and full year 2024 net sales grew approximately 6.9% and 4.4%, respectively. We returned to year-over-year active customer growth in fiscal year 2024 with 20.5 million active customers, reflecting a year-over-year increase of approximately 2.1%. We believe we have reached an inflection point in this area and once again outperformed across all elements of the active customer equation. New customers and reactivations grew year-over-year, while gross churn improved over the same period. Autoship customer sales increased by 21.2% to $2.62 billion in Q4 and 10.6% to $9.39 billion for the year. Growth in Autoship customer sales outpaced overall top line growth by approximately 630 basis points in Q4 and by 420 basis points in full year 2024. Autoship customer sales as a percentage of total net sales represented 80.6% and 79.2% of our total net sales in Q4 and full year 2024, respectively. NSPAC reached $578 as of Q4 2024, representing an increase of 4.1% year-over-year. Q4 2024 included an extra week of operations, which added approximately $11 of benefit to NSPAC in the quarter. As a reminder, net sales per active customer equals the aggregate net sales for the preceding four fiscal quarters, divided by the total number of active customers at the end of that period. As such, you can expect our reported NSPAC for the first three quarters of fiscal 2025 to include the benefit of the extra week in Q4 2024. Moving to profitability. We reported fourth quarter gross margin of 28.5% and full year 2024 gross margin of 29.2%, representing 80 basis points of margin expansion for the year, which is double the amount of gross margin expansion we delivered in 2023. Sponsored ad was the largest driver of gross margin improvement in the year, followed by product mix shift into premium categories, including consumables and health and wellness. Shifting to operating expenses. Please note that my discussion of SG&A excludes share-based compensation expense and related taxes. We continue to demonstrate operating expense leverage in the fourth quarter with SG&A of $601 million or 18.5% of net sales, representing 150 basis points of improvement on a year-over-year basis. For the full year 2024, SG&A represented 18.7% of net sales, reflecting 100 basis points of improvement year-over-year. We continue to deliver SG&A leverage driven by at-scale fixed cost infrastructure and ongoing discipline and efficiency with respect to corporate payroll. Fourth quarter advertising and marketing expense was $235 million, bringing full year 2024 A&M expense to $804.1 million or 6.8% of 2024 net sales, consistent with our previously stated expectation of coming in at the high end of our 6% to 7% of net sales target range. Fourth quarter adjusted net income was $120 million, and full year 2024 adjusted net income came in at $446.8 million, which translated into $0.28 and $1.04 adjusted diluted earnings per share for the fourth quarter and full year 2024, respectively. Fourth quarter adjusted EBITDA came in at $124.5 million, bringing full year 2024 adjusted EBITDA to $570.5 million, representing a 4.8% adjusted EBITDA margin for the year, reflecting 150 basis points of year-over-year margin expansion. We are proud of the meaningful margin expansion we delivered this year driven by the improvements in gross margin and SG&A leverage described earlier. In the fourth quarter, we reported free cash flow of $156.6 million. And in fiscal year 2024, we generated a record high $452.5 million of free cash flow. Our full year 2024 free cash flow reflects $596.3 million of net cash provided by operating activities and $143.8 million of capital expenditures. In 2025, we continue to expect approximately 80% of adjusted EBITDA to convert into free cash flow and that CapEx will be between 1.5% and 2% of net sales. Our ability to generate increasing levels of free cash flow and our disciplined approach to capital spending have allowed us to not only reinvest back into the business, but also return meaningful capital to shareholders this year. Recall, in Q1 2024, we announced the authorization of Chewy's first-ever share repurchase program of up to $500 million. Over the course of the year, we executed a number of share repurchase transactions, including open market repurchases made under this program, as well as repurchasing additional shares directly from BC Partners, our largest shareholder. In 2024, we repurchased approximately 29.4 million shares directly from BC Partners, reducing their overall ownership position in Chewy by approximately 16%. We also repurchased approximately 3.4 million shares of Class A common stock, spending approximately $93.3 million under our $500 million share repurchase program. At the end of the fourth quarter, we had approximately $406.7 million of remaining capacity under our existing share repurchase program for future repurchases. Collectively, the company repurchased and retired a total of 32.8 million shares in 2024. We ended the year with approximately $597 million in cash, cash equivalents and marketable securities, and we remain debt free with an overall liquidity position of approximately $1.4 billion. Now I'd like to discuss our first quarter and full year 2025 outlook. We have an increasingly high degree of confidence in our ability to deliver on our strategic road map and the long-term financial model the team outlined at Chewy's Capital Markets Day in December 2023. We made tremendous progress in 2024 towards those strategic and financial goals and believe against the backdrop of a normalizing pet industry, we are poised to continue to deliver share gaining growth and margin expansion in the coming year. Before we dive into our guidance details, I would also like to acknowledge that the company's increasing profitability profile has resulted in growing interest from the investment community regarding earnings per share metrics for Chewy. As such, we will be providing some supplemental information regarding adjusted diluted earnings per share expectations. With that, let's discuss the specifics of our 2025 guidance. We anticipate first quarter 2025 net sales of between $3.06 billion and $3.09 billion or approximately 6% to 7% year-over-year growth, and full year 2025 net sales of between $12.3 billion and $12.45 billion or approximately 6% to 7% year-over-year growth when adjusted to exclude the impact of the 53rd week in fiscal year 2024. We expect our net sales growth to be driven by a combination of active customer growth, NSPAC growth and minimal price inflation. Based on the current environment we see today, we remain confident in our ability to deliver year-over-year active customer growth in the low-single digit range with the level of net additions broadly consistent throughout the course of the year. Moving to profitability guidance. We anticipate full year 2025 adjusted EBITDA margin in the range of 5.4% to 5.7%. Furthermore, we expect 2025's quarterly profile of adjusted EBITDA margin to broadly follow the same trend observed in 2024 with modest sequential declines throughout the year due to typical seasonality and the timing of investments. Additionally, we expect first quarter adjusted diluted earnings per share in the range of $0.30 to $0.35. For the full year 2025, we also anticipate share-based compensation expense, including related taxes to be approximately $315 million, and weighted average diluted shares outstanding of approximately 430 million. We expect 2025 net interest income of approximately $25 million to $30 million and our effective tax rate to be in the range of 20% to 22%. And finally, embedded in our guidance is minimal expected impact from tariffs. In closing, I'd like to thank all of our Chewy team members for their disciplined and record setting execution in 2024. I believe Chewy is better equipped than ever to execute against our strategic road map, delivering compelling financial results and increasing shareholder value. With that, I will turn the call over to the operator for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question today comes from David Bellinger with Mizuho. Please go ahead, David.

David Bellinger, Analyst (Mizuho)

Hey, everyone. Good morning, and excellent results here. Just two questions from us. I want to start on the net actives. A big sequential jump Q3 to Q4. Can you unpack what's driving that change in a little more detail? How much is a function of a better pet spending environment and how much is Chewy specific in share gaining with all the initiatives in place like the app adjustments and Vet Care? And I've got a follow-up as well. Thanks.

Sumit Singh, CEO

Sure. Hey, David. This is Sumit. Good morning. I'll start with that one. So the short version is that the momentum that we talked about from last quarter continued into Q4, resulting in our return to year-over-year active customer growth for the first time in eight quarters. The increases that we saw happened across the board for the customer equation: new customers were up, reactivations were up and churn improved year-over-year. These results in our view are predominantly driven by execution and strength in the model relative to the market meaningfully changing in any particular direction. Let me elaborate on some specifics that speak to the evolution of marketing strategy and the tactics that drove the results. As I mentioned last quarter, we focused on connecting the marketing funnel to give us expanded reach. We continued that effort through Q4 and are now optimized and ready going into 2025. Last quarter, I also talked about our sharper ability to identify and target customer spend on our platform to drive higher conversion. In Q4, we had a chance to put a completely rebuilt internal bidding model into perspective. These internal bidding models are driving higher lift on campaigns while also optimizing for cumulative contribution profit, or CCP, which is the guardrail of the ROI we use to ensure that campaigns run optimally. All of this allowed us to lean into the stronger demand signals that we were seeing coming into and out of Q3 and invest heavier in Q4, while simultaneously driving efficiencies across our investments and driving higher net adds as a result. Specifically, we invested approximately 15% more in Q4 marketing spend, yet our cost per gross adds increased less than 2%, and we added over 400,000 customers in Q4. So we're pleased with the way the marketing engine is developing. I should also add that Q4 is generally a quarter where there is incremental interest and shopping intent, so we likely benefited from seasonality. We expect the changes we put in place to be durable and continue through 2025, which is why we said we expect active customer growth in 2025.

David Bellinger, Analyst (Mizuho)

That's very helpful. Yeah. I just want to ask about gross margins in Q4. So up about 30 basis points year-on-year, but a little light versus expectations and sort of a slowdown versus the past several quarters. Can you help us understand the momentum on the gross margin side? Anything specific to call out for Q4 that held margins back in some way? Just how do we think about the expansion opportunity in 2025?

David Reeder, CFO

Thanks for the question. Let me broaden it out a bit and then get to your question. We expanded adjusted EBITDA margin 150 basis points year-over-year in 2024 versus 2023. Of that 150 basis points, about 60% was driven by improvements in gross margin underpinned by growth in sponsored ads, product mix accretion as well as the normal efficiencies you expect through gross margin, such as freight and packaging. Fourth quarter was very much what we expected it to be, with no major surprises for either gross margin or EBITDA margin. For 2025, we expect adjusted EBITDA margin to grow roughly 75 basis points at the midpoint versus 2024, and we expect a similar growth profile in terms of contribution from gross margin as well as the other lines of operating expense. So fourth quarter played out approximately as we expected, and we expect the trends from 2024 to extend into 2025.

David Bellinger, Analyst (Mizuho)

Got it. Thank you very much.

Operator, Operator

Our next question comes from Doug Anmuth with JPMorgan. Please go ahead.

Doug Anmuth, Analyst (JPMorgan)

Hi. Thanks for taking questions. I was hoping you could talk a little bit more about automation. I think you're around 50% of volume currently. Can you update us there? And then perhaps talk about the bridge to the 70% to 80% that's expected over time? Also on gross margins, sponsored ads being the largest contributor to improvement with the 1P platform migration complete, can you help us understand some of the opportunities that opens up for you and the path to 3% over time? Thanks.

David Reeder, CFO

With respect to automation, if you go back through time, you've seen us increase the amount of volume that flows through automated facilities from roughly 30% approaching 40%. As we sit today, we're north of 40%, not yet at the 50% number you referenced, but north of 40%. Utilization of the network remains similar to what we quoted in Q3, around 70% to 75% utilization. Regarding the bridge to ramping more volume through automated facilities, we have started to ramp more volume through our Houston facility. The Dallas facility remains important, particularly for pharmacy, but you have seen us start to ramp the Houston facility in a more meaningful way in the fourth quarter and then throughout 2025.

Sumit Singh, CEO

One thing to add on automation: the numbers David mentioned are purely second-generation automation numbers. If we consider overall automation that we've implemented since earlier investments, that volume is over 50% of total volume. We continue to make improvements as reflected in overall operating expense scaling. Combined with Houston enablement, this should continue to strengthen our automation footprint as we move closer to the 70% to 80% range over the near to medium term.

David Reeder, CFO

Thank you for that, Sumit. From a gross margin perspective, sponsored ads was the largest contributor to gross margin improvement in 2024. Throughout 2024 we were on a third-party software platform for ads that did not provide all the capabilities we wanted to offer. We rebuilt a first-party software stack during 2024, and that first-party software has since been launched. Being on first-party software allows us to provide new media content such as video, enable vendors to onboard content in a more self-service fashion, and to use content developed for other channels seamlessly on our platform. It also enables us to offer off-site advertising in addition to on-site ads. The first-party stack is operating largely as we expected, and we are moving forward full speed on first-party sponsored ads.

Sumit Singh, CEO

Doug, the first-party platform opens up the funnel at the top. Over the long term, we would expect the on-site to off-site ad mix to be in a range similar to the industry standard, roughly 65-70% on-site to 30-35% off-site. The margin profile will reflect that mix—on-site ads have higher flow-through while off-site is slightly more diluted. Owning the stack expands total addressable media, enables video and branded campaigns, improves measurement precision, and removes commissions to third parties. These combined benefits support our view of up to a 3% long-term entitlement for sponsored ads.

Doug Anmuth, Analyst (JPMorgan)

Got it. Thank you, both. Appreciate it.

Sumit Singh, CEO

Thank you, Doug.

Operator, Operator

Our next question comes from Eric Sheridan with Goldman Sachs. Please go ahead, Eric.

Eric Sheridan, Analyst (Goldman Sachs)

Thank you so much. Maybe two, if I can. First, in terms of thinking through the growth investments as a stimulant for 2025, could you delineate between what you see as the landscape for net new customer growth as opposed to potentially stimulating more levels of reactivations across the base as potential driver of growth? And then in terms of the broader consumer landscape, you're looking across either the ages of your cohorts or the income level of your cohorts. Are you seeing any differences in behavior, either in the forms of strengths or weaknesses versus expectations maybe you had 90 days ago? Thanks so much.

Sumit Singh, CEO

Sure. I can start and Dave will jump in. In terms of net new investments, Chewy Vet Care Clinics (CVC) are a net new investment and a new channel that is bringing in a higher proportion of new customers than we initially forecasted, though CVC is still smaller scale and will take time to ramp. Specialty categories are another area where we continue to attract more customers and see headroom to double down; this is attractive and includes categories like equine and farm. Programs like the app and Chewy+, which cut across demographics, drive conversion at various income levels. Chewy+ starts with a 30-day free trial and then converts to a paid membership at $49 per year; conversion from free trial to paid has been higher than expected, creating a healthy funnel of new customers who might not have been attracted otherwise. The app performance continues to strengthen: app installs in Q4 grew 20% year-over-year, and the number of customers making their first app purchase grew 34%. These are customers we were not previously reaching as effectively. Chewy+ and Autoship act as flywheels for each other, supporting mutual growth. Overall, we have several customer-facing innovations in flight that we expect to discuss as they progress in 2025.

David Reeder, CFO

To build on that, other than a little contribution from mobile app, CVC and Chewy+ were not material contributors in 2024 and are on a slightly longer timeline into 2025 and beyond. Cohort trends and profiles look strong and similar to historical trends at Chewy. As cohorts age, they consolidate share of wallet with us. Newer cohorts we're capturing are performing at or above pre-COVID levels. We're encouraged by these cohort trends and optimistic about how the new initiatives will contribute in the latter half of 2025 and into 2026.

Operator, Operator

Our next question comes from Steven Zaccone with Citigroup. Steven, please go ahead. Your line is now open.

Steven Zaccone, Analyst (Citigroup)

Great. Good morning. Thanks very much for taking my question. Sumit, I was curious for your assessment of the pet industry landscape. I'll kind of asked two in one. How are you thinking about pet adoption trends relative to the guidance you've provided? And then on the comment about guidance for the year, I think you mentioned minimal impact from pricing. So just kind of curious, what are you seeing from a promotional perspective out there in the pet landscape?

Sumit Singh, CEO

Sure. We believe we grew share at a premium to the overall pet industry in 2024, supported by industry growth measures and our strong search performance versus the market. E-commerce grew relative to retail and Chewy grew faster than the e-commerce segment. Regarding pet adoption, it's nuanced: net adoptions are still up from shelters and rescues; dog adoption seems fairly flat while cat adoption is up slightly, contributing to a slight premium in adoptions overall. We'll continue to monitor these trends. Regardless of market performance, we expect to continue taking share in 2025.

David Reeder, CFO

On pricing and promotions, the promotional environment in Q4 was in line with expectations. The team managed the promotional environment effectively. A large portion of our portfolio is MAP-protected or price-protected, which provides some pricing stability. Inflation trends during 2024 were mid-single digits in Q1, moderated in Q2, near zero in Q3, and low-single digits in Q4. Looking into 2025, and as included in our guidance, we are not seeing significant inflationary pressure in pet categories at this time.

Sumit Singh, CEO

Adding to Dave's comments, conversations with strategic partners and suppliers do not suggest a broad deflationary trend at this time. Private brand portfolios may gain momentum if the environment remains subdued, but MAP protection across the segment is holding. We haven't seen elevated promo abuse or pricing deflation so far. Our guidance ranges incorporate these scenarios and the low end of the range takes into account wider potential outcomes.

Operator, Operator

The next question comes from Curtis Nagle with Bank of America. Curtis, please go ahead.

Curtis Nagle, Analyst (Bank of America)

Great. Thanks for taking the question. One, just in terms of for 2025 expectations for marketing as a percentage of revenue for the year, assuming that will still be 6% to 7%, and should we expect any quarters through the year to be above 7%? And then I'll have a quick follow-up.

David Reeder, CFO

For 2025, we're viewing advertising and marketing within the range of 6% to 7% of net sales. Looking back, 2023 was 6.7% and 2024 was 6.8% for the year. As we roll into 2025, we expect to be in that 6% to 7% range in total for the year, in line with the trends from 2022 through 2024. While timing of campaigns may result in some quarters being slightly above or below, we don't have a specific quarterly target and we evaluate advertising and marketing spend based on returns.

Curtis Nagle, Analyst (Bank of America)

Yeah. A quick one. It looks like hard goods outperformed consumables in Q4, I think you called that out. What's relating to that? Is anything in terms of people buying new crates or beds or stuff like that for new pets? What drove the outperformance for hard goods?

Sumit Singh, CEO

It's a combination of factors. We've invested in improving site experiences to increase conversion across categories, including hard goods. The app generally helps with attachment for hard goods because recommendations perform well on the mobile experience. Growth in the new customer file also tends to have higher propensity to purchase hard goods. We benefited from Q4 demand and strong active customer gains, including gift purchases and hard goods. Overall trends are consistent with expectations and we're pleased with the traffic we're converting on our platform.

David Reeder, CFO

Broadly, the outperformance in Q4 was broad-based: leashes, collars, tags, beds, toys—all categories were up year-over-year. That reflects work to increase selection, assortment and search performance. We're quite pleased with that performance.

Curtis Nagle, Analyst (Bank of America)

Okay. Thank you.

Operator, Operator

The next question comes from Trevor Young with Barclays. Please go ahead, Trevor.

Trevor Young, Analyst (Barclays)

Great. Thank you for the question. First one, Dave, to your comments on net adds and low-single digit growth in 2025, that implies maybe around 600,000 adds throughout the course of the year. I also think you said fairly balanced throughout the year, so that would imply about 150,000 quarter-on-quarter each quarter. Is that the right way to think about it? And then relatedly, why wouldn't it be stronger Q1 to Q3, given the compares and then maybe a little bit softer in Q4 given the number you just put up?

David Reeder, CFO

Thanks for the question. Without guiding each quarter specifically, I would characterize active customer growth in the low-single digits as being broadly consistent in absolute net additions throughout the year. We believe it will be somewhat consistent in terms of absolute numbers added. So we see it as broad-based and sustainable, but I'm going to avoid providing specific quarterly active customer guidance.

Trevor Young, Analyst (Barclays)

Yeah. A follow-up to fulfillment utilization and so forth. The CapEx guide at the low end, 1.5%, implies CapEx growth of upwards of 30% year-on-year after a flattish year this last year. Could you help us understand what that incremental spend is going towards and how do you feel about fulfillment center capacity overall for the next couple of years?

David Reeder, CFO

When we think about CapEx at 1.5% to 2%, we had expected to be at the lower end of that range in 2024 and indeed were. CapEx breaks down largely into fulfillment center sustaining and automation refresh projects, which are generally maintenance and productivity-related, not full facility builds. The lion's share of spend is still related to fulfillment and automation productivity gains. Incremental CapEx we had in 2024 related to health care, specifically pharmacy demand, and the vet clinics. Rolling forward into 2025, a modest increase at the low end of the range would primarily be associated with growth in health care, incremental spend to satisfy pharmacy demand and continued expansion of vet clinics.

Trevor Young, Analyst (Barclays)

Very helpful. Thank you.

Operator, Operator

We have time for one more question. Our final question comes from Dylan Carden with William Blair. Please go ahead, Dylan.

Dylan Carden, Analyst (William Blair)

Thanks a lot. Quick one here. End of 2023, you gave a number that about a third of the industry was online. Do you have a sense a year in where that number is? And is it your understanding that that migration has normalized coming out of the pandemic?

Sumit Singh, CEO

Yes. The number I quoted was roughly 28% to 33% online, excluding buy-online-pickup-in-store. Our read of the industry was somewhere in that 28% to 30% range on a normalized basis. Pharmacy and health categories were in the mid-teens penetration, and food and supplies were in the 30% to 35% range. With that composition, the migration has normalized. We believe the secular trend toward e-commerce remains intact. We saw e-commerce pick up in Q4, and we're not forecasting a reversal. We continue to monitor, but we believe we're still capturing roughly $0.40 to $0.50 of every dollar that moves online, which is a metric we track internally and are pleased with.

David Reeder, CFO

Did you have a follow-up, Dylan?

Dylan Carden, Analyst (William Blair)

Excellent. Thank you very much. Not particularly. I guess the expectation at this point, there's been chatter focused on adoption and pet growth broadly. Does it stand in your view that as online migration normalizes you will continue to capture share beyond what the general category does?

Sumit Singh, CEO

Our assumption is yes. If you look at 2025 market growth expectations of roughly 3.5% to 4.5% and our guidance of 6% to 7%, you can see we're projecting growth roughly two times the market expectation. We are capturing incremental share. Also, not all channels have normalized equally; e-commerce has picked up a larger share of the normalization versus other channels. Given the secular trend and our investments and differentiation, Chewy should benefit more as e-commerce continues to strengthen.

Operator, Operator

Thank you. Those are all the questions we have time for today. This concludes our call. Thank you, everyone for joining us. You may now disconnect your lines.