Great. Good afternoon, everyone. Thank you so much for joining us. My name is Nathan Feather. I'm Morgan Stanley's small and mid-cap internet analyst. I'm pleased to be joined today by Smith Singh, CEO of TUI. Thanks so much for having me. Nice to be here. Thank you. Now, before we get in a quick housekeeping item for important disclosures, please see the Morgan Stanley Research Disclosure website at www.morgansanley.com. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that, let's kick it off. You know, we're now about two years since your investor day where you outlined your strategic plans along with long-term financial targets of high single-digit revenue CAGR and 10% or higher adjusted EBITDA margins. How are you progressing towards those long-term targets you outlined?
we believe we are ahead of targets and expectations you know it was the first capital markets day that we'd hosted we had a lot of fun doing it it really gave us a view into you know what had worked from 2018 or 19 onwards since we'd come to the market with an IPO and then what our focus should be over the next you know three five seven years per se and you know from all from all sense of the word, in our opinion, we've exceeded our own internal targets and expectations. So let me break that down. From a top-line point of view, back in 23, it was a pretty tepid year for the market and category overall. And we had sort of said, hey, we want to get growth rate back into the high single-digit to low double-digit growth rates. And so we've clearly been able to do that. And so the difference between the high single digit to the low double digit, you know, we'd also assume that the market would normalize by this particular time so we can get into the industry a little bit more. But barring the industry not getting back to sort of pre-COVID levels of health, you know, everything else from an execution point of view has gone really well. So, you know, net ads are running ahead of expectations. We've inflected coming into 2024, we expect that to be sustainable and durable. We've clearly hit the high single-digit growth rate that we were talking about as a combination of net ads growing, but also share of wallet growing. So we expect share of wallet also to have durability. Underneath of it, Autoship has exceeded our internal forecast, reaching over 80% of net sales. And then on On Capital Markets Day, you know, we'd also said it was sort of our announcement of getting into health clinics or CVC's Chewy Vet Care. And, you know, we had really not a good idea on how to forecast these. We had a pretty good understanding of, you know, what it might take to execute something like this. But, you know, we were coming to market as a new sort of a novice team. We knew we had the power of the homegrown tech that we were put in behind it and a really high-quality experiential mindset. And on the back of those, you know, we sort of launched first in the first 12 months. You know, we had a target of six to eight, so we launched eight. And, you know, that business continues to exceed our expectations. So I'm sure we'll talk about that as well, but we're super bullish about where Chewy Health can go, not just the CVC part of the business, but Shoei Health can go in general over the next three to five years. When you look at profitability, I mean, clearly the numbers speak for themselves. We came to market at 3.3% adjusted EBITDA in 2023, and we provided a guidance of improving profitability roughly 100 or expanding profitability roughly 100 basis points per year, 15% flow through or more. We've beat both those expectations. 24 was a really solid year, many things compounding to be able to produce that type of a performance. And then 25, despite being characterized as an investment year, we're very close to the average 100 basis points that we've talked about. In fact, averaging the two years, we're, I think, sitting somewhere in the 130, 140 basis points of expansion. So we're super pleased. Sitting here, I would say we have more confidence looking forward than we did in 2023. Our most bullish bets or our boldest bets are working even better than we had expected. And so that's really a great feeling to have. So all positive.
Well, a lot I want to get into there. But first, you recently announced Chris Depp as your new CFO. Help us peek behind the curtain at why the company chose Chris and what he brings to the role.
Yeah, so, you know, I don't know if you know, but I have a supply chain and operations background, two degrees in industrial engineering and operations research, and then, you know, later went to Chicago Booth and became dumber. But, you know, I have a deep respect for what you need to make an e-com engine. You know, we were then a DTC player in 2017, 18, when I joined Chewy. But the power of delivering empathy at scale, you know, I've often said, you know, we are delivering the convenience of e-commerce at the personalized service that you can only expect at your best local neighborhood pet store. And so to deliver empathy at scale, if you look at the best e-commerce engines out there, they're built on two pillars, strong supply chain and operations, strong product and tech. And both of them are powerhouses of ours. So Chris, I knew back from his Amazon days, Chris has been with us now a little less than five years. And really, back in 2018, when I'd taken the bet of reforming the fulfillment centers to go away from 1G sites to 2G sites, and we were quickly becoming one of the larger DTC players in the country. I'm not sure how many of you know, but we are the third largest DTC player in the country today. We're a very sophisticated supply chain and operations team, 16 fulfillment centers, five pharmacies, multiple compounding sites. We have a lot of infrastructure that is built underneath of it that is highly efficient and scaled for all practical purposes. To run this big of a sophisticated engine, you need a big, sophisticated finance partner. And so back in the day, I'd reached out, and we'd brought Chris over to Chewy, and we were lucky that we were able to have him over at Chewy. And so he's seen this journey over the last few years of how we've built out a really large-scale network. Then, you know, alongside, you know, as Dave was exiting, you know, a few months ago, we sort of leaned into Chris and said, why don't you take over FP&A and long-range planning for us? And so he's had that under his belt for now about 15 months or so. And then eight months ago when Dave left, you know, I really leaned into Chris to be able to help me run the business better. And, you know, at Chewy, we pride ourselves on being strategic, but also, you know, each level of management is, you know, has an operator-owner mindset. So, you know, you're going to be able to get a lot of detail out from each of us, regardless of the level we operate on. And, you know, having a strong finance partner who had continuity, could understand or does understand our strategy really well, you know, and is culturally such a strong fit, But candidly, I mean, I am thrilled, actually, of having Chris at the company, and that's why I use the words that the board and I were thrilled when we were actually able to tap into Chris internally rather than going to seek a new leader externally. So that's the background.
Now, looking at the broader pet macro, can you give us your latest view on the pet industry and how you think both 2026 pet ownership growth and pricing are going to come in?
Yeah. Yeah, so in Q3 prepared remarks a few months ago, we said, hey, we interpret 2026 to be materially the same as 2025. Let me take a step back and start at the higher level. So when we interpret PET in the United States, we call it $150 billion TAM, broken into three categories, You know, food and supplies at about $90 billion, health at about $50 billion, and the remaining non-healthcare pet services. Chewy now, with us expanding ourselves into specialty and equine a couple years ago, and expanding into the vet services space, we now fully address the $140 billion TAM, or the $150. So we play in nearly all of the TAM. Underneath of it, you know, the market essentially has been growing at low single-digit percentage points over the last couple of years. Most of the growth has come on the back of volume. Very little in the last two years has come on the back of price. And those inputs aren't necessarily expected to change as we go into 26. We were hoping they would. So in 24, we started seeing, or sorry, coming into 25, out of 24, Q4, 24, we started seeing green shoots where pet adoption was starting to outrun relinquishments. But the rate of outpacing relinquishments is something that we would like to see, you know, increase by a few factors. So today when we compare, again, one of these data points where we're integrated with about 50% of the shelters and rescue community in the United States, so we get a pretty good grounds-up data back into us. And shelters and rescues produce a majority of the pets back into the market. In a normalized environment, you want to see about 10 to 15 million pets, pardon my choice of words, but getting sort of recycled every year. Pets die, pets get adopted. So 10 to 15 million pets, and I'm talking dogs and cats only. I'm not talking specialty animals, you know, chicken and equine, which, by the way, equine runs in million. In fact, I don't know if you know, but chicken is the third most popular pet in the United States. Maybe that's intuitive. It wasn't to us, but there you have it. So the dog and cat market, household formation is running at roughly in the 2 to 4 million aggregated positive range, Which is great, because in 23, it was negative 2 million. So clearly the market is inflecting. But to achieve the 10 to 12 million, 15 million pet refresh rate that we would like to call normalized, I don't believe we get there in 26. Pricing, we don't see material benefit in pricing in 26. We also don't see, you know, we see a rational promotional environment in 26. So we don't see, you know, discipline coming off the rails in 26. Dogs are currently running slightly softer than cats. You may have heard this. You may have read about it. Suppliers who we talk to, whether it be, you know, Nestle's or Mars' or, you know, Hill's, the Royal Canins of the world, or the, you know, Blue Buffalo's, General Mills' of the world. Everybody seems to be essentially coalescing on these data points now. Underneath of it, you should expect two strong trends favoring Chewy. A, the secular tailwind towards e-commerce continues. B, we continue to differentiate ourselves or we continue to extend ourselves outside of squarely the dog and cat segment into segments like equine, specialty animals, health, et cetera. So underneath of it, you should expect us to continue to gain share. Pretty nicely, I would say, just like you saw in 2025. You should expect us to continue to capture a very healthy percentage of growth that is moving online, both in the retail segments, which are dog food, dog cat food supplies, as well as the health segments.
So overall, we're bullish about 26. Got it. Let's dive into the P&L here. And starting at the top with customers, we've seen a strong rebound in customer growth over the past six quarters. What would you consider a normalized level of net ads? And then what are opportunities that you're pursuing to further increase your share gain here?
Yeah, so let me tie this question to the components of the growth algorithm first, and then I will dive deeper into this question. I was talking to you about growth in 2026. We will guide when we come to market on March 25th on our earnings call. The composition of the growth will primarily be led by volume, less price. In terms of customer algorithm, you should expect us to continue to expand on NetAds, just like we did in 25, and expand on Nespac. So the combination of NetAds and Nespac will drive growth. You have now, coming to customers, you've seen us add in 2025, expand NetAds at the rate of 150,000 to 250,000 customers per quarter. We believe that to be durable and sustainable in a market where we expect no greater tailwind going into 2026. So if you connect that with my original commentary on when the market normalizes, we expect to further increase our net ad expansion. If you look at gross ads expansion pre-pandemic, at peak, we were adding 1.4 to 1.6 billion customers. This is pre-pandemic, not pandemic, so I'm normalizing for the pandemic. So at our peak, you should expect us to add 1.4 to 1.6 million customers, which was the rate that we were adding pre-pandemic. Currently, you're right, we're adding somewhere in the 600 to a million range in a market that is essentially flat. I think that's pretty compelling performance. It showcases the durability as well as the differentiation that we bring to the marketplace against any competitive forces or against any market headwind. So we're super proud of that.
Okay, got it. Well, one of the things you are doing on the customer side is your new paid loyalty program, Chewy Plus. It seems to be driving improved Nespac for adopted cohorts. Certainly, it's improved my Nespac as a customer. Can you help us visualize how big Chewy Plus can get as a percentage of revenue, and what's the right way to pace that expansion over the next few years?
For those of you who have studied Chewy and know the management team, you will appreciate we are thoughtful and deliberate. and highly disciplined about financial guardrails on one side and customer experience on the other. You know, we gated and paced sponsored ads very, you know, in an equitable kind of model, per se. So, Chewy Plus is our way of putting another flywheel next to Autoship on purely the product merchandise side, mostly consumables, right? So you didn't really have a compelling hook for customers for supplies or for non-consumable categories or discretionary categories. Number two, the deeper a retailer penetrates into a category, the more you open yourself up to sort of cross-category compares. Number three, Chewy has so much more to offer than we did in 2018. team, instead of us trying to brand every product and go to market from a product marketing point of view, we thought, why don't we come up with a paid membership program and test product market fit? So you should imagine or you should envision Chewy Plus in its current phasing to be part of that product market fit testing. We expect incrementality out of the program at very little capital deployed or very little margin impact for the program. That's our current sort of guardrail. And this figuring out Chewy Plus as to what the sweet spot really is or where it sits, I think it's going to take us a bit. In fact, if you go back and trace the history of Amazon Prime, it took several years before Prime truly had incrementality data or was able to sort of figure out, like, okay, what actually does it do to consumers? We have some positive, very positive signs coming out of Chewy Plus in its initial first four quarters, I would say. What are those? It's helping discover choices at Chewy faster. It is helping customers consolidate share of wallet faster. Incrementality is positive. The range of incrementality is wide, from low double-digit percentage for high-spend customers to healthy levels of double-digit expansion for low-spend customers. The sweet spot is for us to really drive incrementality for cohorts that sit between $300 to $800. And so we continue to sort of refine our targeting abilities. We continue to build more value prop into the program without actually having to put dollars on the table. And we've gotten to the point where it's not, you know, materially dilutive to us. And at the same time, we are seeing incrementality come through. Is it material enough to swing, you know, our growth rates, right, beyond kind of the tailwinds that we would see from the market? Not yet. We would exit this year exactly where we've guided, you know, just at the low end of the low single-digit penetration. And going into 26, we don't see material profit impact at all out of Chewy Plus.
Okay, great. Now, one of the areas we've been really excited about is the vet clinic opportunity. Can you talk to us about your key learnings from clinics you've opened already? You know, one of the biggest pushbacks we've received is that the vet business is simply too small to really value. I guess, what are the key steps you have to take to scale that business to a more material level?
Yeah, we're happy we're at this point that, you know, the questions have turned from show me this works. to how fast can you scale. Although we haven't truly shown you this works, but we intend to. So give us, you know, we're nearing the completion of, you know, 18 months to two years with our original cohort of April 2024. And that is our timeline for us to come and share a whole lot more with you to give you sort of, you know, one-time look under the hood so you can truly appreciate and get excited, as excited perhaps even more relative to why we are so excited. But let me give you a few data points. So we are viewing success on CVC across a few different dimensions. One is the net promoter score or customer sat and vet satisfaction rates. That also includes our ability to hire and retain vets. That is exceeding our expectation. You know, you can open up, we now have 18 in operation and we've run these over a period of two years. It's easier when a product launches, and perhaps you could even throw at me that you launched it in familiar markets. But to have a 4.8, 4.9 consistent rating on Google reviews that cannot be influenced by us and is really public rating, NPS is running phenomenally high. So we love kind of the product market fit that we're finding out there and the customer response to it. Number two, wet satisfaction scores are high. our ability to recruit and retain vets continues to run at par, continues to run ahead of where we believe the industry hiring and recruiting timelines are, so we're happy about that. So that is definitely not a bottleneck for us. Number two, we've guardrailed this on the ability to ramp clinic utilization levels and bounce against marketing spend in the market that we're entering. Both are running ahead of our expectation in the right way. So, for example, we are ramping these clinics faster than our internal forecast, and our marketing spend that we had originally forecasted is running lower than what we had originally forecasted. What we're finding is that the Chewy brand overall is so strong that we go drop a box inside the market, we don't necessarily have to spend localized marketing at the levels that we thought to be able to attract demand into the marketplace. Number three, financial success. So from a ramp point of view, we've benchmarked ourselves to standard clinics out there, which are, you know, two to three million dollars in revenue, four wall revenue, and roughly 50 to 18 percent EBITDA margins. Currently, we're running ahead of these plans, and so we want to come talk to you about that. We're super excited about how they're ramping and the financial metrics that we're seeing. So basically, across all of our metrics, the scorecard is a bright green. The final thing I would say is customer incrementality, which was a thesis that we had, but there was really no way of putting numbers behind it. There was some market research that we'd conducted. So this is something you've heard. Four out of ten customers are net new to Chewy. That has maintained. In fact, that number is higher in certain markets than others. So at a minimum, four out of ten customers are net new to Chewy. Half the customers within a very short period of time are attaching themselves to other categories on Chewy.com, pharmacy, supplements, food, in that order. And CVC currently is the fastest Nespac compounder. inside the company to a scale that we believe is very impressive. So to us, you know, when we come back and share with you greater details in April, that's the timeline we've set for ourselves. We want to be able to set a path for how we think about expansion on Chewy+. Let me give you the framework. We will deploy both capital and capital-like models to be able to, or asset-light models to be able to scale, you know, a network of, you know, clinics. In the investment portfolio, you're looking at us, you know, build right now 8 to 10, 10 to 12 clinics per year. That may go up some, but not materially. We will also continue to, we are in the market continuing to look at very specific, curated, you know, So culture-forward, tech-forward acquisition opportunities or integration opportunities or strategic business opportunities, which I look forward to talking to you about in the near future. And then next to it, as you know, we build our own technology. So currently, CVCs run Chewy Tech. Chewy Tech is more efficient. Why? Because an average clinic out there, so why do we believe our margins are going to be better? This is one data point. An average clinic out there runs on eight different software integrations. We run on one, which is Chewy's stack. And so for us to be able to have that efficient attack alongside a better experience allows us to build a moat that is much more attractive than any mousetrap you've seen in the marketplace. When we take this software stack and come to market alongside the Chewy brand name, We believe we're going to be able to create affiliates, you know, using an asset-like model that will really help tie in the ecosystem and scale profitability at an even greater rate, you know, on different types of revenue models. So hopefully that's helpful, but we're super excited about CVC.
Very helpful and looking forward to learning more in April. Now, on the flip side, one of the things you haven't been as vocal about is AI. And so can you help us think through what are the most underappreciated opportunities for Chewy, in your view, and the most underappreciated challenge?
I love it. Most companies are going to get AI incorrect, or they're going to get off course, in my opinion, in the near term. The reason is that for AI to work, you really have to build AI use cases and solutions on top of strong data sets and a really fundamentally sound infrastructure. Given that we are 1P, so you should know something about the Chewy stack for those of you who appreciate tech literacy. So we are built on a completely services-oriented architecture. For a company of this scale and size, we run roughly 450 microservices that essentially are tied with a really nimble cloud engineering team where we are dual-sourced in the cloud. And from a data point of view, we now have our data consolidated at the enterprise level across one main platform rather than multiple platforms. right very soon in the near future we're going to have certified data lakes and layers that are essentially going to allow us to unify data signals so if you go to chewy.com today our experience in the app is much better than it used to be a year or two ago right two years ago i couldn't even recognize whether you are a dog customer or a cat customer that's how basic we were today not only do i ingest your pet profiles i am able to connect your pet profile data to to my order engine and put that through my discoverability and my search algorithms. In the future, we're going to be able to unify signals that come from other pet parents and essentially go to market with you or allow you to be able to use us as a full pet concierge. But let me kind of back up, because I'm painting you the future. Let me talk about what we're doing now so that you can sort of not just say, OK, we'll see when that works. So AI is going to be implemented in three places at Chewy. We've already started that. Let me break that out for you. The purchase experience, which I'm sure we'll talk about, you know, all of the latest sort of news that you're hearing about disruptions and agentic commerce and all of that stuff. I'll come to that at the end. Number two, the middle layers of the company, the service layers of the company. So whether that's workflows, inside functions, or whether that's customer care, going out and meeting customers. I will refer to this as the middle service layer. And then finally, supply chain and fulfillment. That's the way to understand an engine like Chewy. When we talk to you about the plan for 2026, you should expect us to talk to you about how we're deploying AI across our pharmacies, across our fulfillment centers, to be able to provide leverage that wasn't baked in in our original 2023 Capital Markets Day business cases. We give you a target of reaching OPEC 17% to 19%. We have visibility with the use of AI across our middle layers and our supply chain and fulfillment to be able to exceed those long-range targets that we've provided to you. And we will start showing you the impact in 2026. Now, coming to the purchase side of the funnel. First of all, I will loudly reject this notion that we are exposed or are at risk of disintermediation from any agentic activity that is happening out there. In fact, quite the opposite. Not only do we feel we are really well insulated, we actually believe this is going to serve as an incremental channel to Chewy. So why are we well insulated? So agentic commerce protocols are essentially going to integrate the most basic available signals before they turn into having recall and context of customer shopping. That's great. It doesn't disrupt empathy at scale or kindness at scale, which is sort of the main moat that we're built on. You know, Chewy getting disrupted on tenets of price or selection, I mean, those days are far behind us. That has been tested over and over again against the fact that we've been playing stalwarts like Amazon and Walmart over the last five years and have continued to gain share and differentiate ourselves. So that differentiation is durable. The moat is very durable. Underneath of it, on a purely pricing side, so if this notion is, hey, there's an agent out there that will price compare, and you essentially, the user will directly buy from whichever the best place is, great. We welcome that because on a weighted price index point of view, we are still positioned 5% to 7% cheaper than retail or independent channels. And by the way, we have yet to lose on price on any large-scale e-com player. And so pricing is just not a tool that competition will be waged on. In fact, we were one of the first players to come out into the market. So you heard about, you know, retailers like Wayfair and Etsy, so forth. We are also integrated with Google's UCP, Universal Commerce Protocol. So, you know, we're leading some of the use cases that they're coming out to market with. We have an agentic team internally that is essentially building AI-forward solutions with all of the AI-native companies that you're hearing about. So to us, you know, we will essentially find ourselves where customers are. And this will open up a net new channel. The analogy is similar to when TikTok came to market. And in fact, it led Facebook and YouTube to launch reels and shorts. And clearly, they're more valuable companies today than they were prior to that product being in the marketplace. These are incrementally new channels. They'll find new users, younger generations, that will essentially perhaps shop. But we'll be right there with them. And don't forget, there's a whole post-persons experience that needs to be delivered. And we have categories like health that are very hard to disintermediate. We will continue to be bigger in physical spaces that are very hard to disintermediate. So we're not worried about this.
Okay, great. Well, let's flip below the line. You made a host of investments in 2025 while still delivering solid margin expansion. As we enter 2026, you said in the last earnings call you expect the balance of investment to shift towards operating leverage. I guess given that, how should we think about margin expansion levers in 2026 versus 2025?
Yeah, so just to recap 2025, we have guided to EBITDA margins of 5.6% to 5.7%. 5.65% at the midpoint, that's an 85 basis point expansion. At the high end, that's a 90 basis point expansion. Profits will flow through at three times the rate of revenue, or profits will grow at three times the rate of revenue. As you go into 2026, I will leave you with a few things. A, the rate of EBITDA margin expansion, our expectation is that it will exceed 2025. Number two, profit flow through will happen at a minimum at 18%. Number three, profits will continue to exceed, the rate of profit growth will continue to exceed revenue growth by a significant margin, right? Just like 2025. The composition of profitability, as we had guided, or, you know, my prepared remarks in Q3, this is now coming directly to your question. We believe the composition of profitability. So in 2025, we said to you, a majority of the profits will be driven by gross margin, right? Followed by SG&A. In 2026, we believe the algorithm will be reversed. We believe we will continue to give you gross profit expansion, but the majority of the EBITDA that you will see, or the expansion that you will see, is due to healthy levels of SG&A expansion. Some part of that is because we don't have Houston Fulfillment Center, as we've been talking about, starting from the Q2 earnings call, right, that it'll start delivering leverage in Q3 and Q4 of this year, so you should expect it to deliver more leverage next year. Keep in mind that every fulfillment center that we launched, the fully automated fulfillment center, you should expect it to give you roughly 25 to 30 basis points of leverage at the SG&A level and 26, you know, we will have Houston ramp up to provide a nice bit of that leverage. I talked about some part of AI solutions that we are putting in across our customer care teams across our fulfillment centers you should see the expect of that starting to come through in 2025 we took some tactical investments right in the low to mid single digit millions right around buying up a few like inventory or some dallas you know the curve that we were managing as houston was ramping and dallas was nailing down shouldn't expect a repeat of that. And broadly speaking, you know, outside of strategic deployment in continuing to build, you know, a really, and transparently build the network of CVC, you know, we will continue to focus on running the business as efficiently as we possibly can. So, overall, we're quite bullish about going into 2026.
Okay, great. Well, one last thing. Can you leave us with one or two aspects of the business you feel are most misunderstood or underappreciated by investors?
Yeah, yeah. I think we're one of the more consistent, you know, deliverers of result and consistent growers of top line and incremental profitability. We should expect to continue to see about 80% or more of that profit converted into free cash flow. We have no debt. It's a very disciplined team. I think the power of Chewy Health as a compounder of financial metrics, I think, is still not well understood. I think the differentiable and durable moat that we go to market with is perhaps also not as well appreciated as it should be. We run one of the largest scale fulfillment networks, world-class fulfillment, backed by 80% plus of our revenue coming through quasi-subscription-type products like Autorship. We run the number one pet pharmacy in the country in terms of scale, and we continue to diversify and strengthen our modes by penetrating deeper into categories like health. And so the durability and the heart that we go to market with and the lifelong relationships that we form with customers, I think I'm not sure if all of that is well understood. But 26 gives us another chance and we're looking forward to doing so.
Great. Thank you so much for being here.
Thank you.