Chewy Inc Q1 2019 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Doug Anmuth - JPMorgan - Analyst : Great. Thanks for taking the questions. I have two. First, Sumit, can you just talk more about autoship customer revenue? You talked about how it increased to 67% in 1Q. Do you have any kind of targets or thought on where that can potentially go over time? And then how do you utilize the initial order discount, given the seemingly temporary increase that we saw during the past week by Chewy? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 18, 2019 / 9:00PM, CHWY.N - Q1 2019 Chewy Inc Earnings Call And then the second question: can you just help us understand drivers of the revenue guide for 2Q and the full year? We know you are not specifically laying out anything around active customers and then net sales per active customer, but are there any puts and takes that we should be thinking about through the year? Thanks.

Question: Doug Anmuth - JPMorgan - Analyst : Great, thank you.

Question: Brian Nowak - Morgan Stanley - Analyst : Thanks for taking my questions. I have two. The first one is on active buyer growth. You did a good job of growing the buyer base so far. I was wondering -- could you just talk to us about some of the high-level hurdles you think you need to clear to continue to bring new customers on the platform? What is sort of the biggest gating factor you have found and how do you overcome that? And for customers you lose, what is the top reason they leave and how do you bring them back? And then I was also just wondering if there is any update on the steps that we should be looking for as you start to build out the vet and the pharmacy side? Thanks. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 18, 2019 / 9:00PM, CHWY.N - Q1 2019 Chewy Inc Earnings Call

Question: Brian Nowak - Morgan Stanley - Analyst : Great, thanks.

Question: Nat Schindler - BofA Merrill Lynch - Analyst : Yes, hi. Thank you for taking my questions and congratulations on your first public quarter and your IPO. Could you just go a little bit more detail into the gross margin ramp that you saw this quarter? If we look at last year's trends, you actually trended up through the year. And I would expect that your mix of other goods, hardgoods, to food would be highest in Q4 around the Christmas sales. So I would expect that gross margin would go up and Q4 would be the highest of the year, but you were up 200 basis points over Q4. You did that also the previous year, but then trended up through the year. Is there anything you can talk to us about the seasonality here and what is driving this up? And what we should expect for the rest of the year? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 18, 2019 / 9:00PM, CHWY.N - Q1 2019 Chewy Inc Earnings Call

Question: Nat Schindler - BofA Merrill Lynch - Analyst : And would you expect to see the sequential improvement occur from rest of the year?

Question: Nat Schindler - BofA Merrill Lynch - Analyst : Great, thank you.

Question: Deepak Mathivanan - Barclays Capital - Analyst : Hey, guys. Thanks for taking the questions. Two questions from us. So first on the marketing expense for the quarter, I mean, I know that you guys have been testing out a few marketing programs related to building our brand on that side rather than just purely performance. Can you talk about how much of that is factored into sort of 2Q guidance? And then how should we think about the expected ramp through the year? And then secondly on the fulfillment center, you guys just opened up the new one and it is about a month in operation. How much of the cost to rent the fulfillment center is in the 2Q? And then what should be the expected investment period before it sort of reaches max efficiency levels? Thank you.

Question: Brent Thill - Jefferies LLC - Analyst : Good afternoon. Maybe you could just talk a little bit about the pathway to profitability and what gives you conviction over time that the bottom line can look a lot like what you are doing on the top line. And share with us -- perhaps it would seem that some of these new businesses seem to be potentially even higher margin that you are moving into than you are in currently. If you can highlight what you are seeing there. Thank you.

Question: Brent Thill - Jefferies LLC - Analyst : Great, thanks.

Question: Mark Mahaney - RBC Capital Markets - Analyst : Thanks. Two questions, please. Sumit, I think you talked about -- I want to ask about autoship. You said you had customers that acted like autoship that actually weren't on autoship, i.e., they purchase pretty frequently. Does it matter to you and to the business whether they stay where they are? Are there any advantages to incentivize those kind of quasi- or shadow autoshippers to actually become full autoshippers? Is that an opportunity? And then second, just generally, I know you were asked about it a lot during the IPO roadshow, but anything new in terms of thinking on international markets? Thanks a lot.

Question: Mark Mahaney - RBC Capital Markets - Analyst : Okay. Thank you, Sumit.

Question: Eric Sheridan - UBS - Analyst : Thanks very much for taking the question. Maybe two, if I can, as well. Obviously, we're getting a lot of questions on the competitive landscape, given some of the pricing and discounting moves in the space over the last very short period of time. Just philosophically, can you help us understand the way you approach competition? And how you think about reacting to competitive moves, especially around price, that you see across the broader industry? That is number one. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 18, 2019 / 9:00PM, CHWY.N - Q1 2019 Chewy Inc Earnings Call And number two, maybe driving back to some of the questions from earlier, can we talk a little bit about where you are seeing some of your better returns on marketing dollars? And how you think about aligning those marketing dollars against ROI, whether it be on driving increased spend or increased buyer and user initiatives around the platform? Thanks so much, guys.

Question: Mark Kelley - Nomura/Instinet - Analyst : Great. Thanks very much, guys. I kind of want to follow up on the last question about the competitive environment and discounting. Sumit, you pointed out that it has always been a dynamic pricing environment in e-commerce. And I think perhaps investors' focus is squarely on you guys because you are such a new public company and we don't have all the history and context. But it seems like the majority of discounts are usually on getting new autoship customers, in your case, or similar products to Amazon. And that is where the big discounts come in. And given that you are already at 67%-plus of sales are from autoship customers, the incremental customer discounts really don't move the dial for margins. It doesn't appear to be the case in your outlook and certainly over the last handful of quarters. Can you maybe give us just some context around that dynamic competitive pricing environment over the last several years, just to give us some comfort that your margin outlook and the long-term margin structure really won't be impacted by discounting like that? And then second, in terms of spend per active customer, how much do you think the healthcare piece of your business will draw some of that growth? And what is the right way for us to think about percent of customers that will use your healthcare products? Thank you. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 18, 2019 / 9:00PM, CHWY.N - Q1 2019 Chewy Inc Earnings Call

Question: Mark Kelley - Nomura/Instinet - Analyst : Got it. Thanks, guys.

Question: Brian Fitzgerald - Wells Fargo Securities, LLC - Analyst : Thanks, guys. It's Fitz on. Sorry, I cut out on my line before. A couple quick clarifications around the pharma business. You call out in your letter that the new Arizona pharma facility operates under your own licenses versus the Kentucky facility. Is that operation -- operational arrangement still in place with PetSmart for the Kentucky one? Can you remind us of the details there? And then kind of walk us through the development process. And then one more quick follow-up. Any color on how prevalent autoship is amongst pharma maybe relative to consumables? And any dynamic to call with how that penetration is ramping, autoship penetration is ramping among pharma or cross-sell dynamics? Thanks.

Question: Brian Fitzgerald - Wells Fargo Securities, LLC - Analyst : Great. Thanks Sumit.

Question: Dylan Carden - William Blair & Company - Analyst : Thanks very much. Just sticking with pharmacy here, I'm curious how at year-end, so to speak, your conversations are going with vets and how you are positioned here in the competitive landscape. I know there is a handful of other companies doing something not dissimilar. And are you sort of making a big marketing push, either directly or a little more broadly to kind of shift customers over, shift their wallet spend over to that business? And how you kind of see it growing organically and whether or not how much of that is embedded in your numbers thus far? Thanks.

Question: Dylan Carden - William Blair & Company - Analyst : Thank you very much.