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Chewy Inc Earnings - Analysis & Highlights for Q3 2024
Overview
PositivesNegativesOutlook
- Net sales in Q3 grew by 4.8% YoY to $2.88 billion, exceeding the high end of the guidance range provided last quarter.
- The company is pleased to share that Q3 marked another quarter of sequential active customer growth, building on the momentum established in Q2.
- The company is seeing that Chewy+ members consistently place more orders, have higher cross-category penetration, and greater mobile app engagement relative to non-Chewy+ customers.
- The company's Q3 adjusted EBITDA results reflect a continuation of strong gross margin performance, a disciplined approach to cost management, and the ongoing benefits of fixed cost leverage as the company scales.
- The company is seeing positive margins extended by low to mid-single-digit ranges relative to Q2.
- Relinquishments were down low single dates.
- Advertising and marketing expense is expected to come in at the high end of the previously stated range of 6% to 7% of net sales for the full year.
- The company expects to deliver top-line growth exceeding the high end of the net sales guidance range, a sequential increase in active customers, continued adjusted EBITDA margin expansion, and robust FCF generation.
- The company expects to increase net sales guidance for 2025, with revenue being a function of active customer growth in the low to mid-single digit and NSPAC growth in the mid to high single digit.
- The company expects to get net sales penetration up to the mid-teens level.
Q&A Highlights from Chewy Inc Earnings Call Q3 2024
- Analyst asked about active customer growth and how it compares to idiosyncratic initiatives.
- The company continues to see signs of industry normalization, with pricing remaining stable and inflation moving towards a more normalized level. The company has seen a return to positive net adoptions in a cycle of Q3, and believes that the active customer growth it is driving is largely due to its own efforts and the industry continuing to normalize in the background. The company has enhanced on-site and mobile experiences, expanded assortment, and improved its performance and CRM strategy, which has led to increased active customer growth. The company's focus on connecting the marketing funnel to expanded audiences and driving funnel exposure has enabled it to find both the right level of efficiency and flexibility to move spend up and down the funnel to capture both share of voice and demand. The company has also improved its ability to identify and segment customers and target them to drive improved second purchase rates, Autoship sign-ups, mobile app engagement, and other metrics.
- The company continues to see signs of industry normalization, with pricing remaining stable and inflation moving towards a more normalized level. The company has seen a return to positive net adoptions in a cycle of Q3, and believes that the active customer growth it is driving is largely due to its own efforts and the industry continuing to normalize in the background. The company has enhanced on-site and mobile experiences, expanded assortment, and improved its performance and CRM strategy, which has led to increased active customer growth. The company's focus on connecting the marketing funnel to expanded audiences and driving funnel exposure has enabled it to find both the right level of efficiency and flexibility to move spend up and down the funnel to capture both share of voice and demand. The company has also improved its ability to identify and segment customers and target them to drive improved second purchase rates, Autoship sign-ups, mobile app engagement, and other metrics.
- Analyst asked about the increase in gross additions in Q3 and how to think about it going forward.
- The company saw improvement across all three metrics that go into gross additions in Q3: new customers added, reactivations, and churn. The company has entered Q4 with momentum on the activities it is driving across those three elements. The company believes that it will continue to build on what it believes is some improvement in the industry and invest in the fourth quarter to continue that into 2025. The company has seen an opportunity to invest in advertising and marketing in the fourth quarter, given the holiday season and the timing of certain campaigns. The company has moved up its guidance for active customer growth, pulling it in to the high end of the 6% to 7% range for the year, and it sees an opportunity to invest in the fourth quarter to achieve that goal.
- The company saw improvement across all three metrics that go into gross additions in Q3: new customers added, reactivations, and churn. The company has entered Q4 with momentum on the activities it is driving across those three elements. The company believes that it will continue to build on what it believes is some improvement in the industry and invest in the fourth quarter to continue that into 2025. The company has seen an opportunity to invest in advertising and marketing in the fourth quarter, given the holiday season and the timing of certain campaigns. The company has moved up its guidance for active customer growth, pulling it in to the high end of the 6% to 7% range for the year, and it sees an opportunity to invest in the fourth quarter to achieve that goal.
- Analyst asked about the progress of automation in the company's vet clinics and how it is tracking towards the long-term goal of 70-80% of volume.
- The company is seeing positive trends in the vet clinics, such as high operational utilization, customer engagement, and net promoter score. The new customer cross-category penetration is also high, with more than half of new customers coming from the vet clinics and shopping online at Chewy.com. The company is encouraged by the engagement with customers and the size of the TAM, which is approximately $25 billion.
- The company is seeing positive trends in the vet clinics, such as high operational utilization, customer engagement, and net promoter score. The new customer cross-category penetration is also high, with more than half of new customers coming from the vet clinics and shopping online at Chewy.com. The company is encouraged by the engagement with customers and the size of the TAM, which is approximately $25 billion.
- Analyst asked about the impact of the new capability on the P&L and if there are any deficiencies in the system that it is correcting.
- The new capability is not expected to have a material impact on the P&L. It is a new feature that will provide more granularity and AI-driven reporting for the company's operations. There are no deficiencies in the system that this is correcting.
- The new capability is not expected to have a material impact on the P&L. It is a new feature that will provide more granularity and AI-driven reporting for the company's operations. There are no deficiencies in the system that this is correcting.
- Analyst asked about the drivers of the customer count outlook and the strengthening in 2025, specifically the role of industry data points versus the company's internal efforts.
- The company believes that the majority of the change in customer count is driven by internal efforts, such as marketing and other initiatives. They are bullish that they will see an incremental tail end when the industry fully normalizes, but they are not taking that into account currently. The company's comments about growing active customers are based on their own internal efforts.
- The company believes that the majority of the change in customer count is driven by internal efforts, such as marketing and other initiatives. They are bullish that they will see an incremental tail end when the industry fully normalizes, but they are not taking that into account currently. The company's comments about growing active customers are based on their own internal efforts.
- Analyst asked about the marketing channels that are working well for Chewy and their impact on the company's performance.
- Sumit Singh, CEO of Chewy, stated that the company has focused on connecting the marketing funnel to expanded audiences and driving full funnel exposure, which has been a significant change over the last few quarters. He also mentioned that the company has seen success in targeting customers when they arrive on their platforms and driving better conversion, which has been a powerful recipe for them.
- Sumit Singh, CEO of Chewy, stated that the company has focused on connecting the marketing funnel to expanded audiences and driving full funnel exposure, which has been a significant change over the last few quarters. He also mentioned that the company has seen success in targeting customers when they arrive on their platforms and driving better conversion, which has been a powerful recipe for them.
- Analyst asked about the performance of Chewy Claus, a program where pets submit their Santa wish list, and its impact on the company's brand uplift and customer service.
- David W. Reeder, CFO of Chewy, mentioned that Chewy Claus has been a successful program, trending better than in previous years, and providing a positive brand uplift and customer service experience. He also mentioned that the company has experienced growth in hard goods, up two consecutive quarters, and private brands within hard goods have been stable.
- David W. Reeder, CFO of Chewy, mentioned that Chewy Claus has been a successful program, trending better than in previous years, and providing a positive brand uplift and customer service experience. He also mentioned that the company has experienced growth in hard goods, up two consecutive quarters, and private brands within hard goods have been stable.
- Analyst asked about the automation of fulfillment centers and the benefits in OpEx savings per FC.
- David W. Reeder, CFO of Chewy, mentioned that six fulfillment centers are currently automated, and automation drives improvements in productivity, volume per square foot, and ergonomics and safety. He also mentioned that the company is continuing to automate across their network and reach 70% of volume in one way, shape, or form.
- David W. Reeder, CFO of Chewy, mentioned that six fulfillment centers are currently automated, and automation drives improvements in productivity, volume per square foot, and ergonomics and safety. He also mentioned that the company is continuing to automate across their network and reach 70% of volume in one way, shape, or form.
- Analyst asked about the private brands within hard goods and their contribution to the company's gross margin.
- Sumit Singh, CEO of Chewy, mentioned that private brands within hard goods have been stable, and the company is focused on expanding assortment across both consumables and hard goods. He also mentioned that private brands are a strategic pillar for the company and are expected to contribute up to 500 basis points of higher gross margin to the core business.
- Sumit Singh, CEO of Chewy, mentioned that private brands within hard goods have been stable, and the company is focused on expanding assortment across both consumables and hard goods. He also mentioned that private brands are a strategic pillar for the company and are expected to contribute up to 500 basis points of higher gross margin to the core business.
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