CHEWY, INC.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and related notes thereto included in this Annual Report on Form 10-K
for fiscal year 2019 ("10-K Report"). This discussion contains forward-looking
statements that involve risks and uncertainties. As a result of many factors,
such as those set forth under the "Risk Factors" and "Cautionary Note Regarding
Forward-Looking Statements" sections herein, our actual results may differ
materially from those anticipated in these forward-looking statements. Unless
the context requires otherwise, references in this Annual Report on Form 10-K to
"Chewy," the "Company," "we," "our," or "us" refer to Chewy, Inc. and its
consolidated subsidiaries.
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Overview
We are the largest pure-play pet e-tailer inthe United States , offering virtually every product a pet needs. We launched Chewy in 2011 to bring the best of the neighborhood pet store shopping experience to a larger audience, enhanced by the depth and wide selection of products and around-the-clock convenience that only e-commerce can offer. We believe that we are the preeminent online destination for pet parents as a result of our broad selection of high-quality products, which we offer at great prices and deliver with an exceptional level of care and a personal touch. We are the trusted source for pet parents and continually develop innovative ways for our customers to engage with us. We partner with more than 2,000 of the best and most trusted brands in the pet industry, and we create and offer our own outstanding private brands. Through our website and mobile applications, we offer our customers more than 60,000 products, compelling merchandising, an easy and enjoyable shopping experience, and exceptional customer service.
Fiscal Year End
The Company's 2019 fiscal year endedFebruary 2, 2020 and included 52 weeks ("Fiscal Year 2019"). The Company's 2018 fiscal year endedFebruary 3, 2019 and included 53 weeks ("Fiscal Year 2018"). The Company's 2017 fiscal year endedJanuary 28, 2018 and included 52 weeks ("Fiscal Year 2017").
Initial Public Offering
OnJune 13, 2019 , our registration statement on Form S-1 to our initial public offering ("IPO") was declared effective by theSEC , and our Class A common stock began trading on theNew York Stock Exchange ("NYSE") onJune 14, 2019 . Our IPO closed onJune 18, 2019 . For additional information, see Note 1 to our consolidated financial statements included in Part I, Item 1 included in this 10-K Report.
Key Financial and Operating Data
We measure our business using both financial and operating data and use the
following metrics and measures to assess the near-term and long-term performance
of our overall business, including identifying trends, formulating financial
projections, making strategic decisions, assessing operational efficiencies, and
monitoring our business.
Fiscal Year % change
(in thousands, except net sales per
active customer and percentages) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Financial and Operating Data
Net sales $ 4,846,743 $ 3,532,837 $ 2,104,287 37.2 % 67.9 %
Net loss (1) $ (252,370) $ (267,890) $ (338,057) 5.8 % 20.8 %
Adjusted EBITDA(2) $ (81,025) $ (228,905) $ (251,247) 64.6 % 8.9 %
Adjusted EBITDA margin(2) (1.7) % (6.5) % (11.9) %
Net cash provided by (used in) operating
activities $ 46,581 $ (13,415) $ (79,747) 447.2 % 83.2 %
Free cash flow(2) $ (2,055) $ (57,575) $ (120,029) 96.4 % 52.0 %
Active customers 13,459 10,585 6,789 27.2 % 55.9 %
Net sales per active customer $ 360 $ 334 $ 310 7.8 % 7.7 %
Autoship customer sales $ 3,362,835 $ 2,322,480 $ 1,294,899 44.8 % 79.4 %
Autoship customer sales as a percentage
of net sales 69.4 % 65.7 % 61.5 %
(1) Includes share-based compensation expense of
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Non-GAAP Financial Measures
Adjusted EBITDA and Adjusted EBITDA Margin
To provide investors with additional information regarding our financial results, we have disclosed here and elsewhere in this 10-K Report adjusted EBITDA, a non-GAAP financial measure that we calculate as net loss excluding depreciation and amortization; share-based compensation expense and related taxes; income tax provision; interest income (expense), net; management fee expense; transaction and other costs. We have provided a reconciliation below of adjusted EBITDA to net loss, the most directly comparable GAAP financial measure. We have included adjusted EBITDA in this 10-K Report because it is a key measure used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating adjusted EBITDA facilitates operating performance comparability across reporting periods by removing the effect of non-cash expenses and certain variable charges. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. We believe it is useful to exclude non-cash charges, such as depreciation and amortization, share-based compensation expense and management fee expense from our adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. We believe it is useful to exclude income tax provision; interest income (expense), net; and transaction and other costs as these items are not components of our core business operations. Adjusted EBITDA has limitations as a financial measure and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: •although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and adjusted EBITDA does not reflect capital expenditure requirements for such replacements or for new capital expenditures; •adjusted EBITDA does not reflect share-based compensation and related taxes. Share-based compensation has been, and will continue to be for the foreseeable future, a recurring expense in our business and an important part of our compensation strategy; •adjusted EBITDA does not reflect interest income (expense), net; or changes in, or cash requirements for, our working capital; •adjusted EBITDA does not reflect transaction and other costs which are generally incremental costs that result from an actual or planned transaction and include transaction costs (i.e. IPO costs), integration consulting fees, internal salaries and wages (to the extent the individuals are assigned full-time to integration and transformation activities) and certain costs related to integrating and converging IT systems; and •other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.
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The following table presents a reconciliation of net loss to adjusted EBITDA for each of the periods indicated.
($ in thousands, except percentages) Fiscal Year Reconciliation of Net Loss to Adjusted EBITDA 2019 2018 2017 Net loss$ (252,370) $ (267,890) $ (338,057) Add (deduct): Depreciation and amortization 30,645 23,210 12,536 Share-based compensation expense and related taxes 136,237 14,351 11,209 Interest (income) expense, net (356) 124 206 Management fee expense(1) 1,300 1,300 866 Non-routine items (2) - - 61,993 Transaction related costs 1,396 - - Other 2,123 - - Adjusted EBITDA$ (81,025) $ (228,905) $ (251,247) Net sales$ 4,846,743 $ 3,532,837 $ 2,104,287 Adjusted EBITDA margin (1.7) % (6.5) % (11.9) % (1) Management fee expense allocated to us by PetSmart for organizational oversight and certain limited corporate functions provided by its sponsors. Although we are not a party to the agreement governing the management fee, this management fee is reflected as an expense in our consolidated financial statements. (2) For Fiscal Year 2017, non-routine items include$33.9 million for compensation expenses to our employees as a result of PetSmart's acquisition of us and$28.1 million of acquisition-related costs incurred for our benefit as part of PetSmart's acquisition of us.
We define adjusted EBITDA margin as adjusted EBITDA divided by net sales.
Free Cash Flow
To provide investors with additional information regarding our financial
results, we have also disclosed here and elsewhere in this 10-K Report free cash
flow, a non-GAAP financial measure that we calculate as net cash provided by
(used in) operating activities less capital expenditures (which consist of
purchases of property and equipment, including servers and networking equipment,
capitalization of labor related to our website, mobile applications, and
software development, and leasehold improvements). We have provided a
reconciliation below of free cash flow to net cash provided by (used in)
operating activities, the most directly comparable GAAP financial measure.
We have included free cash flow in this 10-K Report because it is an important
indicator of our liquidity as it measures the amount of cash we generate.
Accordingly, we believe that free cash flow provides useful information to
investors and others in understanding and evaluating our operating results in
the same manner as our management and board of directors.
Free cash flow has limitations as a financial measure and you should not
consider it in isolation or as a substitute for analysis of our results as
reported under GAAP. There are limitations to using non-GAAP financial measures,
including that other companies, including companies in our industry, may
calculate free cash flow differently. Because of these limitations, you should
consider free cash flow alongside other financial performance measures,
including net cash provided by (used in) operating activities, capital
expenditures and our other GAAP results.
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The following table presents a reconciliation of net cash provided by (used in) operating activities to free cash flow for each of the periods indicated.
($ in thousands)
Fiscal Year Reconciliation of Net Cash Provided by (Used in) Operating Activities to Free Cash Flow
2019 2018 2017
Net cash provided by (used in) operating activities $ 46,581 $ (13,415) $ (79,747)
Deduct:
Capital expenditures (48,636) (44,160) (40,282)
Free Cash Flow $ (2,055) $ (57,575) $ (120,029)
Free cash flow may be affected in the near to medium term by the timing of
capital investments (such as the launch of new fulfillment centers, customer
service centers, and corporate offices and purchases of IT and other equipment),
fluctuations in our growth and the effect of such fluctuations on working
capital, and changes in our cash conversion cycle due to increases or decreases
of vendor payment terms as well as inventory turnover.
Key Operating Metrics
Active Customers
As of the last date of each reporting period, we determine our number of active customers by counting the total number of individual customers who have ordered, and for whom an order has shipped, at least once during the preceding 364-day period. The change in active customers in a reporting period captures both the inflow of new customers as well as the outflow of customers who have not made a purchase in the last 364 days. We view the number of active customers as a key indicator of our growth-acquisition and retention of customers-as a result of our marketing efforts and the value we provide to our customers. The number of active customers has grown over time as we acquired new customers and retained previously acquired customers.
Net Sales Per Active Customer
We define net sales per active customer as the aggregate net sales for the preceding four fiscal quarters, divided by the total number of active customers at the end of that period. We view net sales per active customer as a key indicator of our customers' purchasing patterns, including their initial and repeat purchase behavior.
Autoship and Autoship Customer Sales
We define Autoship customers as customers in a given fiscal quarter for whom an order has shipped through our Autoship subscription program during the preceding 364-day period. We define Autoship as our subscription program, which provides automatic ordering, payment, and delivery of products to our customers. We view our Autoship subscription program as a key driver of recurring net sales and customer retention. For a given fiscal quarter, Autoship customer sales consist of sales and shipping revenues from all Autoship subscription program purchases and purchases outside of the Autoship subscription program by Autoship customers, excluding taxes collected from customers, excluding any refund allowance, and net of any promotional offers (such as percentage discounts off current purchases and other similar offers), for that quarter. For a given fiscal year, Autoship customer sales equal the sum of the Autoship customer sales for each of the fiscal quarters in that fiscal year.
Autoship Customer Sales as a Percentage of
We define Autoship customer sales as a percentage of net sales as the Autoship
customer sales in a given reporting period divided by the net sales from all
orders in that period. We view Autoship customer sales as a percentage of net
sales as a key indicator of our recurring sales and customer retention.
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Components of Results of Consolidated Operations
We derive net sales primarily from sales of both third-party brand and private brand pet food, pet products, pet medications and other pet health products, and related shipping fees. Sales of third-party brand and private brand pet food, pet products and shipping revenues are recorded when products are shipped, net of promotional discounts and refund allowances. Taxes collected from customers are excluded from net sales. Net sales is primarily driven by growth of new customers and active customers, and the frequency with which customers purchase and subscribe to our Autoship subscription program. We also periodically provide promotional offers, including discount offers, such as percentage discounts off current purchases and other similar offers. These offers are treated as a reduction to the purchase price of the related transaction and are reflected as a net amount in net sales.
Cost of Goods Sold
Cost of goods sold consists of the cost of third-party brand and private brand products sold to customers, inventory freight, shipping supply costs, inventory shrinkage costs, and inventory valuation adjustments, offset by reductions for promotions and percentage or volume rebates offered by our vendors, which may depend on reaching minimum purchase thresholds. Generally, amounts received from vendors are considered a reduction of the carrying value of inventory and are ultimately reflected as a reduction of cost of goods sold.
Selling, General and Administrative
Selling, general and administrative expenses consist of payroll and related expenses for employees involved in general corporate functions, including accounting, finance, tax, legal and human resources; costs associated with use by these functions, such as depreciation expense and rent relating to facilities and equipment; professional fees and other general corporate costs; share-based compensation; and fulfillment costs. Fulfillment costs represent costs incurred in operating and staffing fulfillment and customer service centers, including costs attributable to buying, receiving, inspecting and warehousing inventories, picking, packaging and preparing customer orders for shipment, payment processing and related transaction costs and responding to inquiries from customers. Included within fulfillment costs are merchant processing fees charged by third parties that provide merchant processing services for credit cards.
Advertising and Marketing
Advertising and marketing expenses consist of advertising and payroll related expenses for personnel engaged in marketing, business development and selling activities.
Presentation of Results of Consolidated Operations and Liquidity and Capital Resources
The following discussion and analysis of our Results of Consolidated Operations and Liquidity and Capital Resources includes a comparison of Fiscal Year 2019 to Fiscal Year 2018. A similar discussion and analysis which compares Fiscal Year 2018 to Fiscal Year 2017 may be found in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our final prospectus filed with theSecurities and Exchange Commission (the "SEC") pursuant to Rule 424(b) under the Securities Act of 1933, as amended, onJune 17, 2019 . 40 --------------------------------------------------------------------------------
Results of Consolidated Operations
The following tables set forth our results of operations for the fiscal years
presented and express the relationship of certain line items as a percentage of
net sales for those periods. The period-to-period comparison of financial
results is not necessarily indicative of future results.
Fiscal Year
% change % of net sales
($ in thousands) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 2019 2018 2017
Consolidated Statements of
Operations
Net sales $ 4,846,743 $ 3,532,837 $ 2,104,287 37.2 % 67.9 % 100.0 % 100.0 % 100.0 %
Costs of goods sold 3,702,683 2,818,032 1,736,737 31.4 % 62.3 % 76.4 % 79.8 % 82.5 %
Gross profit 1,144,060 714,805 367,550 60.1 % 94.5 % 23.6 % 20.2 % 17.5 %
Operating expenses:
Selling, general and
administrative 969,890 589,507 451,673 64.5 % 30.5 % 20.0 % 16.7 % 21.5 %
Advertising and marketing 426,896 393,064 253,728 8.6 % 54.9 % 8.8 % 11.1 % 12.1 %
Total operating expenses 1,396,786 982,571 705,401 42.2 % 39.3 % 28.8 % 27.8 % 33.5 %
Loss from operations (252,726) (267,766) (337,851) 5.6 % 20.7 % (5.2) % (7.6) % (16.1) %
Interest income (expense), net 356 (124) (206) 387.1 % 39.8 % - % - % - %
Loss before income tax
provision (252,370) (267,890) (338,057) 5.8 % 20.8 % (5.2) % (7.6) % (16.1) %
Income tax provision - - - - % - % - % - % - %
Net loss $ (252,370) $ (267,890) $ (338,057) 5.8 % 20.8 % (5.2) % (7.6) % (16.1) %
Net Sales
Fiscal Year 2019 vs. 2018 2018 vs. 2017
($ in thousands) 2019 2018(1) 2017(1) $ Change % Change $ Change % Change
Consumables $ 3,596,778 $ 2,708,156 $ 1,646,446 $ 888,622 33% $ 1,061,710 64%
Hardgoods 705,087 551,425 347,251 153,662 28% 204,174 59%
Other 544,878 273,256 110,590 271,622 99% 162,666 147%
Net sales $ 4,846,743 $ 3,532,837 $ 2,104,287 $ 1,313,906 $ 1,428,550 (1) Prior periods have been reclassified to conform with current presentation.
Net sales for Fiscal Year 2019 increased by$1.3 billion , or 37.2%, to$4.8 billion compared to$3.5 billion for Fiscal Year 2018. When compared to Fiscal Year 2018 excluding the 53rd week, net sales for Fiscal Year 2019 increased by$1.4 billion , or 40.5%. This increase was primarily due to growth in our customer base, with the number of active customers increasing by 2.9 million, or 27.2%, and increased spending among our active customers with net sales per active customer increasing$26 , or 7.8%, to$360 in Fiscal Year 2019 compared to Fiscal Year 2018, driven by catalog expansion and growth in our healthcare and private brand businesses.
Cost of Goods Sold and Gross Profit
Cost of goods sold for Fiscal Year 2019 increased by$884.7 million , or 31.4%, to$3.7 billion compared to$2.8 billion in Fiscal Year 2018. This increase was primarily due to a 36.2% increase in orders shipped and associated product costs, outbound freight, and shipping supply costs. The increase in cost of goods sold was lower than the increase in orders on a percentage basis, primarily as a result of realized supply chain efficiencies and cost reduction initiatives. Gross profit for Fiscal Year 2019 increased by$429.3 million , or 60.1%, to$1.1 billion compared to$714.8 million in Fiscal Year 2018. This increase was primarily due to the year-over-year increase in net sales as described above. Gross profit as a percentage of net sales for Fiscal Year 2019 increased by 340 basis points compared to Fiscal Year 2018, primarily due to margin expansion across all verticals, including improvements in margin profile of pharmacy and private brands. 41 --------------------------------------------------------------------------------
Selling, General and Administrative
Selling, general and administrative expenses for Fiscal Year 2019 increased by$380.4 million , or 64.5%, to$969.9 million compared to$589.5 million in Fiscal Year 2018. This increase was primarily due to an increase of$120.6 million in non-cash share-based compensation expense and an increase$118.0 million of other general and administrative items including an increase in compensation and facilities expense related to expansion of our corporate office and increased headcount as a result of business growth and also in contemplation of becoming a public company, as well as investments in security and data protection software. We also recognized an increase of$141.8 million in fulfillment costs largely attributable to increased investments to support overall growth of our business, including the opening of a fulfillment center inDayton, Ohio and pharmacy fulfillment centers inLouisville, Kentucky , andPhoenix, Arizona , and growth of fulfillment and customer service headcount.
Advertising and Marketing
Advertising and marketing expenses for Fiscal Year 2019 increased by$33.8 million , or 8.6%, to$426.9 million compared to$393.1 million in Fiscal Year 2018, but overall spend declined as a percentage of net sales to 8.8% from 11.1% in Fiscal Year 2018. This increase in advertising and marketing spend through existing channels contributed to an increase in the number of active customers of 2.9 million.
Quarterly Results of Operations Data
The following table sets forth our unaudited quarterly consolidated results of operations data for each of the quarterly periods in our fiscal years endedFebruary 2, 2020 andFebruary 3, 2019 . This data should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this 10-K Report. Our historical results are not necessarily indicative of the results that may be expected in the future and the results of a particular quarter are not necessarily indicative of the results for a full year. 13 Weeks Ended 14 Weeks Ended 13 Weeks Ended ($ in thousands)February 2, 2020 November 3, 2019 August 4, 2019 May 5, 2019 February 3, 2019 October 28, 2018 July 29, 2018 April 29, 2018 Net sales$ 1,354,525 $ 1,229,801 $ 1,153,545 $ 1,108,872 $ 1,088,158 $ 875,630 $ 805,587 $ 763,462 Cost of goods sold 1,028,370 938,021 881,310 854,982 861,258 703,589 639,711 613,474 Gross profit 326,155 291,780 272,235 253,890 226,900 172,041 165,876 149,988 Operating expenses: Selling, general and administrative 284,942 258,488 244,563 181,897 176,234 150,373 139,748 123,152 Advertising and marketing 101,810 112,071 110,752 102,263 116,977 100,163 89,263 86,661 Total operating expenses 386,752 370,559 355,315 284,160 293,211 250,536 229,011 209,813 Loss from operations (60,597) (78,779) (83,080) (30,270) (66,311) (78,495) (63,135) (59,825) Interest (expense) income, net (343) (221) 204 716 (33) (122) 21 10 Loss before income tax provision (60,940) (79,000) (82,876) (29,554) (66,344) (78,617) (63,114) (59,815) Income tax provision - - - - - - - - Net loss$ (60,940) $ (79,000) $ (82,876) $ (29,554) $ (66,344) $ (78,617) $ (63,114) $ (59,815)
Liquidity and Capital Resources
Since our inception, we have financed our operations and capital expenditures primarily through sales of convertible redeemable preferred stock and cash flows generated by operations. Our principal sources of liquidity are expected to be our cash and cash equivalents and our revolving credit facility. Cash and cash equivalents consist primarily of cash on deposit with banks and investments in money market funds. Cash and cash equivalents totaled$212.1 million as ofFebruary 2, 2020 , an increase of$123.8 million fromFebruary 3, 2019 . 42 -------------------------------------------------------------------------------- We believe that our cash and cash equivalents and availability under our revolving credit facility will be sufficient to fund our working capital and capital expenditure requirements for at least the next twelve months. In addition, we may choose to raise additional funds at any time through equity or debt financing arrangements, which may or may not be needed for additional working capital, capital expenditures or other strategic investments. Our opinions concerning liquidity are based on currently available information. To the extent this information proves to be inaccurate, or if circumstances change, future availability of trade credit or other sources of financing may be reduced and our liquidity could be adversely affected. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in the section titled "Risk Factors" in Item 1A of this 10-K Report. Depending on the severity and direct impact of these factors on us, we may be unable to secure additional financing to meet our operating requirements on terms favorable to us, or at all. Cash Flows Fiscal Year ($ in thousands) 2019 2018 2017 Net cash provided by (used in) operating activities$ 46,581 $ (13,415) $ (79,747) Net cash (used in) provided by investing activities$ (49,861) $ 31,838 $ (195,804) Net cash provided by financing activities$ 127,037 $ 1,141 $ 187,849 Operating Activities Cash provided by (used in) operating activities consisted of net loss adjusted for non-cash items, including depreciation and amortization, share-based compensation expense and certain other non-cash items, as well as the effect of changes in working capital and other activities. Net cash provided by operating activities was$46.6 million for Fiscal Year 2019, primarily consisting of$252.4 million of net loss, adjusted for certain non-cash items, which primarily included depreciation and amortization expense of$30.6 million and$134.9 million of share-based compensation expense, as well as a$122.2 million increase due to favorable working capital changes. Operating cash flows benefited from an increase in current liabilities of$261.0 million , primarily due to timing of payments for inventory purchases, partially offset by an increase in current assets of$138.8 million due to an increase in inventory and receivables associated with net sales. Net cash used in operating activities was$13.4 million for Fiscal Year 2018, primarily consisting of$267.9 million of net loss, adjusted for certain non-cash items, which primarily included depreciation and amortization expense of$23.2 million and$14.4 million of share-based compensation expense, as well as a$196.9 million increase due to favorable working capital changes. Operating cash flows benefited from an increase in current liabilities of$269.5 million , primarily due to timing of payments for inventory purchases, partially offset by an increase in current assets of$72.6 million due to an increase in inventory and receivables associated with net sales.
Investing Activities
Our primary investing activities consisted of purchases of property and equipment, mainly for the launch and expansion of our fulfillment capabilities, as well as purchases of servers and networking equipment, and leasehold improvements.
Net cash used in investing activities was$49.9 million for Fiscal Year 2019, primarily consisting of$48.7 million of capital expenditures related to the launch of new fulfillment centers, the expansion of corporate and customer services offices, and additional investments in IT hardware and software, and$1.2 million of cash advances, net of reimbursements from PetSmart. Net cash provided by investing activities was$31.8 million for Fiscal Year 2018, primarily consisting of$76.0 million of cash reimbursements, net of advances from PetSmart, partially offset by$44.2 million of capital expenditures related to the launch of new fulfillment centers, the expansion of corporate and customer service offices, and additional investments in IT hardware and software. 43 --------------------------------------------------------------------------------
Financing activities
Net cash provided by financing activities was$127.0 million for Fiscal Year 2019 primarily consisting of$110.3 million of proceeds from our IPO, net of underwriting discounts, commissions and offering costs and$17.3 million received pursuant to the tax sharing agreement with PetSmart. Net cash provided by financing activities was$1.1 million for Fiscal Year 2018, primarily consisting of a$1.3 million contribution from PetSmart, partially offset by$0.2 million of principal repayments of finance lease obligations.
ABL Credit Facility
OnJune 18, 2019 , we entered into a five-year senior secured asset-backed credit facility (the "ABL Credit Facility") which provides for non-amortizing revolving loans in an aggregate principal amount of up to$300 million , subject to a borrowing base comprised of, among other things, inventory and sales receivables (subject to certain reserves). The ABL Credit Facility provides the right to request incremental commitments and add incremental asset-based revolving loan facilities in an aggregate principal amount of up to$100 million , subject to customary conditions. As ofFebruary 2, 2020 , we had no outstanding borrowings under the ABL Credit Facility. For additional information with respect to our ABL Credit Facility, see Note 5 - Debt in the Notes to the Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data, of this 10-K Report.
Contractual Obligations
The following table summarizes our contractual obligations as ofFebruary 2, 2020 : Payments Due by Periods ($ in thousands) Total <1 year 1-3 years 3-5 years >5 years Operating lease obligations$ 401,200 $ 36,518 $ 73,199 $ 60,292 $ 231,191 Real estate obligations (1) 124,975 - 7,853 16,357 100,765 Services purchase obligations 13,784 7,038 6,380 366 - Advertising purchase commitments 11,194 11,194 - - - Total$ 551,153 $ 54,750
We lease all of our fulfillment and customer service centers, corporate offices and certain equipment under non-cancelable operating leases. These leases expire at various dates through 2031.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet activities or have any arrangements or relationships with unconsolidated entities, such as variable interest, special purpose, and structured finance entities.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with GAAP. The preparation of our consolidated financial
statements and related disclosures requires us to make estimates, assumptions
and judgments that affect the reported amounts of assets, liabilities, net
sales, costs and expenses and related disclosures. We believe that the
estimates, assumptions and judgments involved in the accounting policies
described below have the greatest potential impact on our financial statements
and, therefore, we consider these to be our critical accounting policies.
Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our
actual results may differ from these estimates under different assumptions and
conditions. See Note 2 - Summary of Significant Accounting Policies, in the
Notes to the Consolidated Financial Statements included in Part II, Item 8,
Financial Statements and Supplementary Data, of this 10-K Report for a
description of our significant accounting policies as well as a description of
recently adopted accounting pronouncements and recently issued accounting
pronouncements not yet adopted as of the date of this 10-K Report.
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--------------------------------------------------------------------------------Share-Based Compensation
We measure the cost of employee services received in exchange for a grant of a
share-based award using the grant-date fair value of the award. For grants of
restricted stock units ("RSUs") subject to service-based vesting conditions, the
fair value is established based on the market price on the date of the grant.
The fair value of RSU grants subject to market-based vesting conditions is
determined on the date of grant using a Monte Carlo model to simulate total
stockholder return for Chewy and peer companies. The Company accounts for
forfeitures as they occur.
The Monte Carlo simulation requires the use of several variables to estimate the
grant-date fair value of our share-based compensation awards including our stock
price and a number of assumptions, including volatility, performance period,
risk-free interest rate and expected dividends. The risk-free interest rate
utilized is based on a 5-year term-matched zero-coupon U.S. Treasury security
yield at the time of grant. Expected volatility is based on historical
volatility of the stock of our peer firms.
Income Taxes
As a result of our corporate conversion inMarch 2016 , we became subject toU.S. federal, state and local corporate income taxes. Prior to this, Chewy was a limited liability company treated as a partnership and therefore was not a tax paying entity for federal, state and local income tax purposes. Accordingly,Chewy.com, LLC's taxable loss was allocated to its members in accordance with its Limited Liability Company Agreement. Subsequent to PetSmart's acquisition of us, we are included in the consolidatedU.S. federal and in certain state income tax returns of PetSmart. The income tax provision and related deferred tax assets and liabilities that have been reflected in our consolidated financial statements are based on the separate return method and have been estimated as if we were a separate taxpayer from PetSmart. Estimates of deferred income taxes reflect management's assessment of actual future taxes to be paid on items reflected in the consolidated financial statements, giving consideration to both timing and the probability of realization. Actual income taxes could vary from these estimates due to future changes in income tax law, state income tax apportionment or the outcome of any review of our tax returns by theIRS , as well as actual operating results that may vary significantly from anticipated results. For additional information on deferred tax assets and liabilities, see Item 8 of Part II, "Financial Statements and Supplementary Data", Note 9 - Income Taxes . We also recognize liabilities for uncertain tax positions based on the two-step process prescribed by the accounting guidance for uncertainty in income taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently difficult and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is included in Item 8 of Part II, "Financial Statements and Supplementary Data", Note 2 in the "Notes to Consolidated Financial Statements" of this 10-K Report.
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