CHEWY, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and related notes thereto included in this Quarterly Report on Form 10-Q for the quarterly period endedMay 2, 2021 ("10-Q Report") and our audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 ("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 and in our 10-K Report, our actual results may differ materially from those anticipated in these forward-looking statements. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to "Chewy," "the Company," "we," "our," or "us" refer toChewy, Inc. and its consolidated subsidiaries. Investors and others should note that we may announce material information to our investors using our investor relations website (https://investor.chewy.com/),Securities and Exchange Commission (the "SEC") filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our investors and the public about our company, our business and other issues. It is possible that the information that we post on social media could be deemed to be material information. We therefore encourage investors to visit these websites from time to time. The information contained on such websites and social media posts is not incorporated by reference into this filing. Further, our references to website URLs in this filing are intended to be inactive textual references only.
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 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 2,500 of the best and most trusted brands in the pet industry, and we create and offer our own outstanding proprietary brands. Through our website and mobile applications, we offer our customers more than 75,000 products, compelling merchandising, an easy and enjoyable shopping experience, and exceptional customer service.
COVID-19
The COVID-19 pandemic has been a disruptive economic and societal event that has affected our business and consumer shopping behavior. To serve our pet parents while also providing for the safety and well-being of our team members, we have adapted aspects of our logistics, transportation, supply chain and purchasing processes accordingly. As reflected in the discussion below, we have seen customers shift more of their total shopping spend to online channels since the COVID-19 outbreak, which has led to increased sales and order activity for our business. While the COVID-19 outbreak has not had a material adverse impact on our operations to date, and conditions do appear to be improving as vaccination levels rise and state and local economies begin to re-open, the positive or negative impacts that the COVID-19 outbreak will ultimately have on our business remain difficult to predict. As this crisis unfolded, we monitored conditions closely and adapted our operations to meet federal, state and local standards, while continuing to meet the needs of our rapidly growing community of pets and pet parents and to ensure the safety and well-being of our team members. While conditions appear to be improving, we are still unable to predict the duration of the COVID-19 pandemic and therefore what the ultimate impact of the COVID-19 pandemic will be on the broader economy or our operations and liquidity. As such, risks still remain. Please refer to the "Cautionary Note Regarding Forward-Looking Statements" in this 10-Q Report and the "Risk Factors" disclosed in our Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2021 .
Fiscal Year End
We have a 52 or 53-week fiscal year ending each year on the Sunday that is closest toJanuary 31 of that year. Our 2021 fiscal year ends onJanuary 30, 2022 and is a 52-week year. Our 2020 fiscal year endedJanuary 31, 2021 and was a 52-week year. 14
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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.
13 Weeks Ended
(in thousands, except net sales per active customer and May 2, May 3,
percentages) 2021 2020 % Change
Financial and Operating Data
Net sales $ 2,135,178 $ 1,621,393 31.7 %
Net income (loss) (1) $ 38,719 $ (47,870) 180.9 %
Net margin (1) 1.8 % (3.0) %
Adjusted EBITDA(2) $ 77,354 $ 3,443 n/m
Adjusted EBITDA margin(2) 3.6 % 0.2 %
Net cash provided by operating activities $ 98,366 $ 20,745 n/m
Free cash flow(2) $ 59,484 $ (21,833) n/m
Active customers 19,765 15,016 31.6 %
Net sales per active customer $ 388 $ 357 8.7 %
Autoship customer sales $ 1,480,240 $ 1,101,189 34.4 %
Autoship customer sales as a percentage of net sales 69.3 % 67.9 %
n/m - not meaningful
(1) Includes share-based compensation expense, including related taxes, of $24.8 million for the thirteen weeks ended
May 2, 2021 compared to $42.3 million for the thirteen weeks ended May 3, 2020 .
(2) Adjusted EBITDA, adjusted EBITDA margin and free cash flow are non-GAAP financial measures.
We define net margin as net income (loss) divided by net sales and adjusted EBITDA margin as adjusted EBITDA divided by net sales.
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-Q Report adjusted
EBITDA, a non-GAAP financial measure that we calculate as net income (loss)
excluding depreciation and amortization; share-based compensation expense and
related taxes; income tax provision; interest income (expense), net; management
fee expense; transaction related costs; and litigation matters and other items
that we do not consider representative of our underlying operations. We have
provided a reconciliation below of adjusted EBITDA to net income (loss), the
most directly comparable GAAP financial measure.
We have included adjusted EBITDA in this 10-Q 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; transaction related costs; and litigation matters and
other items which 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:
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•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 related costs and other items
which are either not representative of our underlying operations or are
incremental costs that result from an actual or planned transaction and include
litigation matters, 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 and adjusted
EBITDA margin alongside other financial performance measures, including various
cash flow metrics, net income (loss), net margin, and our other GAAP results.
The following table presents a reconciliation of net income (loss) to adjusted EBITDA for each of the periods indicated.
($ in thousands, except percentages)
13 Weeks Ended
May 2, May 3,
Reconciliation of Net Income (Loss) to Adjusted EBITDA 2021 2020
Net income (loss) $ 38,719 $ (47,870)
Add (deduct):
Depreciation and amortization 11,426 7,253
Share-based compensation expense and related taxes 24,772 42,341
Interest expense, net 402 384
Management fee expense(1) - 325
Transaction related costs 831 -
Other 1,204 1,010
Adjusted EBITDA $ 77,354 $ 3,443
Net sales $ 2,135,178 $ 1,621,393
Net margin 1.8 % (3.0) %
Adjusted EBITDA margin 3.6 % 0.2 %
(1) Management fee expense allocated to us by PetSmart LLC ("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 condensed consolidated
financial statements during the thirteen weeks ended May 3, 2020 .
Free Cash Flow
To provide investors with additional information regarding our financial
results, we have also disclosed here and elsewhere in this 10-Q 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-Q 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.
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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.
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)
13 Weeks Ended
Reconciliation of Net Cash Provided by Operating Activities to Free
May 3,
Cash Flow 2021 2020
Net cash provided by operating activities $ 98,366 $ 20,745
Deduct:
Capital expenditures (38,882) (42,578)
Free Cash Flow $ 59,484 $ (21,833)
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 proprietary brand pet food, pet products, pet medications and other pet health products, and related shipping fees. Sales of third-party brand and proprietary 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 proprietary 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.
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