Chewy shares jump on first quarter earnings results

Chewy shares are soaring after the pet retailer posted a surprise profit on the first quarter. Sumit Singh, Chewy CEO speaks on the company's 14.7% jump in year-over-year sales.

Video Transcript

[AUDIO LOGO]

BRAD SMITH: Investors are throwing Chewy a bone this morning, as shares surge on the company's surprise profit. The pet retailer saw net sales per active customer and sales from auto ship customers hit record levels in the first quarter.

Chewy CEO Sumit Singh joins us now, alongside Yahoo Finance's Executive Editor, Brian Sozzi. Great to have you here with us. You got to take us into some of the, dare I say, catalysts for the quarter here, Sumit, and what really jumped out to you that drove some of this performance.

SUMIT SINGH: Nice to see you guys. Thank you for having me here. What you're seeing is, it's a proof point pet remains resilient, that's one. And B, Chewy's value proposition continues to resonate loudly. Customer engagement was super strong this quarter, which we were obviously pleased to see.

And I think underneath of that, you're seeing a couple different trends pick up. Supply chains have never been better. Be pricing, our pricing is as sharp and competitive as ever. Our delivery convenience and the way that we approach customers on personalized service, that bar has never been higher.

So when you combine all of that and provide customers this platform that they can engage with, it just drives massive levels of engagement. So we saw that come through in our ownership levels, where both active customer engagement is up, but also [INAUDIBLE] for ownership was up. And then generally speaking, customers engaging with us to build bigger baskets during Q1 was all a prevalent trend. So we were happy to deliver the growth that we did.

BRIAN SOZZI: Sumit, Brian here. Really interesting quarter from you guys. It was, I would say, a different tone compared to when we talked to you a couple months ago. So that's that. Also, a different tone compared to your largest one of your largest competitors in Petco. So, good quarter by Chewy. Is it just a good start to tick season for you? I mean, do you see what you posted here in the most recent quarter as sustainable?

SUMIT SINGH: Brian, we raised guidance for the rest of the year, both on top line and on bottom line. So we clearly are bullish on the momentum that is playing through from Q1 forward. The macro remains evolving. But at the same time, the strengths that we're projecting, we believe are fundamental and structurally built in into the platform.

Because customers, if you look at our customer trend, our gross adds continue to run ahead of pre-pandemic, and then we saw a steady waning of the attrition from the large cohorts. And so what you're seeing is a steadying customer base. And customers who are on the platform are engaging much more robustly.

And so flea and tick did provide a boost, for sure. It was an early start to the season. And we were ready both with supply, as well as a high bar customer experience, which translated well for conversion on the platform. But overall, the growth inputs are very much in line with our expectations.

DIANE KING HALL: Hi, Sumit, Diane here. I want to jump in this conversation. Obviously, you talk about the flea and tick season, so that helps give a lift. But one thing that we've seen with a lot of retailers is some cutbacks in discretionary, like say for instance, toys. Did you notice any impact in that segment?

SUMIT SINGH: Yeah, nice to see you, Diane. So when you look at our revenue composition, here's what's interesting. Nearly 85% of our revenue was driven by recurring non-discretionary categories such as consumables and health, where engagement remains super strong.

On hard goods, what do you have to remember is, hard goods is governed by a few different types of inputs. So, pet household formation remains kind of flattish right now. And on the back of that, we're not seeing customers participate with categories such as crates, or refresh categories such as beds.

But when you consider replenish hard goods, the toys is an example that you provided, or poop bags or leashes and collars, I mean, these are seeing relatively high levels of engagement. And they're boosted by our ability to build baskets on the platform. And so Q1 was a net composition outcome of these type of activities that we delivered for consumers. Hopefully, that provides some context.

BRIAN SOZZI: This is a key moment for Chewy, Sumit. You are now launching in Canada, as you disclosed that on the earnings call. Does that market know who Chewy is? And to the extent you could, how do you drive brand awareness in a market that may not really know your brand?

SUMIT SINGH: Yeah, it's a great question. So we're excited to finally launch Canada and excited to be there in Q3 of this year. So Brian, when we researched Canada, what we found pleasantly surprised us. Our brand awareness is starting out at mid 20s in that marketplace. So it's not starting from ground zero. Customers are aware of who we are.

And in fact, customers are kind of excited and leaning in, trying to understand what our approach and go to market is going to be here. So we obviously, are going to meet them with high bar expectations and with high service delivery.

Overall, I believe we understand consumers' desire to seek maximized value, and also to be treated with utmost care, which are kind of two pillars of our go to market. And alongside that, we will take advantage of the platform so that we're not building from zero. But we clearly have some work cut out for us here.

BRIAN SOZZI: A year from this launch, where do you see that brand in terms of sales in Canada? And do you need to see success there before you try piloting in other international markets?

SUMIT SINGH: Yeah, so when we choose markets, we've been careful about understanding customer needs and working backwards from that to ensure that our value proposition resonates loudly. And those, that input alignment is important to ultimately earn customer trust, which then leads to loyalty, that then leads to kind of revenue generation per se. And it amplifies as you move along.

We believe we can achieve similar or higher levels of share capture in Canada, as we've done in the United States. We also believe, having played through the US for the last 10, 12 years, we have a playbook that we understand well. Entering a market, the base core business first kind of creating scale, health categories then kind of substituting next to it.

So it allows us to really responsibly grow in a market and not chase kind of low dilutive growth, per se. So we're excited about that. And any time you enter a strategic project like an international market, it requires a multi-year effort.

But what we're confident of, is our ability to win in this particular marketplace. No doubt, it's going to be a lot of hard work. And at the same time, we're not expecting this to take us away from our long-term commitments on cost or CapEx targets.

BRAD SMITH: Even as you think about some of, regardless of the market that you are in, kind of more broadly for Chewy's sake, the demand elasticity that you're seeing right now, how much of that do you believe is going to need to be driven by additional promotions, marketing, spends on that side of the business?

SUMIT SINGH: Yeah, so Brad, good question. So, promo intensity was up on a year over year basis. So relative to last Q1, this Q1 was up. And we had forecasted as much, given that supply chains, as I mentioned, were much improved state coming into 2023. And so the market does have some ability to absorb incremental promotions. And so promos were high. Flea and tick early start also helped with higher promos in the marketplace.

At the same time, they were lower in intensity than we would have anticipated, which is obviously a great data point to observe. And the Q2 so far isn't looking much different. So I think consumers are appropriately engaging. They are seeking value. Our platforms, such as auto ship, delivers tremendous value. And so the flywheel impact is pretty clear and observant when we go to market with consumers in that particular fashion.

BRAD SMITH: And then as you back out some of those promotions over time, how do you look to perhaps eliminate some of the churn off? Because the consumer will have become quite, they will have expected some of those promotions, or at least baked that in to the relationship with the company.

And so how do you kind of look out and forecast into the future that even as you kind of take some of those promotions off the table, that you're still going to see the same type of buying activity?

SUMIT SINGH: Excellent point. So that's why we are not actively engaging with direct or discretionary promos, right. Our strategy is to engage you with basket-building efforts and transition you into becoming a loyal auto ship customer, which then earns you recurring 5% discount on an ongoing basis. It allows you access to our large and growing vet network, our telehealth service.

And so it gives you all of these benefits that you would expect in a high bar loyalty program, without really being propensed to promotions to drive repeat purchase. And so our thinking on promos is very different than driving transactional promos, because of the point that you exactly mentioned. We don't want this to be brand dilutive. We don't want this to be a medicine that we can't wean customers off of, per se.

DIANE KING HALL: And to your point about consumers seeking value, you have some consumers who turn to a place like Amazon. It's seen as one-stop shopping. How do you continue to maintain leadership advantage over a competitor like that?

SUMIT SINGH: Yeah, so then, pet is a category that is highly emotive. And here in this category, it's the only category outside of kids, where customers refer to themselves as pet parents. What that tells you, is that the basics of competing around offering competitive pricing, around offering choice, and offering convenience, are ones that you have to win in.

And we do a wonderful job remaining on par advantage relative to those basics. And at the same time, our philosophy of delivering surprise and delight, personalized service to consumers that allows them to kind of form this close bond with us, so that they can actually transition their share of wallet.

A fact in pet remains that for the first several quarters, customers cross shop various retailers. What you observe at Chewy, is consistently over the past years, customers over time, over several quarters, end up transitioning their entire share of wallet over to a Chewy platform.

And it's that recurring ecosystem of personalized delivery that really amplifies the flywheel for us. And so we've continued to innovate and continued to deliver a high bar value proposition. And that's what customers expect.

BRIAN SOZZI: Sumit, I was just looking at those puppy photos we were just rolling on the side of the screen. I can't help but to think Fido's experience will be changed by generative AI in some capacity. I mean, are you investing in AI? I mean, how is it going to change how I shop for those puppy bones for that Fido on the screen?

[LAUGHS]

SUMIT SINGH: I love that question. So, Brian, AI is first of all, we're not net new to the field itself. Over the last three years at least, you heard me talk about our supply chain transformation, how we've taken-- when a company goes from $2 billion just a few years ago exiting 2017, to $10 billion exiting '22, you have to almost redefine and redesign your platforms, your supply chains, the way that you connect with customers, the way that you deliver service.

And so we have continued to lean behind machine learning across various areas of our supply chain, fulfillment operations, marketing science, e-comm science, et cetera. And with this new evolution of generative AI, it provides us even more opportunity to capitalize on the base that we've set over the last three years.

So we are currently, inside the company, devising specific plans on how we improve in these areas where we're already delivering kind of transformation, per se. And we're excited about what the future will bring. So whether it's search and discovery, or whether it's engaging with pet parents on content, all the way back to improving, further improving our supply chain positions, I think every use case can be a valid one here.

DIANE KING HALL: Oh, wow. We love this conversation. Our thanks to Chewy CEO Sumit Singh, alongside Yahoo Finance's Executive Editor Brian Sozzi. Also love those pictures we had of Fido, as well. Thank you so much, Sumit.

SUMIT SINGH: Good to be here.