Chewy, Inc. (CHWY) Earnings Call Transcript & Summary

Welcome, everyone. It's great to see many of you and be here today. I'm Jen Hsu, and I lead our Investor Relations efforts here at Chewy. Our team is incredibly excited to be here today hosting our first Investor Day and we have a lot to discuss in terms of how we have grown and continue to evolve our business relative to the story that we told during our IPO back in 2019. Before we dive in, let me summarize our disclaimer. Note that during today's presentation we'd be making forward-looking statements. Such statements are based on information available as of today and are subject to certain risks, uncertainties and other factors that could cause actual results to differ materially from those contemplated by the forward looking-statements. These factors are detailed on the slide and documents that are filed regularly with the SEC. Our SEC filings can be accessed on investor.chewy.com. We disclaim any obligation to update any forward-looking statements, except as required by law. Further, during this event, we will present both GAAP and non-GAAP financial measures, and reconciliations of these measures are included in the appendix of today's presentation and will be available on our Investor Relations website. Non-GAAP financial measures are not intended to be a substitute of GAAP results. Our Investor Day is being web live and can be accessed via the details on our Investor Relations website, a replay and a copy of today's presentation materials will also be made available following the conclusion of today's event. Now let me take you through the agenda that we have planned for today. Sumit will begin with opening remarks, summarizing the Chewy ecosystem, including why we believe we are well positioned to continue delivering market share gaining growth while also rapidly expanding free cash flow. Mita Malhotra and Allen Hughes, Presidents of Chewy Health and Chewy Retail, respectively, will provide a detailed overview of their businesses, including the specific opportunities that we see there within. We are particularly excited to talk to you about our Chewy Health story, including its complementary and reinforcing nature alongside our large and scaling retail platform. We believe that Chewy Health is both early innings and represents great growth and margin potential as we look ahead. Following these deep dives, Sumit will provide an update on our thoughts as it relates to international expansion. And following a short break, you will hear from Scott Anderson, our Chief Operations Officer, who will provide an update on our fulfillment network and operations specifically showcasing why we believe that this part of our business provides a unique competitive advantage and drives margin upside. Stacy Bowman, our Interim Chief Financial Officer, and I will then recap our strong financial execution and how our strategy translates into our updated long-term financial targets. Sumit will close our prepared remarks, and we will then open the floor for a live Q&A session at the end of today's event. You will notice that we've placed QR codes on the desk throughout the room as well as on the bottom right corner of the webcast for our virtual participants. Please feel free to use those QR codes at any time throughout the presentation to submit your questions to ensure that we stay on track throughout today's schedule, we will reserve all questions for the Q&A session at the end of today's event. Before I hand the mic to Sumit, we will run a short video, which highlights what makes our brand so special for all of our customers, partners and pets. [Presentation]

Good morning, and welcome, everybody. They said they wouldn't let me into the NYSE unless I wore a suit. So I wore a suit and I'm here, and I figured I would present without one. It's great to see everybody. Welcome. Our Analyst and Investor community, Chewy Board members are here, BC Partners, Raymond Svider and the team are here and the Chewy leadership team is here. We're very excited to be here and to be presenting the story. Many of you are familiar with our story. And to a great deal, the story is about consistent high-quality execution, building deep connection, emotive connection with customers, driving a repeat purchase loyalty flywheel that amplifies our revenue algorithm and then producing tremendous leverage from our cost structure, which we'll talk about today. But underneath of it, the story is about innovating and improving customer experiences. A lot has been done since the IPO, been 4 years, 4.5 years since we IPO-ed. A lot was built, a lot has been built, results delivered and today, we're super proud of what we've accomplished over the last few years, but we're actually more excited, stronger and hungrier as a team for the future. Why? Because a lot is still to be built, a lot of customers to acquire a lot of share of wallet to capture, a lot of challenges to solve, a lot of innovation to be had, a lot of shareholder value to be unlocked. Super excited about bringing -- it's a deep drink on specific topics. But overall, you should get a very good sense for how these in a connected manner provide the amplified algorithm that we're bringing forward on the revenue side, accelerated margin and free cash flow opportunities in generation and how we create shareholder value now and for the future. We've put together a rich set of content and assembled a high-quality leadership team, which we'll present it to you firsthand. After I am done with my section, I'll take you through the first couple of slides over the next 30 to 40 minutes. Mita will come up, you'll receive a deeper drink on Chewy Health, where we're leading innovation, positively disrupting an industry, creating value for both customers and our veterinarian partners. You'll hear about how we're doing that. Allen Hughes will tell you about the retail business, the complementarities between the two and how we connect the two. Scott, super excited about talking about robots and automation. It's been hard to contain his excitement. It's a supply chain transformation that we started multi years ago, which I've sort of been articulating on our earnings calls and post analyst post-earnings meetings. So today, you'll get to see really what we've built behind the scenes and how Chewy comes together as an experience-led organization on the back of product and technology as a pillar and supply chain and operations as another pillar underneath of that, right? And then finally, Stacy and Jen will wrap up with financial frameworks and our methodology and our modeling of the income statement as well as the balance sheet moving forward. So without further ado, let's get started. Our mission is to be the most trusted convenient destination for pet parents and partners everywhere. I've been consistent in the way that we've talked about this mission statement. Three specific phrases are to be emphasized, trusted and convenient destination for pet parents and partners and everywhere. Trusted and convenient, while trust, obviously, I don't need to go into the details of why trust is important to acquire and retain customers, but in a business like this, in pet, relationships matter more, even more so than in any other businesses that we're a part of our consumers of out there. Destination for pet parents and partners because we recognize full well that pet is more than just food and supplies. It's a deep health care equation across pet parents and partners such as veterinarians. And just like it takes a village to raise a child. It takes a village to raise a pet. So we've been standing for pet parents. But a few years ago, we said we should be staying for our partners as well. Partners such as The Borders, the Groomers, the Dog Bark Friend, the Google University, petmd.com, content which you're going to see which you're going to hear and see a lot about today. And of course, not to leave out the veterinarians who are at the center of providing care to pet and need. And then finally, everywhere because we believe our brand is extensible outside the United States and also because pets and pet parents are more the same than different everywhere than outside The United States. So the mission statement is essentially one that is enduring. It allows us to formulate strategy and put our teams on prioritization paths behind the mission statement. It's easy for us to recognize whether we're working on the right stuff, which stuff creates value, how do we put more investment behind which particular initiative ultimately to build a brand that will essentially stand a differentiated long-term and value creating. So with this mission statement in mind, today, 4.5 years after IPO, 12 years after the foundation of Chewy, here's what we've accomplished. We are the largest pet specialty retailer in the United States. We are the largest pet pharmacy in the United States, not online pet pharmacy, the largest pharmacy in the United States. 75% of our sales runs through our Cosi subscription product called AutoShip. It is the most scaled subscription product out there in any one particular category, custom-built for the consumer. We are, at our scale of 18 fulfillment centers, the network of footprint operations and the volume that we put out are the top in the top 3 direct-to-consumer e-com players out there today. That's how expensive our network has been. That's how unique and differentiated our network has become. And finally, for multiple years in a row, we've been #1 on Forrester's Customer Experience Index. There's a saying in business that innovation and quality of care is ultimately what differentiates the business for the long term. And that's the mission that we essentially lead ourselves, our teams and our company with. And this is a culmination of all of those mental models coming together here. This slide is likely one of the most important slides today. It's important to understand what Chewy was, what Chewy is and will become. At the time when we came to you at IPO, we were a food primarily a retail food and supplies organization. We had a catalog that was roughly 40,000, 45,000 SKUs, fast growing. We had an Autoship business that was fast growing at the same time. And we were focused on creating scale which we have over the last year growing revenue 3x from the time that we came to you at IPO. Our retail business continues to rapidly scale. Underneath of that, we've focused and we've continued to build out a scaled operations network, enabling world-class delivery experience and unlocking cost savings now and into the future. And having built a network like this, going forward, we expect both CapEx intensity and CapEx efficiency to change CapEx intensity reduce CapEx efficiency to increase across our core network, leading to improved free cash flow generation. You will see us detail how and what this means for our algorithm. Alongside roughly 5 years ago, we said pet health which is 1/3 of the Pet TAM, I'll give it in one second, was a faster-growing category than food and supplies, and they really had not been incredible innovation, and it was a bit of a legacy industry. And so we said, great, there are problems to solve challenges to overcome and customer experience is to improve and deliver and alongside creating value for partners and customers and shareholders. So we stepped into it. And the last 5 years has been about growing the health business and building complementarities between retail and health. Health is a business that is growing, that is delivering premium growth and premium margins and the business remains in its early innings. Less than 20% of our customers today engage with health. And so when you put these two together, the financial complementarity of this equation essentially amplifies the value creation where we will build our building a pet platform that continues to deliver share-gaining growth. And from this point onwards, will create meaningful acceleration in profitability and free cash flow generation. Let's take a look at the market. Always helpful to orient ourselves where we're going. Pet, as we understand, is $144 billion TAM coming out of 2023. We interpreted the market broken in 3 different segments: food and supplies that makes up $87 billion or roughly 60% of this TAM. Health, that makes up approximately $50 billion or 1/3 of this or 33% of the TAM and then the rest being non-healthcare services. On my right here, on your right, of course, is essentially the market CAGR, pre-pandemic and post-pandemic. If we take out the dynamic bomb, the market essentially is expected to continue to grow at an average of 6% moving forward. 24% might be a little bit different given kind of the macro conditions we're living in. But on an average, we expect market Pet to be resilient and markets to grow at 5% to 7% CAGR. When you look at channel distribution, in Pet this is how the channel has shifted. So over the last 5 years, the most amount of share shift has been captured by the online segment, unsurprisingly so. It's a consistent story. And you can see how the share distributions come out. Coming out of 2023, online was estimated at about 36% penetration of overall net sales. BOPUS numbers are playing on playing into this number. So if you extract BOPUS and take pure-play e-com, this number is about somewhere between 28% to 32%, depending upon what source you refer. Ultimately, the category continues to grow. The current towards e-com is very consistent and very prevalent and where the pandemic brought in the high tide, we're back to sort of normalized tides at this point, but the current continues to be towards e-commerce. And over the next several years, we expect the category to be north of 45% penetrated in the e-com segment. This is a slide we're tremendously proud of. It summarizes our accomplishments, both in terms of outputs that we've achieved and the inputs that we consider into the outputs that we've achieved. So at the bottom, on the back of growing active customers and on the back of growing net sales per active customer, which is NSPAC and fueling the business via the subscription product Autoship, we've essentially delivered revenue from $3.5 billion to $11 billion and a 1,000 basis point improvement in adjusted EBITDA margins. Extremely proud of the way that we've accomplished this, but our work isn't done yet. I think it's important to understand and take a deeper drink on why we win. So let's double click on that a little bit. We win because we provide the scale and convenience of e-commerce at the personalized service that we kind of come to expect from our local neighborhood pet store. What does that mean? So underneath of it, the scale that you create in e-com, particularly when you have a technology-enabled technology solution-oriented mind, it brings forward solutions that lower barriers for purchase and post-purchase for customers. It leans in with the basics of e-com, which is broadest assortment that we carry in pet, competitive prices, which we offer in pet. And alongside that, we've put together meaningful differentiations along the health care business, a signature pet custom-designed Autoship program, and we've gone to market with relationship in mind. So the personalized service of a neighborhood pet store is a really important part to understand about pet and the next couple of slides essentially dive deep into that. So when we go out and we refer or take sort of input from customers, what is in front of you are a few call research summaries that have come out over several years that have continued to date. In terms of retailers, customers -- that customers prefer as their destination for pet, we have a marked lead relative to the next competitor. In terms of NPS or a proxy for NPS, which is customer service offering a key differentiator, which is in this particular case, measured by customers reporting a 5-star customer service review, we are at 87%. our NPS, if you remember at the time of IPO, was right about the 83%, 85% mark. So our CSAT scores, our NPS scores, our Coal Index scores have maintained as we've scaled the business. And then finally, share of wallet that actually differentiates us relative to everybody else out there, we've continued to accumulate share of wallet, as you also saw from the previous slide. But for -- to truly understand customer care, you have to take a deeper drink on what is our methodology of going to market. We run 24/7, 100% U.S.-based call centers. And we pair up our agents who are happy, healthy pet parents, we don't overly train them. We don't have productivity metrics, such as calls per hour that our agents have subscribed to. We instead invest in technology and experiential solutions to lower barriers for customers to engage, lower barriers for customer service agents to provide the service, and that's where we take the cost out. So this is not a costly proposition to us. It's a loyalty building proposition for us. We can show via data that cohorts of customers that engage with our customer service produce greater LTV and have longevity with the platform. Roughly 30% of our calls are not for defects. They are calls where customers are calling in to understand how -- what they should buy for a new pet that they brought home. I just bought home a puppy, what should I feed it? My dog's itching, my vet provided me an appointment that is a couple of weeks out. Can you guys help, et cetera, et cetera. The pictures that you see are real pictures, our agents are empowered to send what we call valve mechanisms or find opportunities to surprise and delight you. The one that you see with the baby in the bed is a dad calling in a new dad with a month old baby, forgot to sort of change the schedule on their Autoship and the agent essentially solved the problem, but that is a surprise and delight, send them a onesie and a Dr. Seuss book. They didn't have to. They listened hard. It's naturally built in, in the way that our agents respond, our Care agents respond to customers. There was a lady who called in from New York. She was an elderly lady up in the high rise, couldn't get the Chewy box to the apartment, called Chewy, said my door management isn't available today. The agent essentially called in a Pizza, provided the tip, asked the pizza guy to take the box up to the old ladies apartment. You cannot teach stuff like this. It has to be in-built into the culture. You have to essentially have a DNA that is built in a customer-centric manner. And we've maintained this even though we've scaled because good service costs less over the long term, not more. Here is customers responding back in when they engage with our mechanisms. I won't read it up to you, but it's essentially when we meet customers during the highs and lows of pet parenting, which is whether you bring home a puppy and we celebrate that or we show up in empathetic moments when pet passes away, it goes viral. It creates worth of mouth advertising for us. This, for many years, used to be the only CRM mechanism Chewy had, customer relationship management mechanism. And as we've gotten bigger, we've gotten more sophisticated. We now have the ability to target customers to understand customers, to speak to them in a manner that connects marketing and our customer care teams very closely, which we've been building for the last 2 years, which only amplifies the power of this particular equation that you're seeing. Pet is an emotive category. In Pet, if you think about it, it is the only category where the customer outside of kids where the customer refers to themselves as pet parents. In this particular category, loyalty matters. And our model in the way that we show up to a customer builds loyalty. On the left is essential -- are essentially factors on how we arrivals -- on how we drive NSPAC. On the right is a visual that shows you how a typical customer engaging with us to build over $1,000 over $1,200 of NSPAC, which our oldest cohorts are demonstrating, and I will take you through the metrics here in one second. So in a category like this, what we understand is good customer care and these mechanisms in the way that we engage with customers, where we delight them, the first experience and then we perpetually continue to delight them, including surprising them moving forward, builds loyalty that fuels repeat purchase that then amplifies the revenue will grow them. We've been consistent on this mechanism for years and years. And in this particular case, consistency is a good thing. So here, what you see is sometimes we receive questions on, hey, can you illustrate how customers essentially build baskets with you? And we have customers we acquire customers across all of our merge classes, whether it be food or supplies or health. And we essentially have the same type of engines and the same type of models that are running underneath. But now with the ability to target customers we have the ability to essentially understand where they come off their life cycle and what trigger should we essentially provide to them at what particular point in the life cycle. This is one of the reasons why we've been able to grow pharmacy, number of customers into both Autoship as well as overall business as quickly as we have. So the implication of an approach in a methodology like this shows up in charts like these. The last time we published this was in our S1 when we came for IPO. What you see here is a couple of things. First, our NSPAC curves are consistent, tight and have a repeatable pattern. Customers spend $150 to $200 in their first year. By year 3, they're spending north of $500 with us. Our oldest cohorts are already spending over a $1000 across a space where share of wallet, as we understand it now, having grown in health as much as we have, our share of wallet understanding has expanded a couple of hundred dollars from the time we came at the IPO. So we interpret this at $1,700 opportunity, which obviously we are roughly capturing just about 1/3 of the pet share of wallet. If you translate this into a cohort of customers and the way the layer cake builds, this is essentially a revenue look of the same of a cohort. And so again, some specific things to note here. Revenue jumped sharply for each cohort, first year to second year and then modestly grows from there on out until the lifetime value of the pet. This is something that is unique to Chewy. Most -- it is a well-understood fact that most retailers or e-tailers retain roughly 15% to 25% of their customers at the bottom of the funnel from year 1 to year 2. Chewy retains multiples higher. And this is essentially a result of that behavior that I'm just describing. Again, a very consistent build. Our brands, our most strategic brands, if you break this cohort chart down into brands, whether it's on the health side or whether it's on the retail side, those cohort charts look very similar. When these cohort charts aren't building in this particular manner with a particular brand, we essentially go back to the table, driving strategic conversations on why are we not either retaining customers in your particular brand because they're not living Chewy, they're likely migrating to a different brand. And Allen will talk about how the two biggest pain points of transition that happens between brands, how we trend to address them both within our retail engine as well as across the Autoship base. And then finally, from -- in terms of how we've maintained our philosophy of acquiring high-quality customers and even though marketing cost has gone up over the last several years, everybody is aware of that for various factors, our LTV to CAC ratios have remained relatively consistent. I should explain this chart a little bit. LTV can be interpreted as many things. You can take it on a revenue basis, you could take it on a gross margin basis. When we talk about LTV, it is contribution profit. It's a conservative view on LTV. When we -- when you talk about CAC, we are talking about fully loaded cost of marketing including channel marketing costs, any discounts that we put on top of it, including first time a large value Autoship discount that we put on top of that. So it's a conservative numerator with aggressive denominator. And so it's actually great to see numbers like these. So questions that I've gotten recently are why don't you spend x more dollars to be able to acquire customers? Because we are attuned to picking up customers that will essentially produce the type of behaviors that we want them to produce to be able to show us the layer cakes and the core charts and the NSPAC curves that so credibly drive our engine. And so we could pick up -- so quality of customers that we pick up is important to us. And in times like this, it is not super financially prudent, it's not financially prudent for us to essentially swap the -- we actually have -- we've tried picking up customers and suppliers and try testing elasticities where the elasticity hasn't existed. So our ability to pick up high-quality customers and grow share of wallet is part and up. And this charts would essentially put some comfort into your minds on, hey, costs have exploded over the last couple of years. But how is the LTV equation trended? It's trended pretty well. So looking ahead, we see compelling profitability and growth vectors looking ahead. We have a scaled retail business that is generating economies where we are changing our investment profiles and taking benefit of the economies of scale that we've created at this particular point alongside a scaled Autoship business. We have a growing health business that plays in a large TAM where we are delivering premium growth at premium profitability. And then international remains a $200 billion TAM, which when I speak, you will see our pursuit is going to be selective and deliberate. I don't talk about non-healthcare services here specifically because I captured that within Chewy Retail, and Allen will take you through that. So this translates into a visual like this. We thought long and harvest like how do we visually represent something like this. So you can see clearly, at the point of IPO, the changes that we've made in terms of sort of the CapEx that we've spent in building our fulfillment network out, where we're now leveraging automation to drive increased throughput. Scott will take you through these metrics. We expect the retail business to continue scaling, albeit at a lower rate than our health business, which will continue scaling at a premium rate, producing premium profitability. Underneath of that, adjusted EBITDA margins have moved credibly from point of IPO. And moving forward, we would expect on an average a 15% flow-through annually on an adjusted EBITDA basis. Health. A quick look into Health. Everything that you see on the left is the ecosystem of what exists today most of which, which has been built in the last 4 years towards customer facing products. We see a distribution of products up top followed by consumer services and then content. And we've now paired this up with products and solutions that we've built for the veterinarian side. This is a truly one-of-a-kind differentiated proprietary fully 1P experience owned open platform system that exists in the market. This is not we're building this for 5 years out. This exists today. And Mita will give you a deeper drink on how this is producing the complementarities and why we are bullish on our potential in health and in positively disrupting the health industry, both for our veterinarian communities as well as for our customers and how we unlock value through that. Likely surprising to some of you, health today, if I can get this is a $3 billion-plus business for us already. Roughly 30% of our business is Chewy Health, which has grown at a 5-year CAGR of 37% and where margins are up to 1,000 basis points higher than our core retail business. If you take a double-click on what existed at the time of IPO and what have we built since, this is a visual that allows you to do that. At the center of the stage is essentially scaled businesses or businesses where we were -- not scale business, businesses that we were operating in a healthy manner at the time of IPO. And since then, we've put a tremendous toolkit of new businesses, across health and non-health side of the house. And some of these are rapidly scaling. Some of these are on a bit of a longer arc and they're scaling nicely, but we expect these to be on different vectors that land at different points in time. But we're super excited about the compelling, again, first-party ecosystem that we're building here that produces differentiation, but also accelerated value creation moving forward from here. This is essentially the implication of what we would expect moving forward. Our CapEx intensity will flatten or reduce moving forward. Our profitability generation will increase, leading to meaningful free cash flow generation from this point onwards. We'll show you margin efficiency and conversion ratios into free cash flow. We'll show you the EPS that we're delivering on a free cash flow basis as well. And so I'm providing you a bit of a high-level summary on what is to come in the latter sections of the presentation. And again, we would expect on an average 15% adjusted EBITDA flow-through from this point onwards. Let's talk about the macro and the customer considerations, probably provide you a little bit of sense for growth algorithm, especially on the top line. We interpret the industry to have these specific inputs, which have been consistent. Pet household growth, generally over the last 10 years, has grown at a low single-digit CAGR. Unit growth and pricing growth is again low single digit and then key factors, which is trend towards online alongside a favorable trend of humanization, which has led to premiumization. I'd love to click into this a lot more, but essentially, it's this notion of the pet used to be out on the patio, now they're on the bed on your couch and you treat them as family. And these numbers over the course of time, there's been two times when these numbers have essentially changed a little bit. The recession in 2006 to 2008, where pet household growth was arrested for a little bit of recovery within -- on a 4-quarter basis. There wasn't as much inflation in the system as we've seen now. At that time, inflation ramped up to 6%, 7% ranges. Right now, we've seen inflation to the tune of plus 30% ranges combined over the last 2, 2.5 years. So there's some change -- some things in trends that are different. But for the most part, these are the inputs that we see in terms of how pet growth algorithm is impacted. And then when you look at customers in the United States. So in the U.S., there's 90 million U.S. pet owning households. And what we did here is essentially bring you a point of view on what we believe we can pick up. So we believe off the customer base that is still out there, obviously, there's a customer base towards the end of the line that likely are not to be Chewy customers. The transaction customers, they look for value at every transaction, loyalty isn't something that's perhaps of premium importance to them, and that's fine. But there's a large base of customers, roughly $50 million or so that we believe we have a medium to high propensity of picking up. We categorize these two as high-value shoppers that make up roughly $12 million of the $50 million and then mainstream shoppers who essentially cross shop a little bit more for mainstream shoppers, they usually pick 3 retailers of choice at any given particular point. They take slightly longer to consolidate their baskets. When we pick up a mainstream shopper, what we find the difference between us for a high-value shopper and mainstream shopper, when we pick up a mainstream shopper, share of wallet consolidation happens over a 12- to 15-month period. When we pick up a mainstream shopper, share consolidation happens over a 3-year period. But ultimately, these shoppers end up shifting their entire basket away from retailers and on to Chewy. Our attrition for those who might recall, the biggest point of attrition for us is between year 1 and year 2. Our attrition year 2 into year 3 is a couple more points from that point and then year 3 onwards, our attrition is de minimis. So if you have you -- if we have you passed the first kind of 2- to 3-year mark, we essentially have you for life. And so we do believe there's an opportunity for us to pick up or to continue to add customers. And that is what we've been essentially saying on earnings calls as well that our rate of acquisition isn't that different from where we were pre-pandemic if you normalize for the specific hard goods or highly discretionary supplies categories where essentially no one's picking up customers right now. But we've really liked our trending on consumables. We've liked our trending on health. We've liked it even more for the type of value creation that happens when we pick up a high-quality customer. When we compare ourselves to inputs that drive growth or competitive advantages, this question comes up a bit. When you look at e-com, table stakes of price selection and convenience, we believe we are either equal or better than our competitors. We have the broadest assortment in pet. We have competitive prices, and in a category that values predictability and reliability, considering that 75-plus percent of our sales is fueled by our Autoship we are able to provide customers that peace of mind where we deliver orders when they need it, as they need it, where they need it. Alongside this, convenience is also purchase convenience. What we hear from customers are our sites are not cluttered. Our experiences are clean. For the portion of customers who like still picking up the phone and calling us, we answer our phones, our telephones in less than 2 rings or between 6 and 10 seconds consistently to provide them a high bar service. And so our purchase and post-purchase experience is at par or better than our competitors as well. And on top of that, when we put differentiators such as the type of services that we've built or the health platform that we've stood up that provides the complementarities or the type of care that we essentially show up in front of customers, it provides both a defensive and offensive moot around us. Key takeaways from my section. I'll let you read the first 5 points rather than raining them. But ultimately, we believe we are well positioned for share gaining growth, accelerating margin expansion from this point onwards, resulting in strong free cash flow generation. And the share gaining growth is important, especially in the near-term construct. '24 is likely going to be softer, looks more like '23 it will look like our years in Pet in the past. But ultimately, we believe there is acceleration to be had given the customer algorithm that's out there, the combination of our growth that continues to be driven and will continue to be driven with a combination of NSPAC and active customer adds, which we will positively continue to add active customers, even if next year is not as strong as we want it to be, given kind of the macro concentrations that we just talked about. So with that, I'm really excited to welcome Mita to talk about Chewy Health.

Thank you, Sumit. Hi, everyone. I'm Mita Malhotra, and I'm the President of Chewy Health. I've been with the company over 5 years, and I was a founding leader for our pharmacy business and subsequently developed Chewy Health, which is our high-growth, high margin pet health vertical. What is most exciting about the Chewy Health story is that we've tried to build a business that should appeal to and capture the full spectrum of opportunity for customers and veterinarians. You will see that we've built a lot and a lot of it that we've built is producing returns today, and we're building some more components of our compound value over time. I will take you through each of these sections one by one. It's going to feel like a crash course in Pet Health. It's a complex space. I will try my best to keep it simple, but I promise you to be worth it. All right. So maybe let's start with some grounding facts. Let's start with how large the TAM is. As Sumit mentioned, we believe the Pet Health TAM is about 1/3 of the total U.S. PET TAM. So we believe it's about $47 billion. We further divide this TAM into 3 categories. So if you look at the chart on the right, you'll see that we divided into pet insurance at $4 billion. Product sales, which includes the sale of prescription and nonprescription medication, supplements, veterinary diets at about $18 billion and then Vet services at $25 billion. So vet service is the stuff that happens within the clinic. So, think wellness exams, diagnostics, surgeries, et cetera, all of that within the $25 billion TAM. As Chewy Health, we play today on -- in $22 billion of the TAM, so only the top part of this chart, which is the insurance space and product sales. We do not have presence in the veterinary services space today. I think another important point to note is this slide basically is the way the market sits today. So basically reflects the current trend of the market. It does not include any future trends or how we believe the industry will evolve over time. We believe trends like telehealth, content, B2B solutions are going to be meaningful categories going forward, and I'll tell you why in my future slides, none of that is reflected in today's TAM. All right. So this is the slide I'm most excited about. So the highest level view of everything that Chewy Health contains, we call this our Chewy Health Ecosystem. We segregate our products into to different categories, B2C products and services, which are products and services that we've built for customers and B2B products and services, products and services that we've built for veterinarians. We've built this entire ecosystem in the last 4.5 years and are incredibly proud of that. There are not many teams out there who can innovate at the speed at which we have to develop something that is completely proprietary and highly differentiated in the market, and that's what we've done. I think another kind of -- other 2 points to note on this slide. There's a lot of components of this ecosystem. Some of these are producing returns today, and some of these were building for longer arcs. So the arcs of maturity across all of these businesses are a little bit different. And then number two, we've built this entire ecosystem deliberately as an open to utilize for all ecosystem. So yes, we can use it, but it's also available for our partners to use, which are partners in this case, are veterinarians, and I'll talk about that in my future slides as well. We will go through all of these individual sections in detail, so we can -- we'll cover a lot more depth across all of these dimensions. I thought I would then start with you've built all this, what is the financial implication of all of the stuff we've built so far. As Sumit mentioned, in the last, call it, give or take, 5 years, Chewy Health has become a $3 billion business that is fast growing and producing premium margins. On the left side of the slide, you will see the bar chart that shows our growth trajectory. So we've grown at a 37% CAGR on the back of all of the ecosystem components that are producing revenue today. Not only is Chewy Health a high-growth business, it's a premium margin business. The margins that we produce across everything that's producing revenue today are plus thousand basis points more than our core Chewy Retail business. It's highly profitable, and we obviously -- we're in the early innings, but we love this business a lot. Next, I'm going to start walking you through all of the components of the entire ecosystem wheel. We will start with our B2C products. When I say B2C products, I primarily mean our pharmaceutical vertical, compounded medications, veterinary diets and supplements. Veterinary diet and supplements are well-understood categories. So I thought it'd be good to actually spend some more time talking about pharmacy and compounding, which are more complex spaces and likely newer to the team as well. Let's start with pharmacy. We are America's #1 pet pharmacy, and we're super proud of that. Pharmacy is a highly complex and regulated space. It requires licensing both at a federal level and a state-by-state level. On our platform, we carry the widest assortment of branded medication and generic medication. We can also customize medication for individual pets. We are a compounding pharmacy. We do all of our compounding in-house and compounding is even a more complex space than core pharmacy when it just comes to regulation and the licensing requirements, which obviously then gives us a much more defensible mode because we do it all in-house against our competitors. Also, just another point on compounding, it is more profitable than even core pharmacy. So just to kind of have the sense of how profitability is building across our medication business. When we entered the pharmacy space about 5 years ago, we found that the entire industry was run on paper and faxes that obviously doesn't scale, and it's complex and adds cost. So we then spent time building a fully custom proprietary prescription management platform that improves productivity for both veterinarians and for Chewy. And at this point, we believe we have the most scaled digital RX management platform that is built to operate in a highly regulated space and a complex space, which makes it super hard to replicate. Let's talk about some numbers in pharmacy. So in the last 12 months, proud to report that our pharmacy business has exceeded $1 billion in top line sales. As you can see from the slide, that represents a 68% CAGR relative to a market that's grown the 7% CAGR during the same time frame. Not only is pharmacy high-growth business, but all the investments we've made so far, our customers love it. As evident by our NPS, we have a pretty high NPS of 83 in this space, and we're super proud of that. So now that we're excited about what we've built, it's a pretty big business for us. I think the natural next question is, where are you going with it? We believe while it is over $1 billion now, there is the future opportunity potential is massive in this space as well. And there are two factors that basically give us confidence in that statement. Number one, if you look at external trends, there's a secular shift towards pharmacy from a customer perspective. So the chart in the middle basically shows you, when we entered the space in 2018, only 10% of pharmacy was online. Exiting this year, we expect about 30% of the pharmacy sales to be online. And over the long term, we believe this number can be between 40% and 50% online. And then an internal trend that we're excited about, yes, we've quickly grown to acquire about -- to become over $1 billion and acquired 20% of our own customer base into pharmacy, but we still have 80% more to go. Within the pharmacy space, parasiticides preventative medication is one of our largest categories, and every dog and cat owner needs that. So we had 80% of our customer base that we can then convert into pharmacy, which then does 2 things for us to drive top line and contributes to NSPAC. So we're excited about that. So effectively, the one thing I want you to take away from our B2C kind of product portfolio that I talked about pharmacy compounded meds, veterinary diets, and supplements is that we're growing at premium margins at premium growth, and we benefit the overall company-wide financial profile. Next, I'm going to move our focus to B2C services. These are services that we've built for consumers. When I say B2C services, I primarily mean 3 verticals. Pet insurance, the advent of telehealth within the pet house space and then the role of content within the Pet health space. I think also important to note that 2 of these 3 verticals are not yet included in the $47 billion TAM as we see it today. These are future trends that we believe will be meaningful, but they're not included in today's number. And then the third vertical Pet Insurance remains nascent in the U.S. and continues -- it still has a lot of growth potential. So we'll start individually with all of these one by one. Starting with Pet Insurance. The Pet Insurance space, as the slide suggests, is super nascent in the U.S. It's a $4 billion TAM currently. However, we believe this category has the potential to become meaningful in the future. Why do we believe that? there's 2 trends that give us confidence in that statement. Number one, if you look at my slide on the top right, you'll see a chart that basically tells you the penetration of insurance or pets insured in the U.S., lags that of global markets. Only 3% of pets are insured in the U.S., whereas 17% in the U.K. and similar trends that we see in other kind of European and global markets. So there's a lot of headroom for us to grow in this space. Number two, if you think about the makeup of our audience base, millennials and Gen Zs have become the highest pet-owning population in the country now. They treat pets as family, they treat pets as children. They have high pet health spending and effectively, things like insurance are going to become meaningful in the future. And I said two, but I have a third one. And finally, cost of care has continued to go up in the U.S. based both on the cost of veterinary care and cost of medication and offerings like insurance are ones that actually help you lower the cost of care as a consumer. So like those 3 trends give us confidence in the category overall. That said, it's been a tough nut to crack clearly, like there's been an insurance industry, the penetration continues to remain low. However, we do believe that Chewy can play a big role in the commercialization of the service in the U.S. and we can drive meaningful change. Customers deeply care about trusted choices and they care about brands who can cater these choices. And with that insight, we partnered with 2 high-quality providers, Lemonade and Trupanion to develop curated plans for our customers that are exclusively available only chewy.com. Our plans cover a comprehensive range of services. They cover a wide variety of different price points and in that way, appeal to many different customer bases. So there's -- we feel like we're positioned to win. We have the right assortment. We have the right price points. So what does insurance do for us financially? From a financial perspective, the category has very attractive gross margins. As you can see from the slide, near 100% gross margin. So we obviously like that. From a top line perspective, this continues to be a category that's on a longer growth arc. And the reason for that is quite intuitive if you think about it. Insurance is a costly product, and it requires thoughtful consideration to purchase. Our average plans cost $50 a month which is about $600 a year. And it's a commitment that you're making towards buying something, i.e., like a subscription, and it's not an easy. So it's a thoughtful considered purchase. It's not a very easy decision. So we've only been in this category for the past 15 months, which, again like as I said, we've built this ecosystem over the last 4.5 years, insurance last 15 months, and we've spent that time effectively standing up our e-commerce capability. Getting licenses state by state because our plans are curated, so you can't launch all at the same time. There's an art to how you launch these things. And then finally, standing up a licensed agent team because the category benefits from an assisted sales model. And in doing that, we're starting to see some early results that we're super excited about. So for example, we measure inputs like our quote to conversion ratios, and we're already seeing that our core to conversion ratios in this space are already about 65% of industry benchmarks, which gives us a good early indication of like that we're doing well. And as we continue to invest in this space, there's more upside to be had. Next, I want to talk about telehealth. Telehealth is also a future trend. It's a service that is not included in the $47 billion TAM today. If you think about the vet industry going forward, effectively, you will see that the demand for vet care will continue to far exceed supply if that's available, and concepts like telehealth will actually then have very meaningful use cases, both for customers and for veterinarians. So let me tell you a bit about what we've built in this space. We have built a fully scaled tele-triage platform on the top -- on top of our proprietary tech. We believe we have one of the leading telehealth platforms in the market today. It's called -- our platform is called Connect with a Vet, Connect with a Vet delivers a very high quality clean experience to customers. You can interact with it in one of two ways, either via our live chat, which is free for all customers or you can do a scheduled video consult for a nominal fee. Connect with a Vet is also fully app integrated. So like it's a -- it's in the app, it's always in your phone in your pocket. So it's literally effectively carrying a virtual vet around wherever you go that you can talk to. We get thousands of calls and chats in Connect With a Vet for triage cases. For example, 9 p.m. at night, Fluffy ate Pumpkin pie and chocolate pie, Christmas season. Choco pie, who are you going to call? the vet is closed. So that's not an option. You could go to the ER, probably an expensive proposition. If you know where your gonna see your ER is or you could call Chewy. And we get many, many calls like this from customers and our vet team is able to help you with that. Not only do we help with these kind of use cases. In fact, we qualify about 60% of our traffic back into vet clinics for high-quality, credible leads into the clinics and clinic vets appreciate that. I think the other way we're using Connect with a Vet today is we view this as an ecosystem enhancing asset for us. As Sumit mentioned, customers love Chewy, they call us recommendations all the time. About 30% of the calls that come into our CS centers are for product recommendations. And we're using these insights to develop highly monetizable use cases via Connect with a Vet around personalized consults, personalized nutrition plant for your pets, et cetera, and customers are loving it. So where do we see the future of this product going? And there are two big insights on this slide. One, you will see that millennials and Gen Zs, which I said are now the highest pet-owning cohorts in the country. They are highly propense towards solutions like telehealth. They're used to telemedicine and telehealth in their own lives for human health and then they want the same level of convenience for their pets. And so that's a tailwind that we see in the category. Second, the regulations in this space, VCPR, which we respect today, and we don't cross the bounds of that, those regulations are evolving. And as those regulations evolve, that lowers the barrier to entry for telemedicine. So effectively, on the right side of the slide, you will see today, we're only using the platform for tele-triage. However, in the future, there are other powerful use cases that we can unlock through Connect with a Vet. For example, we could become an after-hour triage option for clinics, where we could basically not only provide the platform but also provide the service. We could develop -- we could -- we could basically commercialize our platform as a telemedicine SaaS solution for clinics as VCPR regulations evolve, that's an option. And then finally, the way we build technology and the way we build all of our kind of platforms, we build them not for single use, we build them for multiuse. So we're careful about that. So in the same manner, the way we've built Connect with a Vet, the platform is extensible to nonhealth care use cases as well, which Allen will talk to you about in his section. And then finally, let's talk about content in this space. The content is the last pillar of our B2C services ecosystem. We operate a content website today called PetMD. So PetMD has the richest vet author and vet reviewed content on the Internet. So effectively, it's like the encyclopedia of pet health. Our content is a multi-format. So we have long-form editorial. We have product roundups, we have videos both live and recorded and we have 5 million users that are on our platform every month consuming this content. If you think about that number, like 5 million users consuming this content is that's a big number. But if you think about, again, the makeup of our audience base, millennials and Gen Zs, that is what this customer wants. They want content. I mean there's a reason why formats like TikTok have taken off. The reason why influencer marketing is doing so well, because the customer of today, they consume this content. Not only do they consume content at a rapid rate, but for a lot of them, content drives commerce. So like these are the insights that we're now taking and kind of evolving our core platform, Chewy, to integrate with PetMD, so we believe the connection of content and commerce is going to be meaningful going forward. And we're starting to now integrate a lot of our PetMD content or B2B content onto the surfaces of our core 3 platform just to have that integration. The other things we're doing is within the PetMD MD space, we have product deep linking and on-ramps onto Chewy as well. So we're going to benefit from the traffic that the site is getting and then kind of connect the content and commerce fly view. I think a final point on this slide, we believe we have the #1 leading pet health website, PetMD in the country. Customers spend a lot of time on this website. So the stat that we have is about 3 to 4x more time, customers are spending, consuming the content on our platforms than they are any other light platforms. We're excited about that. It drives with a sticky customer base, which we can then obviously convert into commerce as we build these on-ramps going forward. All right. Well, in the last two sections, I've walked you through a lot. We've covered all of our B2C products and services. I'm now going to shift our focus into our B2B products and services that we're building and that basically complete our entire ecosystem. All right. So this slide just shows you on the left similar to what Sumit had on his all of the B2C products and services we've currently walked through. So a quick recap. We talked about pharmacy and compounded medications. We have the Vet diet and supplement categories. We talked about insurance, talked about Connect With a Vet and telehealth. And then we talked about content and PetMD. The two B2B or vet-facing services I want to talk to you about that we've built our Practice Hub, which is our veterinary e-commerce platform and Rhapsody, which is our Practice Information Management System or PIMS or simply set an operating system for clinics. So let's start with practice out. We stand for customers. We stand for partners. This is our mission statement, and we developed Practice Hub to effectively democratize e-commerce veterinarians. So how are we doing that? The simplest way to understand Practice Hub is a service that seems -- that fully integrates into chewy.com. It then seamlessly connects all of our B2C products and services that we've built to veterinarians. The Veterinarians can have access to all of our B2C products and services via Practice Hub, which -- and Practice Hub it's in the chewy.com platform, and I'll show you that in a second. Through Practice Hub, veterinarians can access all of our pharmacy catalog, compounding catalog, veterinary diet catalog without having to hold any inventory, without having to worry about any logistics or customer service because we handle all of them, and they make revenue alongside. Not only do veterinarians make revenue on the first sale, but if a customer puts their product on Autoship, which we have pretty high Autoship rates, they make revenue in every subsequent sale. Also Practice Hub is integrated into their current PIMS. So to utilize the platform, you do not have to change your existing PIMs, implying you can be -- you can use your current workflow in clinic and then practice up with seamlessly integrated into your current workflows and allow you access to everything that Chewy has built. That's kind of how the platform works. There's 2 ways to interact with the platform. So if you look at the middle or the first screen that I have veterinary-facing screen, vets can access this from their own clinic. And utilize it just to improve prescriptions back and forth, so like digital prescriptions sort of management solution or they can or an end like they have the option. They can select to list their clinic on chewy.com. So if you look at the right screen, you will see that the Happy Animal Clinic buy box is right above the Chewy buy box. So like effectively, if you list your clinic with us, we're going to put to you on our product detail pages across all of Chewy surfaces. And in many cases, we will default our buy box with a veterinarian. So really showing that we are partners in care with them and really bringing them to the forefront of the e-commerce equation. And by the way, when a customer transacts in this manner with a veterinarian on our product detail pages, the veterinarian earns revenue on the first purchase and any repeat purchase through Autoship. I think another important stat, which you might be surprised to hear about and which is typically is rising to people, our take rate on this platform is pretty massive. We have 14,000 clinics already using this platform, which is about 45% of the total number of clinics in the U.S. And that's currently. The platform continues to grow, and we expect this number to be higher as we go forward. So before I move off of Practice Hub, just to recap it quickly because the next product is a little bit different, but also in the B2B space. So if you are a clinic, that effectively wants to utilize and harness the power of everything Chewy has to offer and earn revenue along the way and do not want to change your PIM, you use Practice Hub. That is what the platform does for you. I'm going to pivot to Rhapsody. Our next platform is called Rhapsody. Rhapsody is Chewy's PIMS, our practice information management system. If you are a Vet in the clinic, it is inside of a PIMS to manage all of your workloads. So inside of a PIM is where you will store your customer data, all of your medical records, diagnostic information, prescription information. So effectively, it's an operating system for a clinic and a clinic cannot really run without a PIMS. The challenge with the PIMS available in the market today are that a lot of them, actually majority of them are designed for highly legacy setup, meaning they're designed to effectively do the workflow within the 4 walls of a clinic. They do not seamlessly connect to anything outside of the 4 walls, example. They don't really seamlessly connect to home delivery, telehealth, content in a way that the customer today wants to experience it and in a way that the veterinarians then want all of that data flowing back into them into their PIM systems. And that is where Rhapsody comes in. The Rhapsody is our version of a PIM. It's a modern -- it's a cloud-based software with modern UI and easy workflows. We are in the process of integrating all of our B2C services that I talked about into Rhapsody, which will effectively make Rhapsody -- which will make Rhapsody the only PIMS that can seamlessly connect care, both in clinic and virtual to commerce via chewy.com. To content, we have PetMD in a very convenient way for customers and veterinarians. We believe as these integrations are completed, Rhapsody will be a highly differentiated and completely proprietary and turnkey solution for clinics that is completely proprietary Chewy and very hard to replicate. So now that we've got Rhapsody, what are the paths forward for this platform and how do we plan to monetize it? So we see 2 paths forward here. We can use it to support third party clinics. And as I mentioned before, we've deliberately built our ecosystem to be open for all to utilize and we could SaaS to third-party clinics. We're excited about that model because we can -- the veterinarians and future works who don't want to build their own proprietary full stack platforms can obviously utilize Rhapsody, which allows them access to all of our kind of ecosystem and we are happy to support and we'll continue on that path. And then in parallel, we also want to eat our own dog food. So effectively, meaning we would like Rhapsody to power our own clinics as well. I'm just trying to see like if anybody, did everybody get that? Okay. Yes. Okay, good. I did say our own clinics, and we're super excited about it. We want Rhapsody to power our Chewy Clinics, and I will tell you in the next few slides why we think this makes sense and what do we want to do with this. Why do you want open Chewy Clinics? It feels very natural to us that to basically think that we've built so far and bundle it and use it within our own ecosystem. Not only do we think it amplifies the value of our current ecosystem, but we think that it will compound returns in terms of margin accretion and customer loyalty over time. We also believe that investing in this ecosystem or having our own clinics, it will unlock complementarities that we wouldn't normally see or which might take a longer path if we just went down a 3P SaaS model. What do I mean by that? So for example, having our own proprietary stack within our custom design footprint will allow us to effectively harness the full potential of our wellness plans, acquire customers, put them on Autoship, deepen relationships with our existing customers, unlock the $11.5 billion in click product sales TAM that we don't participate in today and make us even more strategic to our already existing supply relationships. Also, if you think about the comment I made earlier around how the Vet industry is shaping, where veterinary demand will continue to exceed supply in the future, having invested in an end-to-end platform will not only serve it, it will serve both as an offensive and defensive mode to the model. That said, we understand it's a big decision and obviously not one that we're taking lightly. So instead of announcing a full launch, we want to be thoughtful about how we approach the space. We want to test a few clinics as proof of concept next year. We want to give ourselves enough time to credibly test and learn and then effectively earn trust of our customers, our partners, veterinarians and our shareholders, you, and then prepare to ramp from there. So what are we building? We are building a proof-of-concept clinics. We want to build about a handful next year, so between 4% and 8% next year. We're going to build these from grounds up. They will be thoughtfully designed, we're keeping pets, vets and pet parents in mind. We're going to launch these under the brand name Chewy Vet Care. We expect our clinics to have full service offerings. So we're going to have comprehensive offerings all the way from wellness exams to acute care surgeries, diagnostics, et cetera. So it's a full-service clinic. And we plan to put these in areas where we already have high customer density and areas of high pet ownership. In doing that, we expect to have high demand generation right out the gate because we have the benefit of having knowing where our customers live and we have all the proprietary data. However, we want to give ourselves enough time to see how demand is ramping. Our profitability is ramping for these clinics before we come back and say that we're prepared to scale. We also want to be thoughtful about how we're doing this, right? So we just weren't like, okay, we should just launch these. We did go talk to customers. We did go talk to veterinarians to get their feedback and to also understand if our brand resonates in this space and we were very encouraged by what we heard. Our customers view this as a -- customer view Chewy Vet Care or our entry into clinics as a natural extension to what Chewy should do and a natural evolution of what they expect from us. Over 50% of customers said they will try and they would be very happy trying our platform, and they want to engage with our services when basically we've told them about the experience and we weren't walking them through all of the details, just a high-level concept of like, hey, if Chewy to enter the vet space, where will you be interested would you come? Over 50% of them said that they would try to service and they're excited about it. And the veterinarians were similarly excited, right? So the vets are they're excited to be associated with a brand that's super innovative. They're excited to be associated with the brand that cares about them and their well-being. They're excited to be associated with the brand that effectively can give them technology solutions that can make care more efficient and then have them basically focus on stuff they like doing, we're just spending more time with pets and take away the mundane of all of the operational work and operational burden. So we're excited about that. So in summary, I've taken you through a lot. We've built a large ecosystem. But I think the one thing I wanted to take away is that Chewy Health delivers premium growth at premium margins. With our clinic announcement, we're now going to be able to unlock the entire $47 billion pet health TAM and also unlock complementarities along the way. Thank you for listening. Hope this was helpful, and I'm now going to hand it over to Allen Hughes, President of Chewy Retail. Thanks, Allen.

Thank you, Mita. And congratulations to you and the Chewy Health team, really impresses what you've built. Also, you got a round of applause and the CEO did not. So you should take that as a positive. Hello, everyone. My name is Allen Hughes, and I'm the President of Chewy Retail. In this capacity, I look after all the categories, not overseen by Mita and our health team, including consumables, like food, litter and treats in hard goods, items like leashes, collars, bowls, beds and toys. I'm also responsible for our purchase funnel and provide leadership for our Autoship program. I've been at Chewy a little over 2 years, and I deeply connect with our mission to be the most trusted and convenient destination for pet parents and partners everywhere. The mission is special to me because I'm a lifelong pet and animal owner and I've seen the transformative power of pet in my life and those are friends and family and loved ones. I'm currently the proud pet parent of 1 dog, 4 cats and I'm going to run out of fingers and toes, but 19 chickens. So I am doing my part to keep Chewy growing. Now over the next 15 minutes, we'll go through a few insights. We'll go through a few agenda items. First, one pack the long-standing tailwind that fuels pet category growth. Then we'll talk about how we're positioned for ongoing share gains, and we'll conclude with growth and margin initiatives. So the pet category is fueled by a long-standing tailwind Mita and Sumit have mentioned it earlier today, I'll call it humanization. Humanization is a phenomenon where pet parents treat pets as members of their own family. Something 96% of pet parents would agree with. And nearly 3/4 of pet parents that are willing to spend more on products to provide health and wellness benefits for their pets. It's pretty simple. That pet lives on your bed, you want to see them happy, healthy and living a long life. This drives some important trends for the industry. Premiumization. Premiumization as pet parents then spending more to find the health and wellness benefits for their pets. In practice, that means they might buy a supplement for a joint condition or a dental treat for oral health or perhaps they need a prescription food at some point. Those are all examples of premiumization, and they work in a synergistic way between participants in the category and customers. What do I mean by that? So the humanization trend long-standing, the industry participants, the manufacturers, the folks who make the product to realize this. And so they started making healthier food, healthier treats, more supplements, things that help pets live better and healthier lives. It works for them. It helps their business on the top and bottom line. And then pet parents are seeing the benefit. They're buying these products and living longer, healthier, happier lives. So it's a synergistic effect. It's produced a multi-decade trend of premiumization that we see continuing into the future. If you couple that humanization trend with the premiumization and what Mita spoke about earlier, the more recent pet parents really having a focus on pet health. And you can see where there's a clear need for a pet expert destination that spans both retail and health. That's Chewy. And we believe that positions us well for ongoing share gains. So how do we do that? So let's start with selection. So we have the best selection in pet. 110,000 SKUs and 3500 brands. This selection allows us to meet pet parents based on their desire for their pets' needs and their budget. So where -- if you think about being a pet parent, it's a journey. You have maybe a large breed dog for 10 years, a cat for 15, 20 years, your needs are going to change over time. And so our selection allows us to support that pet parent throughout their journey. Whether it's a mainstream food today based on a value budget, or as a health condition emerges perhaps an itchy skin and coat, a solution-based diet in the future. We offer that selection, and we offer the best selection or the most complete selection in pharmacy that Mita mentioned earlier. So that's really powerful. In addition, we couple that selection with our high-touch service offerings, the telehealth, the tele-triage, they Connect With a Vet and shortly, Chewy Clinics. So we offer that expert advice and we have that empathetic customer care that's available 24/7, 10 seconds or less, they pick up the phone. Our 1980s call center technology works really well in this category. People really want to engage and we're there for them. We underpin that with competitive prices. So we are competitive day in, day out on price across our full portfolio. We then have our Autoship program. We've talked about that a couple of times up to this point, and we'll go through it in more detail, but Autoship drives incredible convenience. It's a purpose-built no fee subscription that is the best in pet, and we're really proud of what we've built. But if you think about that pet ownership where your pet lives 10, 15, 20 years, you're buying food 100 times, 150 times having that product delivered to your door, those big bulky bags that show up on your doors need it, is inherently convenient and we are best-in-class at doing this. And then finally, our purchase and post-purchase experience, whether you visit our website, open our app or give us a call. We're there to help you find the food and products and treat that you're looking for. We'll deliver them quickly, conveniently, right to your door. And if you have any questions, we're always there to happy to support our pet parents. So let's talk about that journey. How does this play out? So you bring home a new pet. Maybe it's fluffy that Mita mentioned earlier. What diet should die them, what treats, what supplements do I need? A pet consult is a great way to get started. We'll give you that information. We get those items set up on Autoship. Now they're coming to your home on a predictable schedule, you've got just what you need. A year goes by and we send you a wow moment a birthday card. We celebrate your pet. [indiscernible] pet lover shop. We are pet lover ourselves and we love to celebrate pets. Your pet's life continues, perhaps, an issue emerges you need a medication. Whether you visit your local vet or go to one of our Chewy Clinics. We're there to take that prescription order, fulfill it consistently, help drive compliance and that health outcome that you're looking for as a pet parent. Finally, as your pet enters its final stages, we have the adult diets, the solution diets, the prescription diets, whatever you need to help your pet live their best life, we're there for you. And when your pet passes, we grieve with you, we have sympathy, we send you flowers to recognize that moment. So these are great components of being successful in pet retail. But what we're really proud of is Autoship. Autoship sets us apart, fuels our business and will fuel our growth looking forward. So how does the program work? So customers -- so we built this program specific for pet. Here's a few critical dynamics to keep in mind in the pet category. Pet parents are going to feed their pets or use litter consistently over a long period of time. 100-plus purchases, if you think about it once a month purchase in a 10-year-plus life of a pet. So how does that work? Well, pet parents find the food or litter that they like for their pet and then they habituate. They buy the same product and use the same amount, pets consume linearly and there's little brand switching. So that product gets delivered to their door just when they need it, superconvenient, takes the thinking out of it, and then they know they're going to get a great price. So we add on top of that an ongoing discount for customers to stay in the program and that initial discounts, Sumit mentioned to get into the program. So now you're getting the product that you want, the time you want with the discount and then we add an incredible easy way to manage the program. One touch of a button, you can skip, pause or add to any order. You can imagine then that the combination of this program that's purpose-built for pet and with the additional discount and the ease of use of the program drives high brand loyalty to Chewy, high stickiness and is enduring. We continue to attract customers into the program and build our customer base that way and retain customers in the program. Those cohorts shown earlier. Those are all Autoship cohorts. They're spending $1,000-plus a year because they're in this program, they're getting the products that they need. So it's a sticky loyal customer base. But don't take my word for it. Let's look at the actual financial outputs that come from it. So in the trailing 12 months, Autoship customer sales were $8.3 billion across Chewy Retail and Chewy Health. In the most recent quarter, that represented 76.4% of net sales up over 1,000 basis points from 2018 and growing at a premium. So a 31% 5-year compound annual growth rate for Autoship customer sales. We keep deepening our penetration of Autoship customer sales as a function of total Chewy sales. But Autoship customers are not dormant customers. They're not set and forget. So 80% of their spend comes through there's replenishable items that are coming to their door each and every week or each and every period. But 20% of their sales are add-ons. So perhaps it's a new bed for fluffy and the chocolate cake incident. If you can rest and get better after his care or it's an add-on toy or treat in the holiday season. So the customers continue to engage with Chewy, continue to be active and grow that net sales per active customer. So let's take stock of where we are. Let's take stock of where we are. So a powerful underlying tailwind in the category, humanization, that drives premiumization and a focus on pet health. We are well situated to serve both and drive ongoing share growth as a result. You take on top of that our Autoship program, which is purpose-built for pet, it's perfect for the category and means into enduring trends. And you can see why we're optimistic about continued share gaining growth. Now let's talk about our growth and margin initiatives. We'll focus on 3 for today. First, sponsored brands or sponsored ads, private brands and then pet services. So sponsored ads. I'm incredibly proud of what the team has built. In short order, we've launched a suite of sponsored ad programs on site that allow us to talk to customers throughout the conversion funnel, awareness, consideration conversion. This helps our vendors build their layer cake that Sumit mentioned earlier and allows us to drive returns for the business. So we're already live with some on-site products. So if a customer goes to the site and searches, where they browse through the site, they will encounter sponsored ads. In the first half of 2024, we'll expand our offering off-site. So our vendor partners will be able to talk to our Chewy customers through search and on social completing our advertising suite and really give us an opportunity to drive our business further. So super excited about that. It's been well received by leading brands in this space, and we really like the customer experience that we're driving to. So we see this scaling to 1% to 3% of net sales, with strong flow-through to the bottom line. Okay. Private brands. Private brands is an important component of the pet category. So it provides selection. It provides pricing opportunities for customers, and we've had success with a number of brands in the space. So American Journey, a dog and treat focused brand, $125 million in sales in the trailing 12 months; Vibeful, a supplement brand in the Chewy Health space. One of our highest-rated products on site with great repeat purchase rates, great loyalty. So we know how to build brands. And our opportunity is to build more brands. So we look forward to launching more private brands leaning into them with our powerful marketing engine and even looking for additional distribution opportunities to continue to scale in the space. In practice that will take us from mid-single-digit penetration for our private brands as a percent of net sales to 15% over the long -- to 15% or more over the long term with strong profit flow-through in the interim. Finally, pet services. So pet services, as mentioned earlier, it's a $10 billion addressable market segment with a lot of customer activities, it is a chance for Chewy to interact with more customers and more places. We have the technology and the capabilities that Mita mentioned earlier to launch a first-party pet services marketplace. Today, we use that technology and those capabilities for tele-triage, telehealth, Connect With a Vet. But we see the opportunity to apply the capability to additional use cases and reach more customers. And we look forward to talking with you about that in the future. So let's pull our growth and margin opportunities together and see what we have. First, sponsored ads, available today, ramping 1% to 3% net sales penetration in the near term with strong flow-through to the bottom line. Private brands, mid-single-digit penetration today, growing to 15% or more over time with profit accretion along the way. Pet services, $10 billion TAM, great customer touch point for Chewy and built on the back of existing technology and capabilities that we have. Underpinning that is this premiumization trend we mentioned that provides ongoing sales expansion, net sales per active customer growth and profit accretion. Okay. Chewy Retail. Excited to wrap -- to kind of finalize this for you. So it's an attractive category. Pet is an attractive category with these long-standing tailwinds. So the humanization and the premiumization and the health focus that comes from that. They're great trends. Customers love to take care of their pets. They love to have better solutions to help those pets live healthier, longer lives. We're grateful we have the opportunity to fill that on behalf of them. So a powerful trend there. We have our differentiated value proposition between retail and health. It allows us to connect with pet parents throughout the life of their pet. So whether they need a mainstream product today that might be offered in a wide variety of locations for specialized diet in the future, we're there for them enable to take care of them and provide the product and the service and the advice along the way. You couple that with our Autoship program, a purpose-built subscription program that is perfect for pet and you have a very powerful combination. We then add in our growth and margin initiatives and we're excited about what the opportunity can provide going forward. So in sum, Chewy Retail is a well-scaled business. It's well positioned for ongoing share gains, strong free cash flow and margin expansion opportunities in front of us. And with that, I will conclude my remarks. I look forward to chatting with you later during the Q&A and turn it over to Sumit to chat about International. Thank you.

Okay. International. Today is about building intuition and about providing you a bit of a construct on how we're thinking about international, less about numbers. We recognize it's a big opportunity. At the same time, we recognize how important focus and the power of prioritization is. So as you can tell, we've built a lot over the last several years. And the curve -- if you'd asked me like separately, like, hey, are you on the curve where you want it to be on international? Were it not for COVID, we'd probably have been here 12 months sooner. So that's sort of the lag in the way that we would have prioritized this in our mind. But the way that we're thinking about international is, I think Canada lends a good perspective. It's being the -- in the proximity of the United States and an easier market for us to test, but we entered Canada just quickly, let me wrap up the Canadian facts. A $10 billion market, roughly 10 million pets, less than 20% e-com penetration that provides us with an unclear leader with players that don't have kind of relative large leads to each other per se. Consumer is more or less the same. And when we tested our proposition in the market, it resonated loudly. So we said, okay, good initial market for us to go into, let's stand up a value proposition, right, which is around a delivery architecture as well as world-class customer service that we're putting on the back of assortment and our go-to-market strategy. And so that's essentially been our approach into Canada, right? We've been CapEx efficient because we've partnered with a high-quality 3PL network or a provider. And we essentially have what we would call a Chewy Blue team closely partnering to be able to control or govern the experience as closely as we possibly can because obviously, that's important to us. And so far, results are really encouraging. I provided a little bit of these stats at the earnings call a few weeks ago. But we like the way we're ramping. We haven't yet started sort of marketing on a full-scale basis. We are optimizing the website for conversion. At this particular point, considerations is building by word of mouth. Our WOW mechanisms are active. So we are sending portraits. We're sending cards. We are acknowledging customers with handwritten notes as they're signing up to the platform. We like the sign-up rate in a manner of speaking, which is happening organically. Our SEO capability is still building, et cetera, et cetera. Why am I providing all of this? Because Canada is a blueprint for us. And so our methodology or way of thinking about it is how do we essentially understand and learn closer to home, build the tech, understand the customer experience to be able to enter market with a financial profile in mind and a customer profile and a customer need-based state in mind that allows us to win in markets. That's how we will think about international, deliberate, focused, thoughtful, specific, not large mass blasts across continents that we will try to sort of put our arms around at the same time. So what are our winning tenets? We want to make sure that we can win on experience, number one. We want to make sure that we are highly -- we are working backwards from customers and have understood needs, need states that exist in a certain market. Canadians, for example, and European smaller real estate footprints, smaller pets, more cats and a different way of approaching pets, slightly different way of approaching pet than in the United States. And so we have to be aware of these need states. Payment mechanisms are different in these countries than the United States. We have to innovate for that. You don't essentially want to end up in market and understand what technology do you need to build for it. So at Chewy, we've essentially segregated a team just like we did for Health, which is a self-funded team that is building tech that is squarely centered for international markets and a relationship that we're developing with freight and supply chain companies, which we will likely pair up with our own capabilities to be able to provide a solution that instantly is gratifying in a way of speaking, per se. We will enter markets where we believe we can win on customer experience. We will enter markets where we believe we can gain share but not dilutive share, right? We want it to be profitable share growth within a reasonable period of time. Reasonable period is not 10 years to us? It's shorter than that. And then last but not least, we will enter markets where we can essentially either -- we can use as a test and learning grounds. So Canada, for example, we are testing or have plans of testing a bunch of stuff that you likely cannot test with a scale base that you have, such as the United States, but you can perfect an offering given that our technology is super scalable, and we essentially can modulate and [ port ] it over very, very quickly. So you should think about that in the way that we're approaching international? It's likely 1 to 2 markets over the next few years, again, very thoughtful way, deliberate and very CapEx efficient. So with that, I will leave you -- I can't read that. It's 9:45, Okay. I will -- hopefully, you enjoyed the conference so far. We're looking forward for the back half of the presentation. We'll take a 15-minute break and start sharply at 10 a.m. [Break]

Hi, everybody. We'd ask you take a seat if you haven't already. Just as we're getting organized. As a reminder, feel free to use your QR codes to submit questions with the QR portal at any point in time. Great. We hope you found our health, retail and international discussions insightful. I am thrilled to be introducing our Chief Operations Officer, Scott Anderson to the stage. Thanks.

All right. I get to welcome everyone back from break. And Sumit already set me up so I have to be very energetic about robotics, which is fairly easy with this team. So my name is Scott Anderson. I'm the Chief Operations Officer for Chewy. So I've been at Chewy about 1.5 years now. I started my career actually with tanks in the U.S. Army, which was a lot of fun and then moved on to 10 years at Amazon leading their North American fulfillment and transportation businesses. And now I get arguably the best job if you ask my 13-year-old shepherd, deploying robots to more efficiently deliver our Autoship order every month, which comes in a nice blue box. And I'm sure most of the pet parents in this room will agree that probably is the most important thing. So I've talked about tanks, robots and dogs, if anyone is interested in a career in operations after this, I'm taking applications. It sounds fun. There we go. We got smiles after breaks. That's all I wanted. All right. So I have a very exciting presentation. We're going to talk about supply chain, operations. And more importantly, kind of the benefits and operational efficiency, this Chewy team has really brought together that's created us as a key differentiator. So operations has provided a competitive advantage for Chewy. And those scaled efficiencies we've already seen come through in our margins. So let's start this off. When I think about Chewy operations, I really define it as 3 pillars. The first is topology. And what does this really mean? This is how well we are positioned across the country to receive, store and fulfill all of that customer demand with our wide assortment of pet specific products, while providing the best possible customer experience. We now operate a retail and pharmacy network consisting of 18 fulfillment centers. And as Sumit said, this is one of the largest in the U.S. This is a sophisticated, geographically dispersed using cutting-edge data science and technology to optimize and continually drive efficiency for our network. Second, as we've talked about multiple times today, Autoship remains a key differentiator because that customer demand is predictable, not materially impacted by seasonality, and this high consistency of demand allows us to offer a lower cost structure and most importantly, a better customer experience for our customers. These meaningful efficiencies we've already seen already in our automation. And as you've heard multiple times, we've really leveraged our investment in this space. So what does this really mean? These are both physical and process improvements, leveraging robotics, AI, to drive these efficiencies across our entire value stream. In summary, ops at Chewy has become a strategic asset. We have purpose-built this network for our pet specific assortment and the needs of our pet parents. In recent years, we've leveraged -- or we've invested heavily into our FC network. And now we feel really good about the scale we've delivered. So I'm excited to walk you through that further. Okay. So back to topology. Since our IPO, we've effectively doubled our network going from 9 to 18 fulfillment centers in just 4 years. We're proud of the launch speed, efficiency and quality. We've been able to ramp up these operations effectively to scale. We've created now 5 fully automated FCs, which are based on a very compelling investment thesis focused on team member safety, what can we add to FC capacity and productivity. As an example of this, -- when I compare our new automated FCs to our -- to our first generation facilities, they're 30% greater efficiency as a proportion of net sales to their square feet. These are also investments in fungible and retrofittable automation into our first gen facilities. What this really means is we can add capacity into our existing footprint without effectively having to launch more FCs. Moving on to our pharmacy network. What we've built here is really impressive. So we have 5 pharmacy FCs today that really provides a competitive differentiation because they distribute both regular and compounded medications. As Mita highlighted, pharmacy is a highly regulated industry with significant barriers to entry, permits that are often measured in years to obtain. What we've created here is a network that can service all 50 states nationwide. It's purpose-built to provide those regular and compounded medications, and it's very difficult to replicate. So I love this slide. Because what it really shows visually is the coverage and scale we've built. So with the network we have today, we are able to service up to 80% of our customers with 1-day delivery and the entire U.S. within 2 days. This is really incredible because when you think about pet food, you think about big, bulky, heavy items, which are primarily transported by ground, which makes this all the more impressive. The key to Chewy is delivering that unmatched assortment with reliable, fast shipping. Our continued investments in automation, we'll focus on building that capacity. Again, with limiting the FC expansion we've seen. And more importantly, what this will result in is a reduced capital intensity in our core network. So effectively, we'll be able to spend on additional automation as opposed to additional FC footprint and see that return on investment. So what we've said, supply chain and operations really is a key driver to our margin and efficiency. But the key to this is pretty simple. It's having the right items at the right place at the right time. And while that sounds simple, it's actually incredibly complex and difficult. So we use cutting-edge data science, machine learning to forecast and optimize our working capital to improve our inventory placement, our transportation prioritization, I'll highlight one area in transportation I'm really excited about. We own a large portion of our own middle mile for both inbound and outbound, and we've created both an import routing facility on the East and West Coast. What this really does is it allows us to control both the cost and the speed of our transportation network and allow us to absorb changes in the macroeconomic conditions. So what this really means long term is this has been a multiyear initiative that the ops team has pulled together, focusing on pillars around reducing delivery distance from our operation to the customer, the number of boxes we have per order, improving our delivery speed and the transportation density, which overall reduces cost. So what does this mean tangibly and how fast are we doing it? Well, on the right-hand side, you have 2 slides -- or 2 metrics I'm really excited about. The first is our average delivery distance just year-over-year has reduced 28%. That's the distance from our FC to a customer. More importantly, our delivery speed for those same customers have improved 7% in just a single year. And we have more room to go. So what makes me most excited about these is these are sustained infrastructure investments that will continue to leverage as the business continues to scale. So going back to Autoship. Autoship, as we said, has a very important key advantage for our customers. But most importantly, it starts with just providing that world-class e-commerce experience. It's very difficult for our competitors to replicate. It starts with a high visibility of what pet parents want, when they're going to get it and providing accurate, reliable delivery experience with a seamless notification process through the way. We fundamentally believe that providing that accurate and reliable value proposition -- or excuse me, that accurate and reliable delivery experience is the core value proposition that we can provide as Chewy. More importantly, for everyone in this room, this is a key differentiated experience for us because it provides clear cost efficiencies. The first is Autoship not only allows us to provide a 10% faster delivery to our customer because we can predict when they're going to order it, how they're going to order it, where they're going to order it to. Second, it creates substantial cost savings because we're able to predict this demand and apply it directly to our highest cost in the fulfillment centers, which is our labor. So we're able to very accurately predict the needs of our labor network and then that -- or that corresponds to a reduction in freight distance. So we see almost a 20% reduction in delivery distance for our Autoship packages and a 100 basis point reduction in freight expense for the same Autoship packages. So what we see from here is as we continue to invest in our Autoship network, we continue to grow this platform. We will see significant operational efficiencies continue to pass through the business. All right. Now for the fun part, robots. I didn't get the real excitement, I got, yes, we go. I got at least one. Any time I get to talk about robots, it's exciting. So what I said earlier, we're not just building automated fulfillment centers. We're building fungible automation that can go in both our first generation and our second-generation fulfillment centers. These are proprietary robotics that leverage artificial intelligence, computer vision to improve the safety of our team members, the cost and the speed in which we're able to deliver. On the upper right-hand side, we have an example of this. This is called [ Autopack ] So what this robot does is effectively build a box completely around the robot based off computer vision. What this does is it reduces delivery cost by reducing the amount of packaging we need, the size of the item, it reduces damage to the customers. And most importantly, it reduces the risk of safety to our team members. So there's a deliberate diversity of automation that we have in our first generation versus our second-generation fulfillment centers. So as an example, in our first-generation fulfillment centers, they're very efficient at processing big, heavy single item or single item orders, which you'd expect from a pet food industry. What we do here is in the bottom right-hand side, you see our robot, we've codenamed Fetch. Yes, we were very woody with names. The first is this robot, it automates and completely eliminates one of the hardest jobs in our fulfillment center, lifting these heavy bags of dog food and picking them, packing them and shipping them to our customer. Not only does it eliminate that job and that safety risk for our team member, it provides almost -- or a 2x improvement in productivity. So again, really excited about the application of these robots. And it comes down to the underlying software and technology that these platforms run on is all built in-house. It's all proprietary. We are a tech-led organization that allows us to rapidly scale and innovate at pace with the rest of the industry. Now don't get too excited, but we have a video for you. Multiple robots, and I'm really excited to show this come to life. And so we'll talk about it after. Let's kick off the video. [Presentation]

I should have started with video right? okay. Again, I got a lot. So again, these are not just automated fulfillment centers. They're fungible automation that we have multiple processes to kind of go through and add on to our existing footprint. So again, I'm really excited about this process. As you've seen from the video and you've seen from my presentation, we have so much opportunity to continue to invest in this space and continue to reinvigorate this flywheel. Our road map for adding this automation is extremely ambitious. Just a year ago today, we were running somewhere between 20% to 30% of our processes, leveraging automated solutions. And today, we're up to 40%. We see a future road map of achieving 70% to 80% of our processes, leveraging these automated solutions. And keep in mind, the automated fulfillment centers that we've launched are still ramping with our newest set of automation deploying to our first-generation FCs early next year. So given the scale we've achieved, what you'll see is a gradual tapering away from our core FC in terms of capital investments and pivoting into automation investments. So overall, reduced capital intensity within our core network. As we've said, these investments have already delivered significant margin improvements for Chewy, and I'm excited for the pace of innovation that Chewy operations continues to bring. What we see on the horizon is another 150 basis points of margin improvement that we'll continue to be able to deliver. I fundamentally believe we have the right team, the right process, the right infrastructure to deliver these efficiencies. I'm very excited about the speed and quality and momentum of the operations team. We continue to provide a world-class customer experience and sustained operational efficiency for Chewy. Now with that, I'll pass it over to Stacy and Jen to walk through our financial road map. Thank you.

All right. Good morning, everyone. My name is Stacy Bowman, and I'm Chewy's Chief Accounting Officer and have also been serving as interim CFO since July. So in that capacity, I've had the pleasure of speaking with many of you already. And I'm very pleased to be with you here today to take you through our financial framework along with Jen. I've been with the company since 2015. So seen a lot. I'm very proud of everything we've achieved and along the way, I've also become a pet parent somehow rescued the cat, even though I'm allergic to cats, but that's a story for another day. So let's get started. I thought it would be helpful to start with a brief look back. Just looking at our track record, Sumit mentioned this at the beginning of his presentation, but it really is compelling. When you look back to just 4.5 years ago at the time of our IPO to where we are today. So how far have we come? Number one, strong top line growth, we've tripled our net sales since the IPO. Number two, our Autoship customer sales penetration and our NSPAC growth, our share of wallet, have both expanded significantly. And why is this important? We've talked about it a lot through the presentation. But not only does it give us a high degree of predictable revenue forecast accuracy from a financial perspective, but also from an operational perspective. As Scott mentioned, we know exactly what items we need, where and when, and that drives great efficiencies within our business. We've delivered excellent margin expansion. I'll get into that in a little more detail. And importantly, our free cash flow has gone from negative at the time of IPO to positive and accumulating such that we have reached an inflection point where we will be generating significant free cash flow per share on a go-forward basis as we reduce that CapEx intensity that Scott mentioned, and we'll go into in a little more detail. So a very strong track record. This management team has delivered results and very excited as we look forward. Just a few more details here. If you take a look at the details of this growth, I mentioned net sales tripled, so $3.5 billion at the time of the IPO and $11 billion in the trailing 12 months. You'll see on the right-hand side of the slide, our compounded annual growth rates. Autoship customer sales going from approximately 2/3 of our revenue several years ago to now the majority of our business, 75% plus and $8.3 billion in sales over the last 12 months. And finally, net sales per active customer, that share of wallet has grown much faster over time. It's up 60% since the IPO and has grown faster than our customer -- our active customer growth. So we continue to engage with our loyal and engaged customers. Let's take a look at the targets we set at the time of the IPO. So gross margin -- our expansion there, 800 basis points from 20% in fiscal '18 to the top end of our projected range sitting at over 28% today. So we've made steady progress against that target. Advertising and marketing as a percentage of net sales, we remain within our stated range of 6% to 7%, and we continue to be very careful as we invest in those customers that we see will have a high LTV. SG&A is an area where we are sitting above our long-term target. We will get into some more details on this, but one of the main drivers of that has been unprecedented wage inflation that we've seen beginning in Q1 of 2020, not unique to Chewy, seen throughout the industry, in many industries. But we definitely see room for improvement here an area for continued leverage. Finally, moving on to our adjusted EBITDA margin going from negative 6.5% at the time of the IPO and expanding 1,000 basis points to over 3% today. So let's double-click into that one. Here, you see the drivers of the adjusted EBITDA margin expansion. The big one, as I mentioned, gross margin, 800 basis points of improvement. Well, how did we do that? Firstly, we have been shifting into our high-margin vertical. So as Mita mentioned earlier, Chewy Health Pharmacy is growing at a premium to the overall business and has premium margins. Freight and packaging efficiencies as Scott just took you through in his presentation, and, to some extent, pricing leverage. Autoship underpins all of this and enables us to gain more efficiencies across our customer base. Moving on to SG&A. As I mentioned, we saw wage inflation beginning in 2020, significant increases in hourly rates for our fulfillment center workers and across the board. We also made investments. So in some of our growth investment areas, we invest in personnel and technology ahead of seeing those investments scale and produce returns. So those headwinds were offset by, again, these automations that we have put in place and other FC efficiencies as well as we do remain disciplined in our G&A management and control what we can. So net-net, we saw deleverage there of about 300 basis points, but then some leverage in advertising and marketing, all adding up to our 1,000 basis points expansion. On the marketing side, we have used technology, Sumit briefly mentioned CRM. So we have expanded that program. We've been using technology. We're becoming more precise in our campaigns, targeting the customers that we want to target that have high ROI and we also have increased brand awareness. So that helps our organic acquisition as well. So that sums up sort of where we've come, extremely proud of our progress, and this management team has really delivered. But where are we going here, and Jen will talk through where we see room for even more upside.

Thank you, Stacy. Transitioning and looking ahead, we continue to see significant margin expansion opportunities in our business. Throughout this morning, you've heard from Mita, Allen and Scott walk you through the various opportunities that we see will drive greater profitability in our company. This slide summarizes the financial impact of those initiatives. I see a lot of faces lighting up and typing as well. Overall, we see continued gross margin expansion as our largest source of upside. With Chewy Health, sponsored ads and private brands collectively representing the potential to drive north of 400 basis points of incremental gross margin. We see north of 200 basis points of SG&A leverage driven by automation, both through the continued scaling of our 5 automated fulfillment centers as well as the implementation of automated technology through our earlier generation sites. The balance of SG&A leverage will come from disciplined management in areas such as corporate payroll and G&A. Moving to marketing. Overall, we expect to continue optimizing our marketing mix with an emphasis and focus on executing against organic traffic opportunities in areas such as mobile. At 7% of net sales, our marketing expense is best-in-class for a company of our size and scale. Over time, we expect to continue expenses in this area largely consistent to recent levels with approximately 100 basis points of leverage opportunity. Stacy will momentarily walk you through how this all culminates into our updated long-term algorithm. Shifting to CapEx. As you can see, we have a strong track record of operating with high levels of capital efficiency. Historically, our CapEx investment has been focused on the build-out of our fulfillment network, which we have doubled from 9 to 18 sites over the past 5 years. This has translated into CapEx spend of 1.5% to 2% per annum. Looking ahead, we expect to be able to maintain our efficient levels of capital expenditure. However, with network expansion materially behind us, we expect the composition of our CapEx to shift gradually from core CapEx into areas of growth CapEx. Let me further specify. What we're defining as core CapEx will include any investments related to our retail platform. This will be inclusive of automation investments. Growth CapEx will include investments related to our new growth initiatives. With our Chewy Vet Care strategy, other broader health initiatives and international expansion being a few examples. Over time, you should expect our CapEx mix to gradually shift towards 1/3 core CapEx and 2/3 growth CapEx. I'll make a couple of important call-outs. As it relates to our Chewy Vet Care strategy, we will take a highly disciplined approach, as Mita articulated earlier this morning. And we will only accelerate investment in this area if we see the associated strong financial results and returns. And as it relates to overall CapEx, even as we make investments to build out our growth initiatives, we expect to be able to maintain our overall levels of expenditure in line with historical levels. This is an important slide for us and summarizes what all this means from a free cash flow perspective. Already with our significant adjusted EBITDA margin expansion, coupled with our high levels of capital efficiency. We have been able to exponentially increase our free cash flow production to north of $300 million in the trailing 12-month period. In fiscal '23, we expect to generate more than 2.5x the levels of free cash flow as compared to fiscal 2022 with EBITDA to free cash flow conversion, rapidly expanding to north of 80%. Taking a step back, it's important to remember that we have now successfully achieved economies of scale and arguably the hardest part of pet from a profitability standpoint, e-commerce, product sales and core consumables and all the adjacencies that we are building on top of our retail platform will be margin accretive. This enables us to deliver what we believe will be on average 15% adjusted EBITDA margin flow through 2024 onwards. If you couple this with our high levels of capital efficiency and the attractive working capital dynamics of our business model, you can see that we are poised to produce material levels of free cash flow. We believe that this is incredibly compelling and represents an inflection point in the financial profile of our company. I will leave you with that message and turn it back to Stacy.

Thanks, Jen. So how does this all come together, both from a time line perspective and from a financial perspective. First, we'll go over the time line. So this slide shows the various initiatives that we've spoken with you about today and the expected time to scale. So when we think about near, medium and long term, we think near term is approximately 1 to 2 years, medium term, 2 to 3 and long-term 3 to 5 years or so. So in the near term, we will continue to grow our pharmacy and our health products. As Mita mentioned, we have approximately 80% of our existing customers that are not Chewy Health customers. So that's really low-hanging fruit that we can go after. Sponsored ads, we've started to ramp. We will continue to ramp and all of these areas are very highly margin accretive. Concurrently, we will continue to expand our B2B services, so those vet-facing services, Practice Hub, CarePlus, et cetera, and our private brand expansion, as Allen spoke about. Moving to the long term. So increasing insurance adoption. It was mentioned that this is more of a thoughtful consideration. It takes a little more time to have that scale. So that looks like more of a long-term but highly profitable prospect for us. And a very exciting announcement today, our vet clinic rollout and ramp up, we will start that next year and then start to see that scale in the long term. Pet services is another area that we spoke about today with a $10 billion TAM. And as Sumit mentioned, international opportunities, we will consider selectively and deliberately and enter the markets that we deem to be accretive to our overall portfolio. Underpinning all of this, Scott and his operations team, you heard they have a multiyear automation road map. They will continue to execute and provide the efficiencies in the business in order to support these growth initiatives and continue to achieve the targets that we will set out for you today. So here are our updated long-term financial targets. We expect our net sales growth annualized to be in the high single digits. We expect to gain market share and as Sumit mentioned, we do continue to operate in a macro environment that's a little uncertain, a little fluid. We see the potential for the fiscal '24 net sales growth to be slightly below this target. However, we will continue to gain market share and explore premiumization opportunities with our differentiated platform and our value proposition. With respect to adjusted EBITDA margin, we expect to deliver north of 10% adjusted EBITDA margin irrespective of the macro environment. So we will steadily and continuously improve and see that margin expansion over time. Finally, as Jen spoke to you about just now, our CapEx is expected to be approximately 1.5% to 2% on average. But importantly, that mix will shift away from the core business. And as that tapers off, we will shift our capital spend towards our growth investments that produce high ROI and high profitability. All of this will produce very strong free cash flow conversion, which we are starting to see, but we expect that our free cash flow will accumulate and become significant free cash flow per share in the future. So what does that all mean in terms of we're generating all of this cash. What is our capital allocation strategy. Well, it hasn't changed. It's very consistent with what we've always spoken about. We want to deliver long-term, profitable and capital efficient growth. And so how do we allocate that capital? Well, as I mentioned, we will continue to invest in the core business, supply chain and logistics we will use enabling technology to propel our business forward and gain those efficiencies. But with a gradual step down there and more allocation towards the growth vectors, including and particularly Chewy Health as we ramp and roll out our vet clinics. International opportunities as they -- as we select them, we will invest there. And then we will also consider other areas such as opportunistic M&A. If we see an opportunity where we think we can acquire talent or technology that will accelerate our time to market, we will do so although we do have a clear organic bias to build. Overall, we want to optimize our capital structure, have a strong balance sheet. We've always been very prudent and disciplined in this regard, but we are very focused on shareholder returns, and we will aim to maximize shareholder value and achieve our full potential. I mentioned earlier that I've been with the company for many years, but I can very confidently say that this is one of the most exciting times to be here. So thank you for your time, and I will turn it over to Sumit for closing remarks.

Okay. A lot has been said, a lot has been shown. Hopefully, that was informative. Hopefully, the team continues to earn trust and build credibility. Today was about showcasing the management team and showcasing the exciting innovation that we've been working on and what we've accomplished over the last several years. But moving forward, as I started out my preamble this morning by saying we are stronger as a team as of this point and hungrier for the future. Hopefully, it's super clear as to why we are hungry. The opportunities that we see in front of us are massive and we -- our ability and our confidence in ourselves, both a, to understand our customers, but also to deliver on these road maps is high. To summarize, we play in a very large TAM that is growing at a healthy CAGR, especially supported by 2 trends that have continued and are expected to continue moving into the future; a, premiumization impact; and b, a secular trend shifting towards e-com. The network that we have built over the last several years, Jen mentioned a point of we have achieved economies of scale in what we believe is one of the hardest categories to achieve in. At the point of IPO, I received a question, how will you make any money shipping cat litter? You're right. You don't make money shipping cat litter. Nobody does. It's sand that you're shipping across the country. What you do make money is if you understand customers deeply and understand that the way to a cat customer's heart is through litter because they build baskets around it. And we are good at getting customers to build baskets and our AOV is one of the highest in the industry. You put a really efficient freight operations and freight structure behind it, it gives you leverage and a high amount of flow-through into the bottom line, which we are now starting to realize. The mission has always been financially internally inside the company. Our mission has always been get big fast and also get fit fast. Operating fitness is built into the routines at Chewy. This is one of the reasons why we've been able to endure one of the hardest times in economic history and continue to do so with grace, poise and margin expansion. We've built a platform that is differentiated. We've built a platform that is proprietary. It is one party experience fully controlled by us, but also fully open for our partners to access. That is truly unique. And as I said, the build is in 5 years out, we are done with most of this build. And in the near term, we're going to wrap up integrations that we believe are going to make this even more meaningful, even more amplifying from our point of view and from a shareholder point of view. I received a question during the break. You guys didn't make a big deal out of the clinic launch. It's a really big deal. You didn't look really excited. We are very excited. Our culture is to be confident and yet be humble. Our culture is to be transparent and earn trust. Our culture is to execute flawlessly and to rapidly scale where we see opportunities. Our mindset on clinics is exactly the same. We believe the complementarities that unlock the incremental profit pools that unlock, the incremental share of wallet generation that unlocks with us, enabling an ecosystem like this is going to be unparalleled and we're very excited about it. Our excited face could do some work, but we are very excited about it. What else is on here. And finally, sharing our updated targets. The combination of retail producing economies of scale will help with health growing at premium growth, premium margins. and the combination of that to be able to create meaningful acceleration and flow-through and greater free cash flow generation is a point in time that we've been building towards. Internally, what we've known is that Chewy and our business model is like a spring-loaded coiled mechanism, where even at some point where the revenue curve comes off of double-digit growth or high 30% CAGR growth, the speed of profitability and free cash flow generation will improve and increase materially. And today, we're positive at that particular point, and we're excited about what our future sort of holds for us. So you should walk away with the message that we will continue to deliver share gaining growth regardless of the macro. We will continue to demonstrate strong discipline and improve our profitability moving forward as well as generate free cash flow. So I will leave you with that thought. And as we get -- how much time do we have for -- what are we doing next? Are you coming up next ? Okay, right. Thank you. Really, really appreciate the time today.

Thanks, everyone. We'll take a quick 15-minute break to get us organized on stage for the Q&A session. During this time, we'd encourage you to submit your questions via the QR code that is the only format where we will be taking questions. And let's come back at 10:55, please. Thanks very much. [Break]

Okay. Great. Let's get started with today's Q&A session. Thanks again for joining us today. My name is Natalie [ Noak ], and I am Director of Investor Relations here at Chewy. We will aim to get through as many questions as we can that came through for our leaders. And with that, let's begin with our first question. So you talked about the 50 million prospective customers in the U.S., 12 million of which you mentioned were high value. How many of those 12 million active customers are our active customers for Chewy today and how many are not, but may have been active in the past?

Of the 12 million high propensed customers that we talked about, not many have been active customers. Our churn rate primarily comes from the other 2 segments that I shared and for reasons that are obvious, which I also articulated around customers as customers demonstrating propensity for a greater choice of retailers early on and taking a little bit more time to settle their purchases with consolidated share of wallet ultimately, which they do with Chewy. So if you take that comment and if you take the comment of our attrition in the first year is materially lower than -- or attrition is materially lower than the usual 80% attrition that you see on an average from the retailer. You'd essentially put that together and say, yes, we've churned out millions of customers, but perhaps not tens of millions of customers. So we see great opportunity within -- in capturing hearts and minds of the [ 12 million ] segment that we shared.

I would also just add, the way we classified the 50 million customers that is -- those are nonactive Chewy customers as of today. So if you think about a population of 80 million to 90 million pet households in the U.S., we have approximately 20 million actives. That was a view at nonactive customers.

Correct.

Great. How many clinics do you think Chewy will open over time? And how should we think about the unit economics of Chewy clinics, including margin profile?

Mita, do you want to take that?

Yes. Let me just first start by saying I'm incredibly excited that we're opening -- this is my excited face. So I'll do a better job next time, too. So from a -- I think just as I mentioned, we are -- we want to open clinics that are highly productive. We are focused on proving this out as a proof of concept for us before we start to sort of scale. We believe that we want to get our unique economics right per box, effectively, we're going to measure top line growth. We're going to better profitability. And once the box economics are right, I think then we're prepared to ramp from there. So now while we're not here to talk about scale today, what I can tell you is we want our footprint to be meaningful enough so it can create value for both company and shareholders. So we're -- but we do want to make sure we start at the right place, and we get the box economics right, and then we can continue scaling from there.

And I would add on financials and economics. So what we can share today is, Sumit, data around industry benchmarks. So you can generally think about a well-performing clinic as producing north of $2 million in revenue, although we would characterize that as highly dependent on the number of veterinaries staffed in clinic. So is this a single veterinarian practice or is it a clinic with 5 vets that will have a high degree of variability on the production of the clinic. From a profitability standpoint, think about the box as producing run rate 4-wall EBITDA margins of 20% at maturity. As it relates to our strategy, what I would say is far too early for us to set financial guidelines. However, we have incorporated our Vet Care strategy into the perspective that we shared around adjusted EBITDA margin flow-through today as well as the thinking around CapEx. But the last point I would make is as you think about the clinic connecting back into our retail ecosystem as well as the broader services offerings, we have a really unique ability to drive incremental financial impact across the rest of our business. So whether it's recommending a vet diet product in clinic, [ fulfilling ] it to your home or educating and converting you into one of our bespoke insurance products, driving better compliance in our Rx subscription. All those are ways that we can use the clinic as a mechanism to drive greater financial results across the ecosystem.

I would just end with one more thing. We're not looking to go silent over a multiyear period on this. So there are predictive leading indicators that can indicate success over the period of time that we need to achieve profitability. And those are demand generation as measured by customer propensity or our ability to utilize the clinic to a high level. And then b, our ability to recruit and retain veterinarians. And those are more so in the near term. If these inputs are right, then in terms of execution, our ability to deploy either using software or using our operations prowess to be able to operate the clinic efficiently, both from a vet point of view and our own point of view to deliver the profitability that we're reasonably confident on.

Great. So staying on clinics, can you talk a bit more about the vet relationship and their perception of Chewy. Are there any concerns that's using Practice Hub today might view Chewy as a competitor? And will the vets that you work with for Chewy Clinics specifically be part of Chewy's corporate payroll?

I will take it. So I think just starting with our mission statement is that we want to be the most trusted and convenient destination for pet parents and partners everywhere. So the word partners is in our mission statement. And as far as from a health perspective, that to us means veterinarians. So we've been very thoughtful about how we approach the industry, how we're thinking about veterinarians and partners in care. And what we find is that vets, they have an affinity towards our brand similar to how customers do so because they are customers as well. And when there is an opportunity to associate with our brand, your competitive intensity goes down and the trust factor with the brand goes up a lot. In the past 5 years, we have invested a lot of time and resources in developing businesses and tools and technologies for veterinarians that help them. So for example, we've developed a Practice Hub, which basically puts the vet at the forefront of the e-commerce equation, and they earn revenue on every sale that they're making and subsequent sale that they make for Autoship. And clearly, 14,000 of them are on our platform, which is half of the market, so like that proposition is resonating. We've invested in Connect with the Vet, which we're sending in highly qualified leads. So think about it in a space where there's deficit of -- there's an imbalance of supply and demand for the veterinarians, every minute that you're spending in clinic on an appointment that is nonrevenue generating is every minute wasted. So if we can take over those kind of triage [ consults ] and we're sending highly qualified traffic, we're sending you more revenue-producing traffic and that proposition is resonating. So I think these are some of the proof points that we've been investing in. And then finally, we've developed Rhapsody, which is our PIMS system, which is again open for all to utilize. So like just in the ways we've developed those technologies, there is value creation that we're passing back to the [ vet ] industry. I think finally, we're also part of the industry, right? So we're now investing in issues that are more meaningful to vets. The industry is mired by mental health issues. We're investing in that. There's a lot of -- there's a need for more vets. So like pipeline building is very important. We're investing in that. We have a pretty big scholarship program, we just announced with the AAVMC, where we are investing in university students, veterinary students, helping them through scholarship programs and internships at Chewy, et cetera. So really kind of investing in that pipeline build. And then also partnering with like state VMAs, Veterinary Medical Association at a state level, and enrolling veterinarians into sponsorship program -- mentorship programs that we are actually now funding. So effectively, we are part of the industry, and we're trying to drive meaningful and positive change, and that proposition is resonating from a veteran perspective, and we're excited about that.

The last thing I would say is we already work very closely with over 150 vets, who are directly associated with Chewy, either in an employee capacity or a contractor capacity. And so not only do they provide us a really good grounds-up view and a closed-loop feedback mechanism, they're also a source of -- they can be a source of recruitment in the right locations, and they are a source of word of mouth, given that they're exposed to Chewy culture. And as Mita said, when they are exposed to the Chewy culture and when they're not immediately -- the competitive intensity essentially goes down and the trust for the brand goes up even more.

Maybe just one more, maybe just [indiscernible] good point you made. The way we have designed our value proposition for Chewy Vet Care Clinic brand, these vets we are talking about, we've partnered with a lot of them to really figure out what the value proposition needs to be from an employee perspective, such that Chewy can become an employer of choice for these vets, right? And so we're very thoughtful about what are the -- how are we going to solve this problem for them, whether it's we get technology in clinics so they can stop doing the mundane work and then spend more time with pets and doing medical care within their own clinics. That's an example of it. How do you give them opportunities to sort of build careers with Chewy, that's a second example of stuff we're doing. How do you thoughtfully design spaces that not only give them the comfort of practicing in a well-designed space that kind of takes care of them, but also like investing again then in their mental health in kind of memberships that they want in continuing education, et cetera. So we're building our employee value proposition in a very robust manner and seeking information and input from all of these vets, and we think that, that will resonate going forward as well.

Great. With expected average annual adjusted EBITDA flow-through of 15%, are there additional levers to drive long-term EBITDA margin above 10%.

There's always opportunity to do more. We've provided guidance today. We're super excited about the road map. And yes, I mean, today, the services vertical that we talked about or the market [indiscernible] vertical is not as part of today's guidance. And -- but we're excited, as you heard, we believe we have a credible tech platform. On one side is the customer, on the other side is a service provider. Today, that service provider happens to be the veterinarian. We can essentially point that technology towards our service providers setting up a GMV-based marketplace model that essentially does provide a high degree of flow-through. The hardest part about building these solutions is, a, building the tech to be able to scale in the future and then standing that up with a really strong customer service proposition. We have strong customer care teams. We've built the tech. This type of stuff is not 100% embedded in our road map as some of the stuff. When we came at the point of IPO, we had just entered pharmacy. And at that time, we didn't truly also understand the full potential of Chewy Health. And as we've built, as we've learned, as we've understood, we've been able to understand complementarities that weren't part of our road map. So we believe -- I think what you should take away is the product that we're building and the different green shoots that it leads to that then when combined back with the 1P fully controlled ecosystem that we have does provide greater opportunity for margins.

You see 200-plus basis points of SG&A leverage long term. Does that include the 150 basis points from fulfillment center automation. And if so, does that mean that you only see 50 basis points from G&A leverage? Why isn't there more leverage potential in G&A if you grow top line as expected?

Again, today, what we are providing you is a view of the world in the near to medium-term horizon or the medium-term horizon, which allows us to essentially inspect investment [ sans ] or growth [ sans ] investments. At the same time, when you look at our overall base, so we have -- the 2 components that make up G&A outside of FC are essentially corporate payroll and investment in technology build, right? So as we've come off what you've seen in the last 4 years, had you approached Chewy 5 years ago, this is literally a 5-year or 5-year thing. Satish and I have been building to move our on-prem architecture with essentially was G&A and CapEx to move that out of that particular world into the OpEx structure, which is essentially scaled with us as we've scaled revenue because to scale the type of revenue that we've scaled, you need to be able to build modular cloud solutions. And so software expenses form a part of G&A, but it's variable G&A because it grows and scales with the business. We are still not done investing to build technology for all of these solutions that we are bringing to life and likely will continue to innovate around ideas in the future. So yes, there is opportunity, which likely we're not taking into account fully. The second part is payroll. We run a fairly lean payroll structure. For an organization which is $11 billion in scaling, alongside all of the net investments that we're making in payroll, which you've seen today, our base head count has essentially scaled or is growing at 1/3 the rate of revenue. We are on-net 2,900 people company, which -- of which, as I said or as you can tell, hundreds of head count is invested in either technology build or solutions build, which will produce meaningful returns in the future. Pharmacy is an example of that. So overall, we believe our cost of payroll has scaled reasonably well [ sans ] the investments that we've made towards growth. So yes, there's opportunity. But today, what we're providing is what we are confident of delivering in the medium-term horizon.

I'd add just a couple of things there. As it relates to the 150 basis points of operations opportunity, remember, that will reflect goodness in both the gross margin level as well as the SG&A level. We spent a lot of time speaking to you in the 2021, 2020 time frame about the supply chain efficiencies. I would say most of the freight and packaging efficiencies, which impact gross margin, have been realized. So think about the 150 basis points as having a greater percentage of impact in SG&A by automation rather than freight and packaging. As Sumit articulated, that gives you a sense of the relative contributions across gross margin level, SG&A level and just general cost management on the corporate side.

In terms of your long-term guide of high single-digit CAGR in net sales, can you please provide how you think about the revenue contribution from retail versus health, domestic versus international active customer growth versus NSPAC?

Great. I can start and feel free to jump in. Broadly qualifying it, we expect a majority of the growth to be domestic, some growth international. We expect the majority of the growth -- what was the third dimension. Can you repeat the question?

Sure. So the revenue contribution from retail versus health domestic versus international, and active customer...

As one of my slides suggested where we were essentially showing growth curves of retail and health compounded on top of that, health will be a faster-growing vertical given that the secular trend in health has started roughly 5 to 7 years behind where food and supplies were. So health today in terms of penetration is where food and supplies was 5 years ago. And so by implication of where we are, where the secular trends are and how much we are pulling towards e-com, health will grow faster than retail in the future. And then in terms of active customer and NSPAC, you should expect the ratio to be majority driven by NSPAC and then the balance to be driven by active customers. We do expect active customer growth on the platform on an ongoing basis. At the same time, the credible NSPAC build opportunity that we have, especially when you consider the customer base that we are converting into pharmacy, which runs in kind of the 1 million range or more. We are not essentially accounting for that in the net add number today, but it contributes to NSPAC very significantly. That's how we should think about our algorithm.

Yes. I would just add, if you think back to the slide we had on the potential wallet of $1,700, right? Health is a big portion of that. So as we begin to cross-penetrate categories, and we expand that share of wallet, then that NSPAC growth will expand, amongst our existing customer base. So the whole ecosystem as we've talked about today, as we begin to offer more and more things throughout the pet parent -- pet's life cycle, we will continue to grow our share of wallet there.

You also heard us talk a lot about Autoship today. Autoship customer base was up 150 basis points year-over-year. And so the right -- the high-quality customers that are declaring intent for Autoship that then produces a higher AOV, higher LTV is essentially the right combination or the right type of indicators that we want to see. So it's incredible NSPAC growth.

What areas do you feel are currently missing in your private brand portfolio? To what extent is expanding private brand penetration about ramping new categories versus increasing sales of existing products?

Yes. So from a private brand's perspective, keep in mind our long-term target is scaling to 15% or more of net sales, and we're mid-single digits today. So the key opportunity is expansion. And I would say that that's the majority of where we expect the growth to come from. While we do have opportunity to lean into the brands, we've already launched. [ Vibeful ] is a great example of a recent brand that scaled over time as we acquire and retain and settle customers and build that layer cake. So it's important to keep in mind that private brands. It functions like the rest of Chewy. We acquire, we retain, we drive that loyalty. It takes time to scale. So from a category perspective, if you inspect our portfolio, [indiscernible] plenty of opportunities in [ cat ]. Our dog portfolio, as I mentioned, has American Journey, which has performed well for us over the years, but we don't have a cat equivalent. So we're excited to expand in the cat category. Then as you look across dog, there's opportunities. We play largely in the natural space. There's opportunity above and below that from a price per pound and a future set of the product. So lots of opportunity for us to expand and doing so purposely, getting those brands built and launched quickly and then scaling over the long term.

Can you talk about early returns and the degree of pent-up demand you're seeing from suppliers around sponsored ads? And how do your suppliers view Chewy and the opportunity in sponsored ads relative to your other online competitors?

So as I mentioned during the presentation, the participation in the sponsored ads has been strong from a vendor partner perspective. I listed some of the key brands in the space. If you're not familiar, I listed several of the largest brands in the category are participating on the platform. And as we mentioned in our Q3 earnings, continue to have strong gross margin, and you're seeing some of that show up already today. From a participation perspective, we expect that to continue to grow as we offer more -- as we expand our product suite. So as we expand to off Chewy in the first half of '24, that will continue to attract advertisers into the platform. So excited about that. From a pent-up demand perspective, I think Sumit highlighted a key dynamic. Our advertisers are excited to reach our customers. They drive -- they know our customers are the most loyal in the business. They want to be part of our platform. It also helps our brands whose layer cake is not what they would like it to be. So advertising is a key way to start building that top of funnel that next layer of the cake and to keep their customers -- keep their customers engaged. From a competitive perspective, we focus on ourselves and are proud of the product that we've built. The feedback from our advertising base and our optimism about where we'll settle out from a function of net sales indicates our advertisers are happy with the platform, enjoying the returns that they see. And we've really helped educate them in terms of how to think about the returns that Chewy drives for them over the long term as they invest today. So feel good about where we are and what's in front of us.

Just to build on the return ROI framework that Allen is alluding to. Some of you might recall, we're taking sponsored ads and combining it with the LTV approach that we use for the business, which then makes it a different financial proposition for our suppliers. And the ROAS that we're seeing in a model like this is pretty attractive. I mean right now, we're seeing ROAS north of 400% to 600%, and so it drives a traction towards the type of product that we're building. It also underscores the strength and the model of building long-term positive cohorts that suppliers are responding well to. So today, we're going to market in this particular manner. We haven't yet opened it up to one-click transactions, which remains in our purview to do in the future.

And to give you a sense of financial ramp, again, as Allen mentioned, there is some gross margin impact second half of 2023, consistent with the time line that we've articulated with many of you. Looking to 2024, we would expect the overall entitlement to start approaching the bottom end of the range that we provided of 1% to 3%.

It would be helpful to understand how you think about the time frame for the 10% plus adjusted EBITDA margin guidance you provided? And what kind of net adds in sales is embedded in that target?

Sure. So we'll start off and Sumit can jump in. So we're not providing sort of a clear sort of date or time. This is a long-term target, right? So we will steadily and continually march towards this. As I mentioned, we do believe that we will deliver continuously irrespective of the macro. So we will do our work here and steadily accrete over time. What was the second part of the question? How does net sales...

How do you -- what are the assumptions embedded in that guidance as it relates to net adds and sales?

Right. So we'll continue to see gaining market share, as we've mentioned, premiumization opportunities and our differentiated platform contributing to all of that. But we're not going to guide to sort of a specific number per year.

May be just build out on that answer. The components of the expansion come from gross margin, SG&A and marketing scale. Marketing scale is likely going to come slowest because we want to continue to invest to capture the demand that we see out there, especially across the millions of customers that we believe are still propensed towards the Chewy platform. So there, we will focus on driving efficiency through technological improvements, bid rate optimization and SEO optimization that can essentially provide us the right mix. When you come into the SG&A curve, Scott mentioned, 2 of our fulfillment centers are still ramping. In the past, we've provided intuition around each fulfillment center contributing to 25 to 30 basis points of scale as it ramps. So you should consider that part of the curve to be more near term, the rest of it to be medium and long term. And when you back into gross margins as it is clear that the combination of sponsored ads, health products and private brands, with continued work in supply chain, these 4 together drive gross margin expansion. As Jen said, majority of the work in the last couple of years has been towards freight optimization. So that's a lower component of the contribution. And then sponsored ads, as Allen suggested and Jen provided guidance is the most near-term impact, health in pharmacy plus compounding plus categorical growth is the immediate parallel impact with the rest of the health category scaling over a medium- to long-term basis.

And finally, I would add the adjusted EBITDA margin flow-through of 15% that we provided gives you some ability to imply the levels of margin accretion that you should expect to see from us. I'd reiterate that's an on-average flow-through metric, right? So some years, maybe slightly more, some years may be slightly less, depending on the levels of investment in any particular year. And importantly, as Stacy just called out, reiterating that next year for fiscal '24, we do expect to deliver margin accretion regardless of economic backdrop.

Great. As you look at capital allocation, how do you think about share buybacks?

All right. Sure. I was waiting for that one. So great question, right? We talked a lot about our free cash flow conversion, maximizing shareholder value. Look, I think we have a great road map of initiatives that we want to invest in, and we want to have the flexibility as well to ramp up and ramp down as we test and learn if we see great success, then we might want to accelerate our road map. That said, I think we're in a position -- you know us, we have a very strong balance sheet. I don't think these things need to be mutually exclusive. So we definitely would consider shareholder return-focused programs in the near future.

I think it's also worth pointing out just if you look at our history, rather share buyback, but broadly, the topic of dilution management. If you look at our track record in the past, we've grown our fully diluted share count on average, call it, 2% to 3% on an annual basis. I think everyone in this room would agree that, that is top decile performance. And so while we do find ourselves in a privileged position of generating incremental cash flow, and we do want you to know that we are considering shareholder return alternatives. We do think it's worth calling out the level of rigor that we've operated in this area in the past.

You mentioned that top line growth may be softer in fiscal '24 than the high end of your target for the long term. What factors could result in upside to your current outlook for fiscal '24? Is it entirely dependent on the macro? Or are there growth opportunities that you believe could drive outperformance?

I'll start off. So look, it's fluid, right? The whole macro we can't control. But what we can control is the things that we talked about, right? So we're accelerating growth and things like Chewy Health, rotating folks into cross-category penetration. We will continue to gain share. And we've seen that in the past, and we continue to see that. So we're confident in that ability. As I said, we're not going to issue guidance at this point. We're going to see how things unfold. We'll come back to you at year-end and give you a little bit more clarity there. But I think that things are very fluid at the moment.

Let me just also provide some context on why we are here at the macro is where it is. There's 2 things that are playing into the current growth algorithm as you look at the market growth. A, with the muted pet household formation, combined with the high levels of inflation, it is keeping pet intent down. Pet intent is down multi-double-digit percentages on a year-over-year basis. Number two, when you look at pricing benefits that were propping up revenue growth in the industry, essentially, in the back half of this year, those pricing benefits are muted, and at the same time, customer demand generation hasn't actually picked up. So it's the combination of these 2 things that essentially drove the lowest growth rate in pet in Q3 and is expected to continue through the near term here. On our side, in addition to what Stacy said, specific goals around driving even incremental Autoship penetration, driving incremental health [ benefit ] ratio, driving cross-categorical purchases, smartly investing in marketing across a full funnel network where in the past, we relied on intent declaration at the lower point of the funnel to be able to capture customers. So consideration building and prospecting is essentially something that we have to take into consideration, especially when you're playing through environments like these. I think -- so we're not essentially sitting idle, waiting for something to change. What would change where you would see the greatest -- or the one leading indicator is in food and supplies, crate sales are a pretty direct indicator to the health of the industry because it generally corresponds to new puppy or new pet introduction to households. So categorically, we are fairly fine-tuned to the level of categorical inputs that we would look at to respond in kind, and we stay sharp to respond to any trend that comes alongside.

Is the 15% incremental EBITDA margin flow through not relevant for fiscal '24? Or is that more relevant for fiscal '25 and thereafter? And do you see this as a consistent incremental margin that you can sustain? Or will it fluctuate based on any reinvestments?

Yes and yes. Yes, we will see this in '24, and yes, we see it as sustainable.

Right. Growing NSPAC to that $1,700 plus level, how much of that do you expect to come from core retail business or consumables versus health care categories?

Can you repeat the question...

I can take a crack at that. So $1,700 general NSPAC opportunity. What I'd first say is we are now with opening up the clinic opportunity. We're now addressing the vast, vast majority of that $1,700 spend. You can think about, call it, $900 of the $1,700 as core consumables, pet food and supplies. And you can see based on our historical NSPAC curves, we've been successful at effectively capturing the vast -- the lion's share of that spend from our customers. There's about $500, $600 within the $1,700 that is broadly pet health. Historically, we've only had the opportunity to touch about half of that. With the opening of that services, we now open up the full wallet share potential of that $500 to $600 and the balance would be not broad pet services and the marketplace opportunity that we spoke about.

Great. So we have time for one more question. So this will be our last. When you look at competitors across the pet industry, there's Chewy, Amazon, Walmart, and it seems everyone else. How much share does that everyone else bucket have? And is it safe to assume that, that is the greatest potential for share gains?

Interesting question. I think the way to think about this is in the way share is distributed across channels. So food, drug and mass and independents are essentially -- share is migrating online from these 2 channels first. Pet specialty is split between a handful of public retailers, or public and private retailers out there. And there is gradual shift happening, but all of the shift is happening towards online. So overall, we believe that the current towards online is secular across every dimension with food, drug and mass and independents contributing to the largest portion that is migrating. When you look at the current dynamics, it is accurate to assume that the share distribution is broadly across these 3 retailers. And we believe it is also a function of current macro where each of these retailers is essentially approaching the consumer with a slightly different proposition in mind. And what I want you to keep in mind is that like Chewy kind of cuts across all 3 with a healthy proposition. So when you look at a retailer like Walmart, they do a very credible job with value assortment and with proprietary on that income segment as well. We've talked about our interest and aspiration to grow in that particular segment base. When you compare head-to-head against consumables and you put a broader health portfolio alongside the retention characteristics that we have, Chewy emerges as a proposition winner. On the other side, when you look at supplies, we believe Amazon right now is consolidating share in supplies, given that you can bundle a toy another basket. Again, when you look at consumables and health, that's where in the current macro, something -- an engine like Chewy essentially props up and continues to pull a very healthy portion of consumables and health customers over into the platform. Broadly speaking, the propositions that we've outlined today should be enduring and durable because the most popular question at the time of IPO was why wouldn't one of these larger organizations pose a competitive threat or a greater competitive threat. We have a ton of respect for competitors out there. At the same time, we have a lot of confidence in the ecosystem in both defensive and offensive modes that we've built that continue to strengthen as we play through pet. So in terms of building a one-stop differentiated ecosystem that brings in customers, locks them incredibly and grow share of wallet, which the level of growth that we have demonstrated over the last 5 years is unprecedented. It is still not being seen in the pet industry. I think there's -- we have great confidence in the engine's ability to produce meaningful results and continue to share gain in the future.

Great. Well, that concludes our Q&A session for today and also brings an end to our Investor Day. For those that are here in the room, we have gift bags for you to pick up on your way out. And if you sent us a pet photo, we have a personalized pet portrait for you. So please grab that on your way out. And thank you to everyone who's joined today and for your interest in Chewy.

Really appreciate it. Thank you, team.