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

Got it. But that's still something that's on the road...

Okay. The Agentic world, you heard me talk about us continuing to lead in a genic. You should expect us to launch customer-facing AI products that allows us to not only aggregate search demand, but improve the efficacy of search and discovery and therefore, conversion of that demand on our platforms. which is currently something that we internally are contemplating and testing in beta modes, but we haven't yet announced market launch announcements to nor are we forecasting revenue behind. It could be a credible river of revenue in the future. .

I do want to turn international. It feels like we've had a conversation about international for a number of years, and then you finally launched the Canadian market a couple of years ago. Talk to us a little bit about the lessons learned from the Canadian launch and what those lessons might mean for the potential to expand in other markets of time?

So international was a very deliberate learning go-to-market use case for us. The tenants behind which we wanted to learn more in international were the following: a, we believe we have customer permission to enter markets. We believe pet parents are more the same than diet. We believe we have permission from customers and the Chewy brand, therefore, is resonant in markets. Number two, each market, as we've learned, is unique to that particular type of demographic or psychographic in the market. This learning comes from many of us in the company have experience launching international markets for consumable-based businesses. I've launched Amazon's fresh and grocery categories in Germany, Japan, U.K., et cetera. Each of these markets has very specific consumer behavior that you need to understand. Number three, we don't -- we are not keen on chasing dilutive growth. Number four, focus matters. Number four, the share positions that we essentially want to accrue in international markets need to be commensurate or better than the share positions we can capture in home. And then number five, we wanted to test out the progress of our technology stack, go to market with a stack that we can essentially replicate rapidly if we wanted to continue with our pace of expansion. I would say we've been happy with Canada. We've learned a ton. We've understood each of these data points a bit more closely. We've also learned things like going back to the classics or innovators dilemma, needs of big companies aren't met in smaller markets. So some part of that has been part of -- some part of that has been that, but overall, I would say we were very clearly able to prove out how we can drive profitable demand in a region. And that's been a learning for us, a positive learning. But international isn't a primary priority. Our priority for investments is the United States. Within the United States, it is our premium health businesses, it is launching digital products and services and physical services in the health space, clinics, for example. And therefore, capturing a very large mind share or large TAM and continuing to see CTE as a platform that aggregates Netpac in a much more credible manner than anybody has done in the past.

Well, let's stick with that priority around health. You've been on an evolution with health. We've had announcements at various investor days over the last couple of years. Now you sit here, you've got the pharmacy offering, you've got the scaling of the vet Care Clinic offering. Talk to us about what you want the health ecosystem for Chewy look like a few years down the road. What are your big strategic priorities in terms of scaling the business and investing in the business?

The health TAM of $50 billion, you have to interpret it in a few different verticals like that's how we do it, at least our point of view. The B2C vertical, which has led into products and merchandising like I talked about. We've built a very credible network doesn't require ongoing investment. We are now leveraging that investment and driving customer adoption and NSPAC growth. Then we entered into B2C services, which we thought was an underpenetrated market. Insurance, B2C services, U.S. insurance is sub-3% penetrated, insurance in the U.K., Australia, New Zealand, general Europe, mid-20s percent penetrated. We believe we have the ability to commercialize pet insurance. We still believe we have the ability to commercialize pet insurance. But insurance, the cost of insurance is 1 that pet parents seriously grapple with. Still, we're happy with our entry into insurance and how we've partnered with some credible players in essentially picking up that gold nugget and making it a part of our portfolio. I'll come back to it in 1 second, so hold it there. We then launched B2C telemed during the pandemic that we have continued to perfect. So far, we've offered teletriage in terms of the product, but we have nice -- but we -- as the industry continues to open up, and it will open up in the near future, we are ready to go to market with a scaled telemed product. B2B. We built we're a 1P tech stack. So we built technology for veterinarians that 18,000 have the veterinaries in the country today use. And then we took that stack, and we essentially have layered in these capabilities into building our clinics. So essentially, if you look at SP709986042 The industry, -- we are unique in going to market with an integrated technology and experienced stack that can combine the overall power of the health vertical faster and larger than any 1 player has done in the past. In many ways, they started as a retail company -- but if you fast forward this equation 5, 7, 10 years, we can very much be a scaled platform or perhaps a leading health brand that also has a very credible retail offering as opposed to the other way around. Why I said I'll come back to insurance is because when we are building the stack, right, the stack currently, we're applying in our clinics. This stack is also being used by a handful of players that are testing the stack, right, in our ability to offer them a SaaS offering. We can blend in all of these capabilities into the same stack. -- right? The current market is restricted because 1/3 of pet parents do not take their pets to the vet at a normal frequency or don't do so at all. affordability and access to veterinarians is the constraint there. You all heard about, it's harder to get the vets. You've all heard about Veta retiring, not enough that are coming in. We're not seeing that problem in the CVC network or in the modern network. Our average met recruiting time is 4 months against an industry which is much longer than that. Our average bet retention 1-year cohort is high 80s, low 90% against an industry that is much lower than that. And then finally, this notion of these products like telemedicine will essentially lower the cost to serve, so it will address affordability -- it will also improve access to veterinarians because you can then bifurcate your capacity using tech and product to deliver the experience while keeping vets reserved for any type of backup that you need per se.

Okay. Maybe just 1 more on this area before we pivot. You obviously also made an acquisition with modern animals. Talk a little bit about the rationale for that deal and how broadly fits into what you just laid out there, Sumit with respect to where you want to take the health business over the long term.

So what we saw in clinics was our ability to -- and we entered as a new operator in this space, right? So we earned our battle scars. And what we saw very quickly was our ability to ramp these clinics up to an estimated revenue per clinic that was 20% to 30% better than the average clinic was producing in the market. We have said a CVC box produces $3.5 million in revenue. On top of that, it drives $800,000 in attach back to chewy.com. So total clinic revenue out of this box is 4.3 million. By the way, we are outperforming these metrics, which we've shared in April, which gives us confidence that this is a durable incremental growth lever as we enter '27 and '28. Yes, we're breaking even in 20 months. We have had success when we put a box in a MA and we've spent much lower marketing than anticipated because the Chewy brand carries the halo of attracting customers and driving clinic demand pretty quickly. And then finally, 4 out of 10 customers that are walking into these clinics are net new to CI. That was a staggering sort of realization to us. Okay. So we said, great. We can continue building at the current rate of 8 to 10 to 12, or we should opportunistically go find another player like Chewy, which we found in modern to be able to immediately 2x our base. It's a culture orientation that we like. There's customer orientation that we like. It is a tech forward stack there's low risk of integration and low risk of operations. But now most importantly, you have 2 teams that can build organically at 2x the rate. It also gives us options to explore what we consider many different forms of going to market with clinics, all the way from asset light to this current model that -- where we are essentially dropping our own boxes into the market, right? And there are a few options in there to consider. So broadly speaking, the economy are highly attractive. And you should think of us as operating a scaled we vet, we're now nearly -- I think we're the largest de novo in the market with 60 clinics and our build pace will increase. We've given you the numbers to do the math. It's highly attractive ROI. So now the question becomes how fast do you want to go, how fast can you go?

Understood. You referenced earlier and fairly topical coming off of some of the announcements across the technology ecosystem last week. How are you thinking about agentic commerce, what role do you play in a world that could potentially be more genic over time? What particular assets that sit inside the company you think could also differentiate you guys in terms of some of the relationships you can develop with Agentic platforms.

Excited about Gentex. The reason I am excited and we view Agentic, I will give you -- the framework that I will have you take away is, we view Agentic in 2 different areas. Agentic in partnership with external agenetic services and companies that will aggregate demand perhaps and route services back into you. Agentic in your own capability to do 2 things: a, capture that demand. receive that demand, right? Just because it's -- the demand is being routed doesn't mean you will naturally receive that demand. Your tech and your data has to be ready to be able to respond. Those back-end services need to be hardened and ready. And most Fortune 300 companies in the country are not ready for that. We will be because we're a newer company. We've rebuilt our stock in the last 5 years. There's no more technology investment that we need, services oriented. We're hardening those services as we speak. I've already talked about that on the earnings call. But the second is developing AI forward products. So you heard me talk about Cai this earnings call, Cai, C-A-I. CAI stands for CAI, could also be the name of your pet. So it kind of works both ways. CAI today essentially has the capability of offering you self-service. It can take care of your post-purchase needs. You already placed the order, Mohican take care of older needs. Now we're building agents that essentially allow you to search, discover and shop more efficiently, right? Then we're going to build agents that essentially unify customer signals and manage each customer relationship on a one-on-one basis without us spending broad marketing dollars on customers right? So in an Agentic world, you are able to essentially -- and all of this is going to hook in through the app, right? So that's, a, how we're getting Cy-ready for it. On Agentic Surfaces, we are leading the partnership with as many players as our series in the industry. We lead in the number of citations. We led with Google in terms of the partnerships, whether it's the price spot -- in response to use Gemini has come up with their own kind of model, which is Chewy demo ready for. You can actually go see it on Gemini's website. They essentially showcase this notion of agents kind of shopping. We are excited because when agents try to accumulate demand, they will route demand to the retailers that win on price, that win on selection, that win on convenience and that win on trust. And Chewy essentially has each of those 4 against any competitor that you can match us against, including the likes of the biggest ones like Amazon and Walmart. From a pricing standpoint, we go to market with absolute parity. We have homegrown tech that responds to that very quickly in 15-minute implements and the pricing is mapped. So it isn't like players with deep pockets can crash profitability floors in the industry. health, very protected ecosystem, much harder for agents to penetrate to begin with. Post-purchase service, Pet is a category where high-touch personalized service is needed. Our Agentic framework is essentially -- I talked on this earnings call, which is you have to essentially -- we're going to build in the brand to 1 voice and respond to customers so that you're not essentially talking to a chatbot. You're talking to you should try diving into a CVC network. And if you get Cali, if you send me -- send me an e-mail if you can determine that Cali, not human but an AI. We're being very thoughtful in building these, and these are on people services. These are not 3P products that you will find outside. So our ability to essentially hack Agentic or be toe-to-toe in driving innovation and participating in these trends is high. We're excited about this.

Okay. So a lot of areas to continue to follow up going forward, both through partnerships with genetic platforms as well as what you're building and scaling yourself on your own offerings across the site and the app. We've talked a lot about health. We've talked about AI. We've talked about the growth opportunity depressing the end market. How do you think about balancing all the things you want to invest in the business against continuing to deliver operating margin trajectory for investors.

So a couple of things. One, we are not about to enter an investment cycle. Just want that to be kind of clearly heard. Number two, we don't need investment to continue to gain market share as we are doing now. If the market doesn't improve, we don't have to invest to stand steady. At the same time, we want to accelerate growth. We feel we have some durable levers that we should consider investing behind to drive incremental growth. . When you hear the word investment, I do not want you to hear promotions. That these are not -- that's not what I mean. I mean durable nondilutive to growth type of investments. What I would say to you is that we have the ability with our base business performing as it is alongside the network of health clinics growing as they are and producing the margins. Alongside the $50 million of AI savings that we have mentioned to you for '27. We have enough dry powder to be able to self-fund a majority of these investments that we are talking about to drive incremental growth and still give you incremental margins in the range that you've come to expect from us in the last few years of performance. So that's how you should think about. And also, we are not baking in, although there's been some enthusiasm in terms of pricing coming back into the market in '27. We are not baking that in yet. So all of my comments and, call it, mental framework is assuming that the market does not recover and assuming that there is no pricing that comes back.

Okay. Last one, if I can squeeze 1 in. As you've laid out, companies are becoming more profitable, throwing off a lot of cash flow. How do you think about allocating cash flow between reinvesting back in the business, but also looking at the capital structure and possibly continuing to return capital to shareholders.

So perfect segue. So this is essentially the proof point of that where. We will identify and are identifying some very high credibility growth levers that will create durable, sustained incremental margin type of growth and reinvest in them while self-funding a majority of them. That's first level of priority. Second level of priority is to opportunistically evaluate M&A. Should we find great deals at great prices in the marketplace. You should know these M&As are primarily when we consider them. There's nothing that I'm going to market with right now. You should also know that. But if I do, it will be in the health space, okay? Number three, if -- once we are past #1, and there's no opportunistic evaluation on an M&A standpoint, returning capital to shareholders, return remains a third and important priority for us.

Okay. It always appreciate the opportunity to have a conversation, especially busy couple of days right after earnings. Please join me in thanking Chewy to part of the conference. Thank you. .