Chewy CEO Sumit Singh joins Yahoo Finance’s Brian Sozzi from the Shoptalk 2023 event in Las Vegas, NV, to discuss company earnings, customer acquisition, innovation, supply chain transformation initiatives, profitability, and the outlook for Chewy. (edited)
Video Transcript
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RACHELLE AKUFFO: Online pet supplier Chewy topped earnings last week as net sales grew over 13% year-over-year. Yahoo Finance's Brian Sozzi caught up with the company's CEO Sumit Singh to get his outlook on the previous quarter and what they have in store for the year. Take a listen.
SUMIT SINGH: So first of all, we're super proud of the earnings. We delivered nearly 14% growth year-over-year. A profitable year to be for the first time, its net income positive. Record EBITDA at 3% and over 20 million customers. So by all measures of record, the team has a lot to be proud of. And I can tell you 23 for us is going to be very much, you know, stay focused, keep the discipline, flawless execution, customer acquisition, net additions growth, and a lot of innovation on the band here.
BRIAN SOZZI: How did you reach profitability? Because I know that it was always been a focus by your team and Wall Street always wanted to take too.
SUMIT SINGH: You know, it's not-- stuff like this doesn't happen overnight. I mean, we've been working for this a number of years. If you look at the mission statement internally at Chewy, in-- a couple of years ago, the mission statement we adopted was we were going to get big fast, but we will also get fit fast. And so what that is it's building operating fitness into the routine of the organization, but then it's investing, you know, drive towards profitability.
It's using your scale to take cost out of the system. It's, you know, continuous improvement that essentially makes you better, you know, in your processes, in your infrastructure that allows you then to kind of deliver that scale much more efficiently. And so, you know, if you look at our gross margins, they've grown from 20% coming out of 2018, 19 levels into 28% is what we closed last year, our SENA, I mean, we took in roughly $150 million of cost in wages and benefits and just sort of enduring the pandemic.
And now with our automation benefits kicking in our fulfillment centers, you know, we're taking it all back, right? And so all of this adds up, and it's helped us kind of continue to drive towards profitability, and here we are.
BRIAN SOZZI: Talk to us about these automation efforts. It's something that I picked up on the past two earnings calls and you seem to be talking about a little bit more. What are your facilities look like right now?
SUMIT SINGH: Yeah. So, you know, these are part of our broader supply chain transformation initiatives. What you have to realize is Chewy has gone from $2 billion coming out of 2017 to $10 billion coming out of 2022. When a pure play e-commerce company like ours grows that fast that big, you have to transform your supply chain a couple of times along the way. And so, you know, up until 2017, we were fulfilling product. Now, I'm back to the operations environment. We were fulfilling product out of our legacy mostly manual environment.
And so, you know, I looked at that, the team looked at that and we said, look, like, if we are to truly improve safety and ergonomics, if we are truly to improve productivity, if we are truly to lower our cost structure, we will have to invest in two generation, second generation automation fulfillment centers. And on the back of that, we dramatically innervated, invested in what you would call automated storage, retrieval systems, you know, state of the art shipping sorters, state of the art technology that allows us to pick, pack, ship, et cetera.
And, you know, having now been three years into the journey, we're seeing improved safety, we're seeing improved productivity and lower cost structure. I mean, last-- this past quarter, we flew through roughly 30% of our volume through these automated sites. We have three of them at this point at 20% lower cost structure. And that just adds up.
BRIAN SOZZI: Given your ability now that you've taken these costs out of the system, you're now getting ready to expand overseas internationally, what can you tell us about this initiative? And can you push back a little bit on what we've heard from Wall Street that this is now a multi-year investment cycle for Chewy?
SUMIT SINGH: So great questions, by the way, both of them. So first of all, we are super excited. If you review our mission statement to be the most trusted, convenient destination for pet parents and partners everywhere, it's that word "everywhere" that was always there. So this was a matter of when, not if. And so, you know, we've worked hard over the last few years to strengthen our fundamentals. What does that mean? You know, build operating fitness into the routine, get the culture where we want it to be, so that we are not distracted, you know, get our infrastructure and technology to the point where we can essentially reach outside the United States.
Plus, don't forget, I mean, pet parents, you and me, we treat our pets like family, and that doesn't change whether you're in the United States.
BRIAN SOZZI: Some of these animals eat better than me. Full and fair disclosure, their food is amazing.
SUMIT SINGH: That doesn't change. Pet parents are more the same than different. And we believe the brand is resilient outside the United States. And so with that in mind, yes, we've announced, you know, our foray into our first international market. We haven't announced what that is. We will do that-- do so in the upcoming May earnings call per se. You know, but we're super excited about it. And in terms of the investment curve, look, these are strategic investments, and we are long-term oriented.
Had I said to you at the time of 2019, when we are IPO-ing that, hey, I would be 3% EBITDA profit, you know, in a matter of less than four years, you would have been like, get out of here. Because at that time, negative-- we were -6.5% EBITDA margins. And yet, our long-term EBITDA margin target is between 5% and 10%. And we are steadily continually, you know, marching towards that profit target, and launching something like international doesn't take us away from that.
BRIAN SOZZI: In the US market, going back to the US, it's been a weird time. March, we're talking about a banking crisis and consumers pulling back a little bit. What are you seeing in your data? Are you seeing a more cautious shopper?
SUMIT SINGH: We absolutely are when it comes to categories that are discretionary in nature. So consumables and health that make up over 80% of our sales remain pillars of strength. Consumers aren't trading down and they aren't sacrificing their pets needs for their needs or otherwise. Where they are, of course, cautioning is in discretionary spend. And so what you're seeing is that the dollar that used to go, you know, towards a plethora of toys for the pet, now, you know, they're buying toys in limited quantity.
But, you know, the core input, Brian, is actually tied to pet household formation, which right now is slightly subdued relative to its historic growth rates. But in 2008-2009 when we saw recession, you know, this was exactly what happened, and it took a few quarters to correct itself. And once these macro inputs correct themselves, discretionary spend comes back in line.
BRIAN SOZZI: When do you see active customers reaccelerating?
SUMIT SINGH: Yeah. So when you look at our growth in gross ads, we are actually adding customers at a faster clip than we were pre-pandemic. What does that tell you? It tells you that the current that was towards online has continued. Pandemic was high-tide. We're sort of in low-tide right now coming out of the pandemic, but the current is still strong. And so our, you know, main commentary has been around working through the massive pandemic cohorts that we acquired. And we are now in the last leg of managing churn through that particular cohort.
And so it's just about digesting the mathematics. And what we've guided to this year is positive net ads.
