Chewy, Inc. (NYSE:CHWY) Q3 2022 Earnings Call Transcript

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Sumit Singh: And then we have not seen trade downs. I think that was part of your question. Your second part of the question was on Practice Hub updates or wet initiatives. Look, we are pleased with the update. Practice Hub scale is up 30% quarter-over-quarter from the last time we met you. So, we continue to deepen our presence, our engagement and our penetration with the vets and in a positively oriented manner. Connect with a vet continues to scale well. We are pleased with insurance. We are very early in insurance. So, these are generally arcs that are certainly beyond the 1-year mark. These are verticals that we think of in terms of 3-year increments, just as we did pharmacy when we launched it back in middle of 2018, €˜19 timeframe. So €“ but overall, we are pleased with the way that we are building out the healthcare ecosystem, and we are bullish about our place in this.

Dylan Carden: Thanks a lot guys.

Operator: Thank you for your question sir. Our next line of questions comes from the line of Justin Kleber with Baird. Your line is now open.

Justin Kleber: Hey, good evening. Thanks guys. Just a follow-up to the question on promotions. If we look at gross margin, you are going to end this year about four points above €˜19. Can you help us understand how much margin has benefited over these past 3 years from this more benign promotional backdrop? Just so we can assess what a normalization in the environment could mean if it does happen for gross margins in €˜23 and beyond?

Sumit Singh: It’s immaterial to the gross margin progress that we are showing. Any context to add, Mario?

Mario Marte: Yes. No, I think that’s exactly right. I think it’s de minimis and I would say where you see the gross margin improvement over time is everything we have talked about. It is getting into or expanding our higher-margin categories, healthcare, hard goods. It is the embedded business getting bigger, gaining the scale. It is gain sharing the benefits across our entire vendor supply and inbound and outbound, it is all those drivers there, but not promotional environment doesn’t really affect it not materially here.

Justin Kleber: Okay. I guess and why the big step down implied in 4Q on gross margin, it’s €“ there is always a promotional holiday, right? So, I guess it sounds like there is not a year-over-year change in promotions that you are anticipating this holiday. So, if it’s not been a big benefit, I guess I am trying to understand why the step down in margin here in 4Q relative to the 28.4 in 3Q?

Sumit Singh: Sequentially, I mean margins of course, Q4 is a seasonal period. So, you would expect increased promotional activity. And we are seeing that. We have seen increased promotional activity as we move sequentially out of Q3 into Q4. On an annual basis, we will be stronger this quarter relative to last quarter, relative to the same quarter last year.

Mario Marte: Yes. So, between that and the peak surcharges that are happening during the holidays, and that’s expected, we wouldn’t have seen that in the third quarter. We would see it more in the fourth quarter. So, there are different drivers there, exactly. Now, I think maybe the other part of your question you didn’t ask, and I will answer it anyways was, if you look at what we are looking at for the full year, we came into this year expecting to be basically we said broadly in line. We expect it to be more or less flat year-over-year on a full year basis. And now we are guiding to a 90 basis point to 100 basis point improvement in end gross margin. So, we are seeing certainly a lift there as we go through the year.

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