So, we have committed to profitable growth at Capital Markets Day. We do believe that we are going to deliver that profitable growth, but we also want to continue to invest for the future. And so, we feel like this business plan that we’ve kind of outlined for you today for the full-year irrespective of the macro environment, it is a plan to continue to take share. And then, of course, it’s also a plan to deliver profitable growth and meaningful free cash flow, I would add.
Operator: Our next question comes from Alex Steiger with Goldman Sachs. Your line is open. Please go ahead.
Alex Steiger: Great. Thank you for taking my question. First, one on competition. So, how would you characterize the competitive landscape as we enter 2024 and what gives you the confidence in continuing to gain market share this year? And then, one follow-up on the Q4 EBITDA outperformance. So, can you maybe just help us understand the contribution from the various initiatives you have laid out versus some of the efficiencies you’re seeing on automation and or OpEx discipline? Thank you.
Sumit Singh: Sure. I’ll take the first one, this is Sumit. So, in terms of competitive intensity, it’s not elevated from our point of view. Promotional intensity was obviously higher coming out of Q4. Ad intensity and ad competition remains high. If you look at CPCs, CPCs were up roughly 14% to 16% in Q4, but they were met with demand given that supplies had recovered in Q4 of this year. So, we were anticipating higher CPCs given kind of bidding intensity was higher coming into the holiday season. That has pared back some as we’ve come into Q1. Some part of that is naturally expecting, some part of that is when you look at across the industry, we believe three, there’s at least from what we can tell, there’s kind of three companies that are taking share.
Chewy is clearly gaining share in the market. Walmart and Amazon are the next two competitors. But each of the portfolio has kind of different strengths, in my opinion with someone like Chewy kind of being able to sort of span the entire gamut here. So, what I mean by that is our performance I mean our performance continues to be supported by non-discretionary categories which make up 85% of our sales. And so, we excel in many pockets in that 85%. In the current environment, some of the other companies that I’m mentioning have been likely primarily winners in the discretionary categories where we are not winning. So that, lower mix of hard goods is both a strengthen an opportunity to Chewy given that it shields us from the discretionary impact that you’ve seen, announced in some other places.
And then, Walmart has unsurprisingly shined in the value segment amidst the current macro backdrop, including kind of outside successes that have been seen in areas like private label, where as we were candid in the Investor Day presentation, we do not have kind of like-for-like assortment, but it’s part of our strategic plan to come out and provide strategic like-for-like assortment there. So, if you kind of summarize it, what is important to I think note is we believe Chewy remains differentiated from both these players or the industry generally through our comprehensive offering that we provide to the pet parent, the type of relationships and the loyalties that we build, the [Quartz] (ph) subscription business and the strength of that ecosystem, the pet health ecosystem which is first party proprietary that extends both through product and services across our retail offerings, All of it positions us well to compete in 2024.
Alongside that, we’ve made several investments in future categories which are both topline growth and margin expanding categories. So, we feel bullish about our ability to compete through 2024 as well as accelerating pace as we come out of ‘24 into ‘25 and ‘26.
David Reeder: Thank you, Sumit. Let me address the EBITDA question that was posed. Let me speak a little bit more broadly about the year first. When you compare 2023 versus 2022, we did expand gross margin by roughly 40 bps on a year-over-year basis. And so, when you look at how that flowed through from an EBITDA perspective, I think what you saw us do, what you saw us execute in 2023 was you saw us execute with long-term investments in the business, but still return a good portion of the gross margin expansion to the bottom line and the EBITDA margin line. And so, we were quite pleased by our ability to take gross margin as it expanded and then push it all the way through the P&L to the EBITDA margin line on a year-over-year basis.
With respect to fourth quarter, we did grow gross margin slightly on a year-over-year basis in fourth quarter by 10 bps. We did have some timing issues with respect to expenses. And so, on a year-over-year basis, adjusted EBITDA did decrease from 3.4% to 3.1%. I would characterize again many of those as the investments that we were making throughout the year to be able to support both our international expansion as well as Chewy Vet Care as the primary reason for that. But again, for the full year quite pleased with our ability to deliver profitable growth.
Sumit Singh: I would just add that when we started the year, we sort of carved out a bunch of growth initiatives that we were impact, that we’d sized for you. And as we move through the year, we increasingly found the ability to self-fund a lot of these initiatives ending the year strong. And as you’ve seen us kind of provide guidance for 2024, we continue to invest in growth initiatives for the future and are self-funding a bunch of that alongside the EBITDA expansion that we’re providing you.
Alex Steiger: Very helpful. Thank you.
Sumit Singh: Sure.
Operator: Our final question today comes from Rupesh Parikh with Oppenheimer. Your line is open. Please go ahead.
